Vietnam’s industrial real estate sector faces tough times in 2023-2024

Vietnam’s industrial real estate sector is likely to face challenges when new supplies fall due to due to delayed approval processes, said leading Vietnamese broker VNDirect Securities.

According to VNDirect, the total industrial land area in the southern market in 2022 increased by 9.2% year-on-year to 41,950 hectares, of which 27,950 hectares or 66.6%, were for lease, up 8.2%.

The northern market witnessed a sharp increase in new supply in the fourth quarter of 2022, with about 590 hectares for lease, mostly in suburban areas, increasing the total leasable area by 7.9% to 11,923 hectares.

Last year, the northern region’s total industrial area expanded by 8.1% to 16,915 hectares, while occupancy rate decreased by 1% quarter-on-quarter, and 0.2% year-on-year to 79%.

VNDirect found that both the southern and northern markets benefited from an upward trend in rents, with respective rises of 10.5% and 7.5%.

However, it noted since the first quarter of 2022, there have not been any new proposals for establishing industrial parks in both regions. In addition, very few new industrial parks have been included in the national IP development master plan.

The broker attributed the situation to poor industrial park development planning, which is mostly decided by localities. Changes to senior leadership positions in many localities in the past year has slowed the approval process for many projects, leading to site clearance delays and overlaps in planning and infrastructure development.

“The industrial real estate market will face a lack of new supply from now until the end of 2023,” it said.

In the southern market, after the supply boom in the first half of 2022, supplies dried up in the second half. VNDirect believed that the southern market will encounter difficulties with new projects in 2023, and new supply for the 2024-27 period will be limited to about 1,134 hectares.

Meanwhile, the North started developing industrial zones later than the South, so there remains an abundance of land available for reasonable rental rates. Although many projects are awaiting approval, VNDirect held that the shortage of new supply in the northern market will last at least until the end of 2023, and then about 3,757 hectares of industrial land is expected to be put into use from 2024-2026, mainly in Hai Phong, Vinh Phuc and Bac Ninh.

According to VNDirect, the upcoming application of the Global Minimum Tax (GMT) will create challenges for Vietnam attracting foreign direct investment (FDI), especially into industrial parks.

The GMT, initiated by the Organization for Economic Cooperation and Development (OECD), is a once-in-a-lifetime global tax reform that will apply to multinational companies with revenue above 750 million euros. It is aimed at ensuring that multinational companies pay their fair share of taxes of at least 15%, regardless of where they operate. A number of OECD countries have announced they will apply the new tax from the beginning of 2024.

If this tax is applied too soon, Vietnam will lose the advantage of preferential tariffs as FDI enterprises will have to pay the difference in tax to the country where they are headquartered, making tariff preferences no longer meaningful.

If Vietnam applies it later than the country where the FDI enterprise is headquartered, it will not collect the tax difference. With more than 100 FDI firms likely subject to the tax, the national budget will lose several billion dollars in revenue each year. In addition, the Vietnamese investment environment will be affected, since investors will redirect their investments to other countries with benefit-sharing mechanisms related to the new tax.

With the GMT application approaching, VNDirect said that industrial park projects with strategic locations, high-quality infrastructure and full utilities will become more and more attractive to investors.