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Manufacturing to drive IP development

Released at: 07:05, 01/05/2018

Manufacturing to drive IP development

Photo: Viet Tuan

Manufacturing and processing likely to support the development of IPs around Vietnam but location is clearly an issue.

by Hong Nhung & Ngoc Lan

The Vietnam - Singapore Industrial Park (VSIP) II-A in southern Binh Duong province was the scene of a breaking-ground ceremony last October for a new state-of-the-art regional packaging material factory belonging to Tetra Pak, the world’s leading food processing and packaging solutions company. With $110 million in investment and covering 10 ha, the factory is one of the largest foreign direct investment (FDI) projects at VSIP Binh Duong.

Positive signs in FDI over the last year, particularly in the processing and manufacturing sector, give Vietnam’s industrial real estate sector more than a hint of promise. “Driven by strong manufacturing and exports and growth in the local consumer market, the industrial segment has been very strong over recent years,” said Mr. Alex Crane, Managing Director, Cushman & Wakefield (C&W) Vietnam.

Appealing strategies

In Vietnam for more than 20 years, VSIP is a joint venture between the Becamex IDC Corporation and a consortium of three companies from Singapore majority held by Sembcorp Development. It has attracted about $11.5 billion in investment to date from 716 multinational and local Vietnamese companies. Tenants come from at least 30 countries and territories and cover all major manufacturing and support industries, with more than 200,000 jobs created.

It now has seven industrial park (IPs) around the country, and “location is our primary concern,” Mr. Kenvin Teo, Co-Chairman of the VSIP Group and CEO of Sembcorp Development, told VET. “We have to think from our customers’ point of view. We pay attention to building up local infrastructure, both physical and administrative, by working in close cooperation with provincial officials to understand their vision for growth, and effort is put into community engagement and services.”

VSIP also maps out the industry positioning of each location and focuses on customizing the master plan around it. It takes many months of constant engagement with a customer before it will commit to an investment, and then a further six months is needed to obtain a business license. “The advantage we have enjoyed in Vietnam is the strong support from government officials, who are very committed to attracting investment and understand the wider societal impact our VSIP projects bring to provinces,” Mr. Teo added.

Another long-term IP operator based in Hanoi and northern Hung Yen province, the Thang Long Industrial Park Corporation, developed by Japan’s Sumitomo Corp. more than 20 years ago, has attracted around 175 FDI tenants and generated nearly 80,000 jobs to date. Last year it began construction of a new IP in northern Vinh Phuc province, its third. “Thanks to the IPs’ development, most of our rental area is occupied by tenants and we are doing our best to extend our area, to have more space to meet requirements,” said Mr. Goki Nobuta, General Director of the Thang Long Industrial Park Corporation.

Thang Long is open to all types of customers conducting different business activities. “We invited some Japanese investors, which we hoped would be a major influence for other investors, with Canon being a good example,” he went on. “Some of our other tenants are Canon vendors.” With the development of its second and third phases, it also welcomed other major tenants and many other Japanese investors. “Such valuable tenants bring success to the IP and boost its development,” Mr. Teo said.

In the context of the vigorous startup trend, some developers have followed a smaller-scale model positioned inside IPs. Starting in 2012, Kizuna, in the Mekong Delta’s Long An province, has been considered a pioneer in setting up the new model of rented serviced factories. It now has three factory areas with occupancy of 94 per cent. “Our more than 50 services have become a decisive factor for customers,” said Mr. Doan Hong Dung, Chairman and CEO of the Kizuna JV Corporation.

Healthy prospects

Industrial parks have performed very well in general over the last two years, with a particular focus on the areas surrounding Ho Chi Minh City and Hanoi. Though rising, Vietnam’s labor costs remain attractive to foreign investors. Mr. Jonathon Clarke, Director of Capital Markets & Investment Services at Colliers International Vietnam, said labor costs are rising around the region so investors seeking industrial locations on a budget will still look at Vietnam. “Vietnam’s minimum wage stands at around $175 per month compared to China’s $325, while countries such as China also collect a higher corporate income tax,” he explained.

But Mr. Dung pays more attention to the boom in the services sector. Japanese enterprises have stepped up their investment in Vietnam with the arrival of AEON Mall and Takashimaya. “That also motivates many businesses to find a place to invest, and the industrial park is the ideal place for them to open their factories and concentrate on production,” he said. “Complete infrastructure and attractive tax incentives and procedures will help the occupancy rate in industrial parks increase in the coming years.”

Vietnam’s impressive GDP growth last year, driven primarily by strong domestic demand and export-oriented manufacturing, has also caught the attention of foreign investors. Along with a series of free trade agreements (FTAs) signed in recent years, investment opportunities are opening up for global manufacturers coming to Vietnam. 

Colliers recently found a factory for a client in Hai Phong that confirmed its key strategy is to relocate production from China to Vietnam. Becamex and Warburg Pincus, two leading players in the industrial and investment world, have set up a fund specifically aimed at industrial development throughout Vietnam. “We expect to see similar funds entering the market on the back of the attractive macroeconomic factors supported by the country’s vocal support for luring FDI in industrial real estate investment,” Mr. Clarke said.

Figures from Colliers show there are 20 operating IPs in Ho Chi Minh City with a total leasable area of nearly 3,024 ha. Average occupancy in the fourth quarter of 2017 was 75.4 per cent, up some 8 per cent year-on-year. Seven industrial zones were fully occupied, and ready-built factories are able to charge between $4 and $6.5 per sq m per month. 

Eleven operating IPs cover over 2,700 ha in Hanoi, mostly in outlying districts such as Chuong My, Thach That, and Dong Anh, which hold a market share of some 54 per cent. Average occupancy was 82.6 per cent in the fourth quarter of 2017, up 5.3 per cent year-on-year. IPs in Bac Tu Liem and Long Bien are fully occupied despite relatively high rents.

Lacking appeal

Vietnam’s industrial property market is now seen as an attractive investment channel and has the potential to welcome any investment wave from foreign investors. There are, however, a lot of IPs in the country with complete infrastructure that fail to appeal to investors. 

Mr. Dung from Kizuna said that many IPs are inexpensive but too far away from city centers, after believing that price is the decisive factor. While cost is indeed an important consideration, location is also key. “Foreigners, in addition to working, also like to live well,” Mr. Teo said. “If the IP is too far away from a city center, it affects their lives and their work.” 

It is clear that Vietnam still has room to attract investment from both domestic and foreign producers but obtaining land for developing new IPs is a difficult and time-consuming process. Mr. Clarke pointed out that many international investors are seeking well-located land plots for just this sort of development, but finding sites, transacting on them, and obtaining licenses is not so straightforward and can take years, even with support from a quality local partner.

Mr. Crane, meanwhile, believes price provides a competitive advantage. The quality of IPs must improve in order to remain competitive as Vietnam becomes more expensive, but this is an issue in the country. “For developers and owners this naturally means their land and construction costs will increase, so this investment needs to be ‘future proofed’ to ensure the asset remains desirable and competitive for the long term, which is difficult when trends change so quickly,” he said.

Mr. Teo said key challenges now include infrastructure development and logistics. The fact remains that not all provinces are suitable for manufacturing. Vietnam is a very big country and its provinces are at different stages of growth, meaning infrastructure may be underdeveloped, there may be difficulty attracting middle management to work in that location, licensing processes are not fully in place, logistics hubs are too far away, and there are no support industries to complete the supply chain. “We need highways to be completed quickly and better access to land in order to meet customers’ operating schedules,” he said.

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