Recently, Cushman & Wakefield Vietnam was delighted to welcome to our HCMC headquarter many senior leaders of the group, including Matthew Bouw, Chief Executive of the Asia Pacific region. Matthew is responsible for leading 11,000 employees in 60 offices across 14 countries globally.
During his first visit to Vietnam after the pandemic, Matthew shared about the global commercial real estate market, the perspective of institutional investors on Vietnam, and why this will be a bright decade for the Asia Pacific real estate market.
Question: How is the CRE market around the world performing right now?
It has been a challenging start to the year for commercial real estate in most markets. In particular, sales of commercial real estate, and to a lesser degree leasing activity, struggled in Q1 of this year. As an example, global Q1 sales were down over 50%, with the reduction in the United States at a level not seen since the Global Financial Crisis, so quite severe. The reduction in sales activity is due to several factors.
Firstly, commercial real estate sale volumes were weak due mostly to the economic uncertainty brought on by the rapid rise in both inflation and interest rates. The fact that this occurred after such a long period of low-interest rates and relatively benign inflation, in most major economies across the world, only compounded the uncertainty. The situation was then made worse by the banking crisis in the US, which created more anxiety and uncertainty for commercial real estate investors.
Secondly, despite there still being a large wall of capital looking to be deployed into commercial real estate, price discovery is proving to be a problem as it is difficult to value a property without being able to forecast the long-term cost of capital, which is impacted by the outlook for interest rates and inflation, amongst other factors. In most markets across the globe, it is still difficult to predict whether interest rates have peaked and for how long they will remain at elevated levels.
As a result of the uncertain economic environment, coupled with the challenges around predicting the long-term outlook for interest rates and inflation, investors are reticent to acquire commercial real estate unless there is some price adjustment. However, most sellers are reluctant to sell at a discount, especially with a lack of comparable discounted sales as a benchmark. This is essentially referred to as the bid-ask spread, where there remains a significant gap between sellers’ and buyers’ expectations.
Question: How long will it take for the global market to recover?
It is important to keep in mind that commercial real estate is intrinsically local, which means it will perform differently depending on the condition of the local market and by asset class. As an example, the office market in HCMC is different from the office market in Hanoi and performance will often differ between the two. Because the dynamics of different markets vary, it is hard to predict the recovery of the global market.
However, generally speaking, industrial and logistics are performing better than most other asset classes due to the impact of factors such as online streaming, online shopping, online banking, gaming, the Internet of Things, 5G etc which are driving the demand for assets such data centers, last mile logistics, and robotic warehouses. Consequently, industrial and logistics is better positioned to ride out the current uncertain economic environment.
Question: Are there any barriers keeping investors from entering a market, apart from the price gap?
The Vietnamese market is becoming a more institutional investor market which is a good thing.
We had a large client event in Singapore about two months ago where we welcomed 80 of the world’s largest investors, a number of which operate in Asia. During the event, we asked them to rank their preferred real estate investment markets and the responses were often Japan, Australia, and Vietnam. The positive sentiment around Vietnam is due to a number of factors including the fast-growing manufacturing sector, and the growth dynamics of Vietnam more broadly.
It is important to keep in mind that institutional investors will look for stable and reliable markets. I have noticed a number of new regulations issued in Vietnam, and many other positive initiatives the government is undertaking to improve compliance and the general business environment. These initiatives are a positive step for Vietnam as an investible market for commercial real estate.
Question: Which segment are they attracted to?
Industrial and logistics are the preferred asset class, whilst some will look at grade-A offices since HCMC is still a landlord-favorable market. If the asset has a good location, all the necessary ESG credentials, a good tenant mix, strong rental growth, attractive lease terms, and high occupancy…that would still be an attractive asset.
Besides the office market, residential apartments, multifamily or build-to-rent is becoming a more sought-after asset class in a large number of cities around the world. With city density increasing due to urbanization, and supply often falling short of demand, the multifamily/residential living sector is likely to be a fast-growing asset class in a number of markets across the Asia Pacific this decade.
Investors always look for where they’re going to see growth – economic growth, a young population, a growing middle class, and urbanization. Vietnam has all those attributes, plus high GDP growth. All of those dynamics are great tailwinds for the growth of all real estate sectors.
Question: How do you compare Vietnam to other markets?
Vast amounts of institutional capital already live in China, Japan, Australia, and Singapore, which are larger markets across the Asia Pacific.
In India, whilst there are already significant amounts of institutional capital, the value of the institutional market is still relatively small compared to other markets. In Southeast Asia, Vietnam and the Philippines are two of the more sought-after emerging markets for institutional investors.
I see a lot of similarities between how investors entered the Indian market and how they are approaching Vietnam. Many large institutional investors went into India’s market by partnering with local developers and businesses. Emerging markets are very nuanced and specific so investors need local intelligence and partnership to secure approvals, source materials and hire talent. That’s an easier way for institutional investors to enter Vietnam, so you will likely see a lot of this activity and those partnerships will continue their momentum as the market matures.
Question: How can Vietnam compete?
The fact is, domestically, there is a tonne of opportunity. Vietnam needs to continue establishing itself as a great place for investment, with the right amount of regulation and compliance and with good infrastructure, where investors can get approvals fast and execute developments quickly.
The opportunities of the future lie in industrial and logistics, high-end manufacturing and data centers. In the last two years, the amount of data stored in the world has doubled. With the growth of online gaming, shopping, and cloud usage in general, Vietnam can become a center for that. By maintaining the growth drivers but putting in the necessary support columns – regulation, transparency, compliance etc – to facilitate that growth, Vietnam will be able to increase its competitiveness within the region and become even more attractive to investors.
Question: What is Vietnam’s position in your portfolio, especially compared to the APAC region?
I have a view that this is the decade of Asia Pacific. Our region has the largest population in the world – at least 50% of the world’s people live here – and it is now the largest and fastest-growing region in the world by GDP. Asia Pacific also has the fastest-growing middle class and the fastest rate of urbanization. By 2029, three of the world’s top four economies – China, Japan, and India – will be in Asia. All of these factors will drive huge demand for commercial real estate assets across the region.
In the US, 22% of all people that work, work in an office. In Asia, approximately 8% of people work in an office. As the markets mature, there will be more office workers, with growing demand for office space. As the middle class grows, it will require more health care, housing, manufacturing… There are all these demographic and economic tailwinds that will drive CRE activity, especially in markets that are highly populated, with generally younger populations, and with high urbanization rates.
Investors will always look for a safe place to invest that offers growth. If the infrastructure is set up to allow investment, you will see huge growth in markets such as India, China, the Philippines, and Vietnam. Vietnam has growth drivers, and if it becomes an increasingly safe place to invest, it will become an even more attractive investment destination.
Question: Is there a higher risk in investing in emerging markets?
Yes, generally speaking, there is definitely more risk in emerging markets. But as markets mature, the risk generally decreases. We’re seeing that with India. Vietnam reminds me of India 6-7 years ago. India is a powerhouse for us, we have over 4000 employees in India now. India made it easier to do business, and their ranking on the Ease of Doing Business Index and the Corruption Perceptions Index has improved materially over the last 6-7 years.
Those infrastructure initiatives were really important for institutional capital and MNCs. Now we’re seeing Vietnam doing a similar thing, and making it a priority. And that shows that the market is maturing, and those signals are overwhelmingly positive for Vietnam.
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