CBRE Real Estate Outlook – Part 1 (Economic Outlook + Retail Sector)

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Private Equity Survey 2016

February 23, 2016


Vietnam has recorded constant high real GDP growth since 2007 despite the period of economic downturn in 2008-2012, with an average real GDP annual growth of 6.15%. The structure of Vietnam’s GDP is shifting towards manufacturing, construction and services while the contributions from agriculture, forestry and fishery are getting smaller. Vietnam’s GDP is forecast to be 6.6% in 2016.

In 2012, Vietnam has experienced trade surplus for the first time since 2007 with impressive average annual export growth of 22% vs. average annual import growth of 16% in the period 2010-2014. Vietnam is expected to continue with this growth model in the foreseeable future thanks to the country’s expanding connectivity to the world as demonstrated by the increasing amount of foreign investments and recent free trade agreements.

The Vietnamese economy has an opportunity to grow significantly in 2016

Foreign investment will continue to be the driver for Vietnam’s economic growth. According to Vietnam’s Ministry of Finance, 66% of Vietnam’s total exports are made by foreign companies operating in Vietnam. Those companies also contribute 22% of the country’s GDP and 26% of the Government Budget. Implemented FDI is estimated to reach US$14 billion in 2015, an increase of 12% y-o-y. Strong FDI growth is expected to be seen in most areas, especially textiles, construction, banking, high technology and real estate thanks to the TPP which will be officially signed at the beginning of 2016.

In South East Asia, the growing presence of ASEAN Economic Community, which will be officially formed on January 1st 2016, will help boost the image of Vietnam locally and globally. Vietnam ranked 2nd in terms of greenfield FDI into Asia, behind only China. A young demographic and affordable labour costs are among key attraction points for foreign investors.

Some issues need to be tackled for Vietnam to stay competitive.

However, in order to reap all the benefits from these agreements and connectivity, Vietnam needs to improve the country’s labour productivity level. Competition will be likely to intensify and force the Vietnamese government to conduct proper changes in policies, especially in taxes, to stay competitive in the regional market.


Real estate came back strongly after 2014 due to low inflation and interest rates supported by foreign investments. As a result, mortgage credit is growing and is forecast to increase at 18-20% y-o-y, higher than the average annual rate of 14-15% in the period 2012-2014 when the market was slowing down. The curent mortgage rate as of December 2015 is 8.4%, lower than the level of 9.87% last quarter and the level of 11.2% in 2007.

The interest rate is forecast to rise slightly in 2016 while inflation will stay in a stable and acceptable range due to the effect of the Fed hiking interest rates for the first time in a decade. The Vietnamese Dong will not be likely to experience a drastic drop in value due to the Fed’s interest rate hike since most of the effect has already been factored into the currency’s current value. However, the Vietnamese Dong is still a key thing to keep an eye on in 2016 since the the State Bank of Vietnam at the end of 2015 has announced to implement a new more market-based mechanism in adjusting the currency. Accordingly, currency movement will more closely follow market trends, especially those related to macro-economy, supply-demand, and influential foreign currency.

Interest rates, inflation and mortgage debt will play an even more critical role in the real estate market

Looking forward, more attention will be paid to the mortgage loan trend. While the growing middle and upper middle classes in Vietnam simultaneously drive and benefit from mortgage loans, these classes may also have mixed feelings in the coming years as interest rates are adjusted upward more often.

Unlike the oil and gold markets, the stock market is expected to recover in 2016

The stock market is expected to reach a level of 650-670 in 2016, partly thanks to real estate stocks which account for 10% of the stock market. On the other hand, the oil price may slide further placing oil companies under even more pressure. A decrease in the gold price, even though not as drastic as the oil price decline, is expected to continue in 2016 and to reach its nadir next year before experiencing any increases.





Increasing new supplies in suburban areas capture demand in local residential zones.

The supply of shopping centres in HCMC has increased more than twelve times in comparison to 2007. New supply in 2015 was 150,000 sm net leasable area (NLA) from five properties, the highest increase in the last eight years. In the next three years, the same amount of additional supply is forecast to come online in both CBD and non-CBD locations.

Projects in CBD prime locations will speed up construction activity from mid 2016. Significant future supplies with NLA larger than 40,000 sm include Saigon Centre and The One.

Supplies in non-CBD areas will provide larger space with more amenities and facilities thanks to land availability and lower costs. There will be at least one shopping centre opened every year. Retailer expansion in non-CBD areas will focus on the mass market and will be more aggressive in commercial terms negotiation.

Market performance remains upbeat

In the last three years, new shopping centres have always reported a high occupancy rate of from 70-80% at opening. However, what has concerned landlords was a high tenant turnover from both international retailers and domestic brands after one year when failing to meet customer expectations due to a lack of differentiation and attractions.

In the next three years, anchor tenants are forecast to play a more important role in determining a shopping centre’s success. Therefore, despite increasing new supplies, city-wide vacancy rates are expected to remain healthy at 10% on average. Some shopping centres in non-CBD areas can have up to 60% space occupied by an anchor tenant which may be self-operated by the developer.

Because prime CBD space continues to be sought after, further rises in average rents are expected but at a conservative pace as more shopping centres opening in non-CBD areas dilute demand. Rent in 2015 decreased 10% y-o-y because all five new shopping centres opened in this year are in non-CBD areas.

There has been always a great discrepancy between rental levels in CBD and non-CBD areas . Rent in CBD retail space is prohibitively high; spot rents at some of the highest quality retail centres can be as high as US$250 psm per month.


New market trends catch up with changing consumer demand

The development of new shopping centres and the relaxed regulations on foreigners participating in retail in Vietnam will result in an influx of new tenants.

Since January 2015 and according to WTO commitments, Vietnam opened its retail sector up to foreign players. There are of course some restricted goods and foreign retailers in some cases will have to satisfy the local authority with their Economic Needs Test (ENT), but generally the news has been welcomed by retailers and developers, especially those from the ASEAN region, who have shown greater interest in entering the market.

Retail leasing momentum in 2015 was driven by expansion of both local and foreign brands, with an additional push from positive M&A activity in F&B, fashion and supermarkets. This trend is expected to continue in 2016, intensifying competition and resulting in rising rental costs for occupiers.

Consumer demand is improving at a slower pace due to a short term fluctuation in consumer confidence. However, in the long term the local economic outlook will benefit from the positive impact of the Trans Pacific Partnership (TPP) and other free trade agreements while Vietnamese consumers are generally confident in their future personal finances.

Consumer behaviour is changing with more focus on the overall consumer experience and less on basic factors such as price and security. To meet these higher expectations of consumers, landlords have started to invest more in benchmarking exercises, market research and repositioning.

Existing shopping centres are re-merchandising to adopt the new concept of retail-tainment. The trend of adding entertainment and experiences to the retail mix started a few years ago, marked by the opening of Aeon Mall in Tan Phu District. This shopping centre is a 45-minute-drive from the CBD but successfully draws footfall due to its regular attractions and events. This trend has accelerated recently as shopping centres look for new ways to widen their catchment areas and target additional customers. Online retail will be another new trend as increasing numbers of Vietnamese use high-tech personal devices and shop online more often.



More supply coming up outside of the CBD

Supply of retail space has grown 19% in 2015 and will continue to grow during 2016. The majority of new supply will be located outside of the CBD due to limited land available in the CBD. It is expected that there will be more than 100,000 sqm of new retail space in 2016 from seven projects. Vingroup is leading the league with three projects in the pipeline (70,000 sm), while the rest are developed by a Malaysian developer and other local companies.

As projects outside of the CBD typically target middle-end customers, retail expansion will focus on mass market, particularly in F&B, supermarket and convenience store categories.

Demand for retail space shifting from high-end consumer goods to mid-market brands

The development of new shopping centre’s and the relaxed regulations on foreigners participating in retail in Vietnam will result in an influx of new tenants. In line with HCMC, retailers and developers in Hanoi, especially those from ASEAN region, have shown greater interest in entering the market thanks to positive outlook from TPP and other free trade agreements.

Apart from the aggressive expansion plans for foreign and local retailers in Vietnam in 2015, one of the most noticeable trends is ‘affordability’. The emergence of new ‘bazaars’ ‘outlets’, and low price supermarkets are all reinforcing the trend that consumers demand better value for money.

Food and Beverage outlets recorded strongest growth during 2015 and will continue to dominate the market in 2016. CBRE Vietnam recorded that nearly 50% of its enquiries for retail space belonged in this sector and that the enquiries were more for fast casual dining than fine dining.

Competition for share of consumers wallet is fierce. Consumers are now more sophisticated and knowledgeable and place value on an overall retail experience when shopping. Shopping center managers will need to have a good understanding of what their customers want, leverage the data they can collect from apps and digital marketing, provide more and better quality entertainment facilities and collaborate more with retailers.


Market performance on the way to recover

As the majority of new supply is in non-CBD locations, rentals offered by new projects are expected to be lower than current market average. In addition, new shopping centers are becoming affordable, targeting middle class, therefore rentals might not be as high as those in the past.

Vingroup will continue to lead market share of retail space with several upcoming projects, yet all outside of the CBD. Other projects developed by foreign players, including Gamuda, Ciputra may offer rentals at market average levels or lower also due to non prime locations.

Most projects in the CBD generally perform better than market average. Those that have been operating at almost full occupancy might enjoy rental growth of 5-10% in the next three years. Market average rental is also expected to improve in the next three years, though to a lesser extent.

Local retail developers are more and more aware of the importance of anchor tenants, and therefore started looking for foreign anchor retailers to fill up retail spaces. However, large leasing area combined with strong negotiation power tend to help anchor tenant to secure incentive rental that is much softer than those offered for other tenants.

Turnover sharing scheme, by which landlord can share part of operation risk with tenants, has been attractive to many retailers, particularly those who want to open additional stores in a new shopping center.

Average vacancy in the past few years was 12%. As non-CBD will have many new projects, which may not be fully occupied easily, vacancies of new projects may negatively impact the whole market. However, existing projects are forecast to improve performance, resulting in stable vacancy of the market on average level at 8-9%.

It is still largely a tenants market due to supply quickly increasing, however with healthy demand from the mass market, the outlook is positive for affordable to mid-end retail formats.


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