Castles in the air: Gloomy office market smashes hopes of overzealous investors

By Ngan Anh, Thanh Nien News

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There are many unfinished office towers like this one in Hanoi. Photo: Ngoc Thang.
Not a single worker can be found at the construction site of the 18-story Lucky Tower I in Hanoi. 
The tower originally designed to incorporate shopping malls and offices is now fenced with rusted iron sheets. Waste is piling up outside the unfinished project.
The construction started in 2008, when the real estate market was still at its peak. But a lot has changed since and its investor, financial investment firm Hoa Binh, has decided to halt the construction. 
The company is not alone in this. Hanoi's skyline is now punctuated with half-finished office buildings. 
Many investors poured cash into property developments when the real estate market was flourishing, only to see the boom period end too soon.
A large number of office building projects have been started, but it is uncertain how many of them will be finished. 
Office and retail rents in Hanoi and Ho Chi Minh City, Vietnam’s two largest cities, have slumped as a wave of supply continues to enter the market amid slowing economic and retail growth.
In Hanoi, it is easy to see many half-finished office buildings, deserted by developers who are struggling with financial problems. 
Meanwhile, many finished towers are left without tenants, becoming a big concern for both their developers and for the banks that financed them.
Cho Mo Commercial Center is a project of local construction firm Vinaconex. Funded with VND1.5 trillion ($71.4 million), the 11,000-square-meter complex has two towers of 15 and 25 stories.
The residential building has come into operation, but the office one has not been completed. The marketing agent of the project said construction has to be postponed because of a lack of tenants. 
Due to the ample supply, the project will face fierce competition from other buildings, which have similar prices but are in even better locations, he said.
William Badger, Associate Director of Office Services at property firm CBRE Vietnam, said the office market is seeing oversupply.
The average asking rent for office space has decreased as the vacancy rate still stands high, with even more new supplies entering the market, he said. 
According to a recent report of property firm Cushman & Wakefield Vietnam, the average asking rent for both Grade A and B in Hanoi stood at US$22 per square meter in the first quarter of this year, down 1 percent over the same period last year. 
To put that into perspective, in 2007 and 2008, Grade A rents could be between $60 to $100 per square meter. 
Experts say the oversupply was a result of a race among many investors, including non-real estate companies, trying to capitalize on the 2007-2010 market boom.
“During that time, investors felt that they could make easy money with property projects. Banks were also too easy with their loans,” said Deputy Chairman of the Vietnam Federation of Construction Pham Sy Liem.
However, the economy slowed down after that, and this forced many enterprises to scale down or even shut down, cutting the demand for office real estate, he said.
A tenants' market
The office market will continue to face oversupply over the year due to a significant number of office projects currently in the fitting-out stage, especially in the western part of Hanoi, said Alex Crane, National Head of Commercial Agency at Cushman & Wakefield Vietnam.
Rental declines are expected to continue and will be of considerable concern for landlords, he said.
Tenants, however, can look forward to more flexible leasing terms in addition to falling rents.
In Hanoi, there is expected to be around 715,000 square meters of office space across all grades coming onto the market in the next two years, thus more opportunities for tenants when choosing office space with a reasonable rental rate, he said.
In Ho Chi Minh City, rents will continue to soften in 2015 with good quality buildings entering the market, Crane said.
Vietcombank Tower will increase Grade A inventory by approximately 25 percent, putting significant pressure on a sector which has experienced lower take-up over the last two years. Attractive offers from new buildings entering the market will increase vacancy in historically well-occupied buildings, he said.
The Lotte Center Hanoi, a complex of offices, shopping malls and hotels, is one of the buildings struggling with vacancy issues. 
Some 75 percent of the 45,000 square meters of available office space in the second-tallest building in Hanoi was vacant late last year, according to CBRE Vietnam, the marketing agency for the project.
To deal with the situation, some investors have turned their office space into commercial apartments to take advantage of the relatively higher liquidity in the residential market.
Last year, the Hanoi Electricity Company has turned 4,500 square meters of office space in a project in Thanh Xuan District into 61 residential apartments for sale.
Recently, real estate developer Bitexco has also planned to use some office space at its project Manor 2 in Ho Chi Minh City to build 414 apartments.
Liem from the Vietnam Federation of Construction said the move may help property investors recoup their capital more quickly.
Many investors have cut rents by 30-40 percent, but still failed to attract tenants, he said.
“Without effective measures to help property investors overcome difficulties, they may face bankruptcy, and bad debts will increase rapidly.”

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