BMI Vietnam Real Estate Report Q2 2014

Q2 2014www.businessmonitor.com

VIETNAMREAL ESTATE REPORTINCLUDES 5-YEAR FORECASTS TO 2018

ISSN 2040-770XPublished by:Business Monitor International

Vietnam Real Estate Report Q22014INCLUDES 5-YEAR FORECASTS TO 2018

Part of BMIs Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: March 2014

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CONTENTS

BMI Industry View ............................................................................................................... 7

SWOT .................................................................................................................................... 9

Political ................................................................................................................................................. 11Economic ............................................................................................................................................... 12Business Environment .............................................................................................................................. 13

Industry Forecast .............................................................................................................. 14Office ................................................................................................................................................... 15

Table: Forecast Rental Costs, 2013-2014 (US$ per m2/month) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15Table: Forecast Net Yield, 2011-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Retail ................................................................................................................................................... 16Table: Forecast Rental Costs, 2013-2014 (US$ per m2/month) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17Table: Forecast Net Yield, 2011-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Industrial .............................................................................................................................................. 18Table: Forecast Rental Costs, 2013-2014 (US$ per m2/month) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18Table: Forecast Net Yield, 2011-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Construction And Infrastructure Forecast Scenario ........................................................................................ 20Table: Construction And Infrastructure Industry Data (Vietnam 2012-2017) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Table: Construction And Infrastructure Industry Data (Vietnam 2018-2023) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Table: Factbox - Key Elements Of Vietnam's Revised Land Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Macroeconomic Forecasts ............................................................................................... 33Economic Analysis ................................................................................................................................... 33

Table: Vietnam - Economic Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

Industry Risk Reward Ratings .......................................................................................... 37Asia - Risk/Reward Ratings ....................................................................................................................... 37

Table: Asia Real Estate Risk/Reward Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Vietnam - Risk/Reward Ratings .................................................................................................................. 38

Market Overview ............................................................................................................... 40

Office .................................................................................................................................................... 44Table: Historic Rental Costs, 2012-2013 (US$ per m2/month) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45Table: Net Yields, 2011-2012 (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46Table: Terms Of Rental Contract/Leases, H113 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Retail .................................................................................................................................................... 47Table: Historic Rental Rates, 2012-2013 (US$ per m2/month) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48Table: Net Yields, 2012-2013 (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48Table: Terms Of Rental Contract/Leases, H113 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Industrial ............................................................................................................................................... 50Table: Historic Rental Costs, 2012-2013 (US$ per m2/month) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50Table: Net Yields, 2012-2013 (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Vietnam Real Estate Report Q2 2014

Business Monitor International Page 4

Table: Terms Of Rental Contract/Leases, H113 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

Competitive Landscape .................................................................................................... 53

Company Profile ................................................................................................................ 56Becamex IDC Corp .................................................................................................................................. 56Nam Cuong ............................................................................................................................................ 58Song Da Construction Corporation ............................................................................................................. 60Vinaconex .............................................................................................................................................. 62Vingroup ................................................................................................................................................ 64

Demographic Forecast ..................................................................................................... 66Table: Vietnam's Population By Age Group, 1990-2020 ('000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67Table: Vietnam's Population By Age Group, 1990-2020 (% of total) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68Table: Vietnam's Key Population Ratios, 1990-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69Table: Vietnam's Rural And Urban Population, 1990-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

Methodology ...................................................................................................................... 70Industry Forecast Methodology ................................................................................................................ 70Sources ................................................................................................................................................ 71Risk/Reward Ratings Methodology ............................................................................................................ 71

Table: Real Estate Risk/Reward Ratings Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73Table: Weighting Of Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74



BMI Industry View

BMI View: We are increasingly positive regarding the long-term strength of Vietnam's commercial realestate sector. Although we are expecting some softness to continue in the market in the short-term, due tooversupply in some sectors and cities, in the long term the strength of the country's economy andmanufacturing base, as well as its youthful demographic, will drive the commercial real estate market.

Various factors combine to mean that we are optimistic for Vietnamese commercial real estate in the long

term. Firstly, the economy is now on a firmer footing, with growth of 5.9% forecast for 2014, and this will

provide a healthier environment for commercial real estate investment. Secondly, we expect increased

foreign direct investment into the country, and into the real estate sector. Draft legislation currently under

consideration would make it easier for foreign investors to buy property in the country.

We are expecting demand for Vietnamese exports to pick up, particularly boosting the industrial and office

real estate sub-sectors, while the country's young and increasingly urbanised population will ensure

continued strong demand for high quality retail real estate.

Meanwhile, the central bank has relaxed interest rates in mid-2013, and we see them remaining stable over

our forecast period to 2018.Efforts to reduce capital controls and lending restrictions have met with mixed

success as the government continues its efforts to attract foreign investment through industrial park (IP) andEconomic Zone (EZ) development.

While office and industrial rents have remained low through 2013, demand for retail space has outstripped

supply and has outperformed other sectors as an increasingly middle income urbanised class boosts overall

consumption rates. Top priorities through 2014 will be economic, increasing GDP growth and attracting

more diversified sustained investment, as the market continues to relax restrictions on property and firm

ownership.

Recent Developments:

There has been limited activity in the office real estate market over the past few months. In mid2013 theCenter Point building in Phu Nhuan was sold, while later in the year the Gemadept building also changedhands. Both properties are in Ho Chi Minh City.

Vingroup opened to large-scale malls in Hanoi in 2013, Vincom Mega Mall Times City and VincomMega Mall Royal City, the largest mall in Vietnam. Meanwhile, MGR expansions continued throughout2013, with Son Ha and Ocean Retail among those opening new stores.



Key BMI Forecasts

We are forecasting that rental rates for office real estate in Hanoi will fall by 5% in 2014, while we see amore significant fall, of between 5% and 10%.

We see office and retail rental costs remaining static in Da Nang in 2014.

We forecast that office rental costs will rise slightly, by 1%, in Ho Chi Minh City in 2014, while retailcosts will rise by 2%

We see industrial rental costs remaining static in 2014 in all three cities that we cover.



SWOT

Vietnam Real Estate SWOT

Strengths Growing investor interest and foreign direct investment into Vietnam.

Real GDP growth of 5.4% in 2013, as well as lower inflation, indicates the economy is

back on a firmer footing.

Development of industrial parks (IPs) and export processing zones (EPZs) is a

significant part of the country's move to modernisation and industrialisation.

With slow growth or stagnation in other areas of the world, notably Europe, investors

may increasingly turn to Vietnam for opportunities.

Weaknesses Oversupply in all real estate sub-sectors due to an earlier construction boom.

Access to credit for real estate development is restricted.

Continued rent decline has forced landlords to create extended incentive packages to

maintain market rates.

Corruption, especially regarding land disputes, continues to affect the business

environment.

Opportunities Foreign interest and FDI in property is projected to rise.

In cities, consumer demand is high, driven by increasingly affluent urban population

with larger disposable incomes which have benefited Vietnam's retail sector.

The country is an increasingly important export-oriented manufacturing hub, which

should benefit the industrial and office real estate sub-sectors.

Tourism is a growing industry, with significant investment into tourist-related real

estate. This should have a positive impact on retail real estate.

The State Bank continues to conduct a review of financing of the property market,

with a view to increasing crucially needed credit flows to the real estate sector which

has suffered due to a lack of financing options for new developments.



Vietnam Real Estate SWOT - Continued

To source financing independently of banks, developers are seeking partners as joint

venture partners or for the sale of projects.

Improved relations with the US and increased US investment have shown promise as

the country attempts to balance its growing geopolitical tensions with China.

Threats FDI remains dominated by Japan, with over 50% total share representing a

dependency risk should major economic changes occur with a new Japanese

government.

Tensions with China over maritime and territorial disputes continue to strain relations

between the two countries, though a recent meeting between leaders has improved

economic cooperation.



Political

SWOT Analysis

Strengths The Communist Party of Vietnam remains committed to market-oriented reforms and

we do not expect major shifts in policy direction over the next five years. The one-

party system is generally conducive to short-term political stability.

Relations with the US have witnessed a marked improvement, and Washington sees

Hanoi as a potential geopolitical ally in South East Asia.

Weaknesses Corruption among government officials poses a major threat to the legitimacy of the

ruling Communist Party.

There is increasing (albeit still limited) public dissatisfaction with the leadership's tight

control over political dissent.

Opportunities The government recognises the threat corruption poses to its legitimacy, and has

acted to clamp down on graft among party officials.

Vietnam has allowed legislators to become more vocal in criticising government

policies. This is opening up opportunities for more checks and balances within the

one-party system.

Threats Macroeconomic instabilities continue to weigh on public acceptance of the one-party

system, and street demonstrations to protest economic conditions could develop into

a full-on challenge of undemocractic rule.

Although strong domestic control will ensure little change to Vietnam's political scene

in the next few years, over the longer term, the one-party-state will probably be

unsustainable.

Relations with China have deteriorated over recent years due to Beijing's more

assertive stance over disputed islands in the South China Sea and domestic criticism

of a large Chinese investment into a bauxite mining project in the central highlands,

which could potentially cause wide-scale environmental damage.



Economic

SWOT Analysis

Strengths Vietnam has been one of the fastest-growing economies in Asia in recent years, with

GDP growth averaging 7.1% annually between 2000 and 2012.

The economic boom has lifted many Vietnamese out of poverty, with the official

poverty rate in the country falling from 58% in 1993 to 20.7% in 2012.

Weaknesses Vietnam still suffers from substantial trade and fiscal deficits, leaving the economy

vulnerable to global economic uncertainties. The fiscal deficit is dominated by

substantial spending on social subsidies that could be difficult to withdraw.

The heavily-managed and weak currency reduces incentives to improve quality of

exports, and also keeps import costs high, contributing to inflationary pressures.

Opportunities WTO membership and the upcoming ASEAN AEC in 2015 should give Vietnam

greater access to both foreign markets and capital, while making Vietnamese

enterprises stronger through increased competition.

The government will in spite of the current macroeconomic woes, continue to move

forward with market reforms, including privatisation of state-owned enterprises, and

liberalising the banking sector.

Urbanisation will continue to be a long-term growth driver. The UN forecasts the

urban population rising from 29% of the population to more than 50% by the early

2040s.

Threats Inflation and deficit concerns have caused some investors to re-assess their hitherto

upbeat view of Vietnam. If the government focuses too much on stimulating growth

and fails to root out inflationary pressure, it risks prolonging macroeconomic

instability, which could lead to a potential crisis.

Prolonged macroeconomic instability could prompt the authorities to put reforms on

hold as they struggle to stabilise the economy.



Business Environment

SWOT Analysis

Strengths Vietnam has a large, skilled and low-cost workforce, which has made the country

attractive to foreign investors.

Vietnam's location - its proximity to China and South East Asia, and its good sea links

- makes it a good base for foreign companies to export to the rest of Asia, and

beyond.

Weaknesses Vietnam's infrastructure is still weak. Roads, railways and ports are inadequate to

cope with the country's economic growth and links with the outside world.

Vietnam remains one of the world's most corrupt countries. According to

Transparency International's 2012 Corruption Perceptions Index, Vietnam ranks 123

out of 176 countries.

Opportunities Vietnam is increasingly attracting investment from key Asian economies, such as

Japan, South Korea and Taiwan. This offers the possibility of the transfer of high-tech

skills and know-how.

Vietnam is pressing ahead with the privatisation of state-owned enterprises and the

liberalisation of the banking sector. This should offer foreign investors new entry

points.

Threats Ongoing trade disputes with the US, and the general threat of American

protectionism, which will remain a concern.

Labour unrest remains a lingering threat. A failure by the authorities to boost skills

levels could leave Vietnam a second-rate economy for an indefinite period.



Industry Forecast

BMI View: We are increasingly optimistic on the

long-term health of Vietnam's commercial realestate market; although we warn that rental rates

could continue falling in some sub-sectors in theshort term.

Real GDP growth came in at 5.4% in 2013, and we

see this rate improving by half a percentage point to

5.9% in 2014, boosted by improvements in

employment and manufacturing output, as well as

increased foreign direct investment (FDI).Meanwhile, we expect consumer price inflation

(CPI) to average 5.8% in 2014, down from 6.6% in2013, 9.3% in 2012 and 18.7% in 2011.

Economic growth in 2014 will be partly driven by an

increase in FDI inflows, which we believe will

create new investment opportunities for both foreign

and local enterprises, including in the commercial real estate sector. According to the Foreign Investment

Agency (FIA), the total value of new FDI reached US$21.6bn in 2013, which translates into a stellar 54.5%increase from 2012.

Rising GDP, Stable Inflation

Real GDP Growth And Consumer PriceInflation, 2008-2018 (% change y-o-y)

Real GDP growth, % y-o-y (LHS)Consumer price inflation, % y-o-y, average (LHS)

2007

2008

2009

2010

2011

2012

2013

2014

f

2015

f

2016

f

2017

f

2018

f5

6

7

8

0

10

20

30

e/f = estimate/forecast. Source: Asian Development Bank,

General Statistics Office, BMI



In general, the macroeconomic conditions mean weare optimistic for the Vietnamese commercial realestate sector. Although we believe that residentialprices still have some way to fall, as demand is farstronger at the bottom than the top of the market, wenote continued demand for retail real estate andongoing strength in hospitality-related ventures. Webelieve that although in the short term office andindustrial real estate will continue to underperform,in the longer term, as FDI increases along withmanufacturing and trade,

Office

Office rents are set to see a moderate increase in Ho

Chi Minh City (HCMC) in the short term, declinesignificantly in Hanoi and stay much the same in Da

Nang. These differing forecasts for 2014 are based

on the wave, or lack thereof, of new developments in

the office real estate sector. New builds in Hanoi are

forcing down rents, while the rising economic

stability of the country is beginning to be felt in

HCMC, where rising demand will be met by

increased supply, is keeping vacancy rates stable in that city, with rents expected to rise slightly.

Table: Forecast Rental Costs, 2013-2014 (US$ per m2/month)

October 2013-March 2014 2014

Min Max Trend % change

Hanoi 16.50 33.00 Decrease 5

Da Nang 10.50 17.50 Same 0

Ho Chi Minh City (Saigon) 19.25 45.50 Increase 1

Source: BMI

According to our in country sources, in Hanoi, 'rental rates have been down in 2013 owing to high supply

and low demand; it is expected to remain steady in H213'. Rentals are expected to decrease further in 2014

as there will be excess rental space owing to current projects under construction. However, thesedevelopments are a long way from completion. Also, recently many companies have moved out of Vietnam.

Stable Interest Rates

State Bank Of Vietnam's Policy Rate,2008-2018 (end of period)

2008

2009

2010

2011

2012

2013

2014

f

2015

f

2016

f

2017

f

2018

f5

7.5

10

12.5

15

17.5

e/f = estimate/forecast. Source: State Bank of Vietnam,

BMI



This led to a 40% vacancy rate in Hanoi towards the end of 2013, further driving down rents. Our in-

country sources ascribe this to the unstable economy.

We also note that in Hanoi, this issue is exacerbated by the fact that many companies only stay for short

periods, to work on a particular project or deal and then leave the country again. According to in countrysector sources 'only a few private companies and big corporations remain active in office markets'.

Table: Forecast Net Yield, 2011-2018

2011 2012 2013e 2014f 2015f 2016f 2017f 2018f

Hanoi 8-10 5-8 8-10 8-10 8-10 8-10 8-10 8-10

Da Nang 5-8 8-14 7-8 7-8 7-8 7-8 7-8 7-8

Ho Chi Minh City (Saigon) 8-10 8-15 8.0 8.0 8.0 8.0 8.0 8.0

e/f = BMI estimate/forecast. Source: BMI

Retail

Vietnam's retail sector has been a strong performer as an increasing urban middle class and younger

generations with access to disposable income have stimulated demand, especially for international brands.

However, conditions for foreign investment remain depressed as low returns in addition to increased

financing controls have limited investment opportunity.

Favourable demographics and robust economic growth largely underpin our optimism in the Vietnamese

MGR growth story. According to our estimates, Vietnam's population is roughly 89mn and is forecast to

grow at a healthy clip of 0.9% per annum to 2021. More importantly, Vietnam has a youthful demographic

profile, implying attractive opportunities in the mass-market.

Moreover, Vietnam's rapid economic development should assist the emergence of a new consumer class - in

major urban centres at least - which has an interest and can afford to participate in modern consumptionmethods such as mass grocery retailing. GDP per capita in Vietnam is forecast to more than double from an

estimated level of US$1,517 in 2012 to US$4,348 by 2021. This rise in purchasing power will only trigger aswathe of consumer spending across the country's retail scene.

The stabilising economy is benefiting the retail sector in Vietnam. This is having a concomitant impact on

the retail rates as rising demand for large shopping complexes and designer boutiques is driving up rates in



some areas. This is particularly true in HCMC, which will see rental rates rise by 2% over 2014. However,

at the opposite end of the spectrum, Hanoi is still plagued by a large supply, which is depressing rates. We

expect these to see a decline of 5-10% over 2014. Our in-country sources put vacant retail space at around

25% in Hanoi, and only 10% in HCMC. Meanwhile, Da Nang has a vacancy rate of about 27%.



Min Max Trend % change

Hanoi 25.00 46.00 Decrease 5-10

Da Nang 8.50 26.50 Same 0.0

Ho Chi Minh City (Saigon) 60.50 103.50 Increase 2.0

e/f = BMI estimate/forecast. Source: BMI

In Hanoi, the maximum rental rate is US$50 per square meter per month. About two years back, the rentalswere as high as US$70 per square meter per month. The market is going down as business has becometough in Hanoi with growing competition. There are limited retail projects for 2014 and no new investmentsexpected in the near future. The current unstable economy is expected to start improving only by 2015.


2011 2012 2013e 2014f 2015f 2016f 2017f 2018f

Hanoi 8-10 4-8 8-10 8-10 8-10 8-10 8-10 8-10

Da Nang 7-10 8-14 5-8 5-8 5-8 5-8 5-8 5-8


e/f = estimate/forecast. Source: BMI

Planned developments include Rose Rock Group and Vung Ro Petroleum's US$2bn Vung Ro Baymixed-use tourism, residential and retail development, which is expected to have 200,000 square metres (sqm) of retail space, according to a January 2014 report in Travel Daily Media. Vung Ro is equidistant fromDa Nang and HCMC.



Industrial

A poor 2012 and the resulting lack of FDI over 2013 hurt the industrial sector in Vietnam, resulting in the

suspension of many planned industrial parks and economic zones in 2012 and 2013. Despite this, some

projects have attracted investment from neighbouring countries such as Japan and South Korea.

The sharp increase in FDI inflows more recently bodes well for activity in the industrial construction sector.



Min Max Trend (% change)

Hanoi 03.38 09.25 Same 0

Da Nang 02.50 05.00 Same 0

Ho Chi Minh City (Saigon) 04.75 09.00 Same 0

Source: BMI

However, in the interim, industrial rents will remain largely unchanged from 2013 levels as concerns over

demand levels for Vietnam's export-driven economy, especially a Chinese economic slowdown, have

limited investment attractiveness.

HCMC in particular was highlighted by our in country sources as offering less opportunities for new build

developments than its peers as its industrial vacancy rates are already quite high at around 30%.


2011 2012 2013e 2014f 2015f 2016f 2017f 2018f

Hanoi 4-8 4-8 7-8 7-8 7-8 7-8 7-8 7-8

Da Nang 13-14 13-14 6-7 6-7 6-7 6-7 6-7 6-7


e/f = estimate/forecast. Source: BMI

We are seeing increasing FDI into industrial real estate. For example, according to a report in VietNamNet

Bridge in February 2014, China's Texhong Group is planning an industrial zone in Quang Ninh province,



while Thailand's Amata Group is planning a high-tech zone, also in Quang Ninh. Meanwhile, a high-techpark developed with funding from the Vietnamese government and a grant from South Korea is being built

in Can Tho.



Construction And Infrastructure Forecast Scenario

Table: Construction And Infrastructure Industry Data (Vietnam 2012-2017)

2012 2013e 2014f 2015f 2016f 2017f

Construction industry value,VNDbn 179,301.00 191,631.00 213,842.25 238,725.87 265,584.74 295,006.60

Construction industry value,US$bn 8.6 9.2 10.4 11.7 13.1 14.8

Construction Industry Value,Real Growth, % y-o-y 2.09 5.83 5.83 6.39 6.25 6.18

Construction Industry Value,% of GDP 5.5 5.3 5.2 5.2 5.2 5.2

Total capital investment,VNDbn 785,337.34 871,493.55 1,013,908.67 1,195,195.54 1,393,000.40 1,589,848.08

Total capital investment, US$bn 37.62 41.70 49.30 58.79 68.91 79.49

Total capital investment, % ofGDP 24.20 23.90 24.80 26.10 27.17 27.79

Capital investment per capita,US$ 414.38 454.83 532.73 629.53 731.59 837.10

Real capital investmentgrowth, % y-o-y 1.87 4.10 10.00 12.00 11.00 8.80

Construction sectoremployment, '000 3,183.5 3,423.9 3,678.0 3,972.9 4,279.9 4,602.4

Construction industryemployment, % y-o-y 2.52 7.55 7.42 8.02 7.73 7.53

Active population, total, '000 64,081.40 64,820.11 65,485.17 66,093.66 66,647.27 67,144.29

Construction industryemployees as % of totallabour force

4.97 5.28 5.62 6.01 6.42 6.85

Infrastructure industry value,% of total construction 32.7 33.8 33.5 33.1 32.8 32.4

Infrastructure industry value,VNDbn 58,653.25 64,809.31 71,579.65 79,046.81 87,054.98 95,588.78

Infrastructure industry value,US$bn 2.81 3.10 3.48 3.89 4.31 4.78

Infrastructure industry valuereal growth, % y-o-y 0.9 3.9 4.7 5.2 5.1 4.9

Infrastructure industry value,% of GDP 1.8 1.8 1.8 1.7 1.7 1.7

Residential and Non-residential Building IndustryValue As % of TotalConstruction

67.29 66.18 66.53 66.89 67.22 67.60

Residential and Non-residential Building IndustryValue, VNDbn

120,647.75 126,821.69 142,262.60 159,679.06 178,529.76 199,417.82



Construction And Infrastructure Industry Data (Vietnam 2012-2017) - Continued

2012 2013e 2014f 2015f 2016f 2017f

Residential and Non-residential Building IndustryValue, US$bn

5.78 6.07 6.92 7.85 8.83 9.97

Residential and Non-residential Building IndustryValue Real Growth (%)

1.02 -1.48 6.41 6.99 6.81 6.80

Residential and Non-residential Building IndustryValue as % of GDP

3.72 3.48 3.48 3.49 3.48 3.49

Cement production (includingimported clinker), tonnes 47,900,158 49,755,167 54,456,929 60,661,903 67,032,460 72,690,571

Cement production (includingimported clinker), tonnes, %y-o-y

1.8 3.9 9.4 11.4 10.5 8.4

Cement consumption, tonnes 47,137,388 48,919,480 53,549,192 59,675,315 65,956,456 71,513,269

Cement consumption,tonnes, % y-o-y 1.4 3.8 9.5 11.4 10.5 8.4

Cement net exports, tonnes 762,769 835,687 907,737 986,588 1,076,004 1,177,302

Cement net exports, tonnes,% y-o-y 28.3 9.6 8.6 8.7 9.1 9.4

e/f=estimate/forecast, Source: National Sources/BMI

Table: Construction And Infrastructure Industry Data (Vietnam 2018-2023)

2018f 2019f 2020f 2021f 2022f 2023f

Construction industryvalue, VNDbn 327,200.51 362,647.35 401,855.54 444,790.98 492,279.29 544,276.11

Construction industryvalue, US$bn 16.5 18.5 20.7 23.0 25.6 28.4

Construction IndustryValue, Real Growth, % y-o-y

6.01 6.03 6.01 5.98 5.98 5.96

Construction IndustryValue, % of GDP 5.1 5.1 5.1 5.1 5.1 5.0

Total capital investment,VNDbn 1,801,170.68 2,019,760.76 2,260,645.51 2,523,110.97 2,816,049.20 3,139,996.24

Total capital investment,US$bn 90.97 103.05 116.23 130.39 146.29 163.97

Total capital investment,% of GDP 28.20 28.39 28.57 28.75 28.93 29.10

Capital investment percapita, US$ 950.59 1,069.03 1,197.53 1,334.90 1,488.72 1,659.41




2018f 2019f 2020f 2021f 2022f 2023f

Real capital investmentgrowth, % y-o-y 8.00 7.00 6.80 6.60 6.60 6.60

Construction sectoremployment, '000 4,935.6 5,290.0 5,664.5 6,059.7 6,478.0 6,920.2

Construction industryemployment, % y-o-y 7.24 7.18 7.08 6.98 6.90 6.83

Active population, total,'000 67,594.92 68,011.07 68,401.62 68,772.11 69,122.44 69,448.57

Construction industryemployees as % of totallabour force

7.30 7.78 8.28 8.81 9.37 9.96

Infrastructure industryvalue, % of totalconstruction

32.0 31.6 31.2 30.8 30.4 30.1

Infrastructure industryvalue, VNDbn 104,761.46 114,611.61 125,304.45 136,917.43 149,642.49 163,654.20

Infrastructure industryvalue, US$bn 5.29 5.85 6.44 7.08 7.77 8.55

Infrastructure industryvalue real growth, % y-o-y

4.7 4.6 4.5 4.6 4.6 4.8

Infrastructure industryvalue, % of GDP 1.6 1.6 1.6 1.6 1.5 1.5

Residential and Non-residential BuildingIndustry Value As % ofTotal Construction

67.98 68.40 68.82 69.22 69.60 69.93

Residential and Non-residential BuildingIndustry Value, VNDbn

222,439.05 248,035.74 276,551.09 307,873.55 342,636.80 380,621.91

Residential and Non-residential BuildingIndustry Value, US$bn

11.23 12.65 14.22 15.91 17.80 19.88

Residential and Non-residential BuildingIndustry Value RealGrowth (%)

6.64 6.71 6.70 6.63 6.59 6.49

Residential and Non-residential BuildingIndustry Value as % ofGDP

3.48 3.49 3.50 3.51 3.52 3.53

Cement production(including importedclinker), tonnes

78,287,306 83,577,075 89,075,636 94,775,641 100,851,880 107,329,187

Cement production(including importedclinker), tonnes, % y-o-y

7.7 6.8 6.6 6.4 6.4 6.4

Cement consumption,tonnes 76,998,573 82,162,136 87,525,398 93,020,216 99,001,095 105,242,755




2018f 2019f 2020f 2021f 2022f 2023f

Cement consumption,tonnes, % y-o-y 7.7 6.7 6.5 6.3 6.4 6.3

Cement net exports,tonnes 1,288,733 1,414,938 1,550,238 1,755,425 1,850,785 2,086,432

Cement net exports,tonnes, % y-o-y 9.5 9.8 9.6 13.2 5.4 12.7

e/f=estimate/forecast, Source: National Sources/BMI

BMI View: The outlook for Vietnam's construction sector continues to be increasingly positive. This isprimarily due to government policy, where the adoption of a loose monetary policy, revisions to theregulatory framework for land acquisition and the restructuring of state-owned enterprises are increasingthe potential for greater construction investment over the coming years. This potential for greaterconstruction activity is reflected in our projections, with our real growth forecasts for the sector revised upto 5.8% in 2014 (previously 5.4%) and averaging 6.2% per annum between 2015 and 2018 (previously6.0%).

Construction activity in Vietnam has continued to recover from the lows of 2011. Latest data from the

Vietnam General Statistics Office reveals that the construction sector grew by 5.8% in real terms in 2013,

faster than the -1.0% and 2.1% print in 2011 and 2012 respectively. This is in line with our view that the

recovery in Vietnam's construction sector will be sustained in the next few quarters.



On The Path To Recovery

Vietnam - Quarterly Construction Industry Value, VNDbn

Source: General Statistics Office, State Bank of Vietnam



On The Path To Recovery

Construction Industry Value LHS And Real Growth RHS (2012-2023)

Construction industry value, VNDbn (LHS)Construction Industry Value, Real Growth, % y-o-y (RHS)

2012

2013

2014

f

2015

f

2016

f

2017

f

2018

f

2019

f

2020

f

2021

f

2022

f

2023

f0

100,000

200,000

300,000

400,000

500,000

600,000

0

2

4

6

8

e/f=estimate/forecast, Source: Vietnam General Statistics Office, BMI

Looking beyond 2013, the outlook for Vietnam's construction sector continues to be increasingly positive.

This is reflected in our projections, with our real growth forecasts for the sector revised up to 5.8% in 2014(previously 5.4%) and averaging 6.2% per annum between 2015 and 2018 (previously 6.0%).



Not Like Before

Vietnam Construction (And Sum-Components) Industry Value Forecasts

e/f= BMI estimate/forecast. Source: General Statistics Office, State Bank of Vietnam, BMI

This relatively optimistic outlook is primarily driven by three main factors:

Conducive Monetary Conditions. The government is seeking to boost economic growth and has

maintained its policy rate at 7.00% since May 2013, the lowest policy rate since December 2009. Given the

lagged impact of monetary easing, any positive effects of this easing could last well into 2014. Moreover,

inflation remains relatively benign, leading us to expect the Vietnamese central bank to maintain an

accommodative policy stance throughout 2014 - we are forecasting the benchmark interest rate to remain at

7.00% by end-2014. This should be favourable for construction activity as Vietnamese companies would

benefit from a lower cost of capital - making them more inclined to take up new projects or carry outcapital-intensive construction works - while municipal and provincial governments could also find the

necessary financing for their infrastructure plans.



A Loose Monetary Policy

Vietnam - Policy Rate, % & Headline CPI - Housing & Construction Materials, % y-o-y

Source: General Statistics Office, State Bank of Vietnam

Robust Foreign Direct Investment (FDI) Inflows. Foreign direct investment (FDI) inflows into thecountry have accelerated across 2013. According to the Ministry of Planning and Investment, Total FDI

inflows into Vietnam grew by 54.5% to reach US$21.6bn in 2013, significantly surpassing the government'sfull-year target of US$13bn.

The sharp increase in FDI inflows bodes well for activity in the construction sector. This is because we

believe a sizeable portion of these inflows were channelled into buildings and infrastructure. To be sure, the

real estate achieved the third highest amount of FDI inflows amongst the 18 sectors between January and

November 2013, while 84.1% of Japan's total investment capital into Vietnam, the country's largest foreign

investor, was channelled into manufacturing and processing projects, according to the Ministry of Planningand Investment. Meanwhile, we have seen several agreements signed with Asian companies over the course

of 2013 for the development of transport and power infrastructure projects in Vietnam (see 'High TariffsAnd Deregulation Bearing Fruit', October 17 2013). Financing from European banks - a major source offinance for Vietnamese infrastructure - has also stabilised at a relatively positive growth rate of 6.5% year-

on-year in Q213.



Limited Upside

Vietnam - Foreign Claims From European Banks, US$mn And % chg y-o-y

Source: Bank For International Settlements (January 2014), BMI

Revised Land Law. On November 29 2013, the Vietnamese government approved an amendment in its

Land Law (see 'Revised Land Law A Major Step In Tackling Corruption', December 9 2013). The revisedlegislation, which takes effect on July 1 2014, is aimed at limiting land disputes by prohibiting the

government from appropriating land for socio-economic development unless such projects have beenapproved by the prime minister and the Vietnamese parliament. From our perspective, the revised law is a

major step in strengthening the regulatory framework with regards to land transfer and entitlement whileincreasing the transparency of economic development projects that are implemented under the direction ofthe provincial government. This strengthening of the regulatory framework for land acquisition and

resettlement could help to reduce the risk of project delays that are brought on by long and costly disputesover compensation.



Table: Factbox - Key Elements Of Vietnam's Revised Land Law

The revised Land Law is effective from July 1 2014.

Land is owned by the people and managed by the State.

Land prices are required to be valued by independent agencies based on market prices at the time of assessment aswell as land use purpose and duration.

New provisions provided on issue relating to ownership and usage of land as well as on compensation andresettlement of residents subject to relocation.

The regulation requiring the release of the government's land price list on January 1 of every year is abolished.

The concession for all types of farming land has been increased from 20 to 50 years.

Source: BMI

Non-Residential Sector: Rising Domestic Demand

There are also sub-sectoral factors that are driving our positive outlook for Vietnam's construction sector. In

the non-residential building sector, we have seen a recovery in Vietnam's manufacturing production

activity, with the HSBC Purchasing Managers' Index above 50.0 level since September 2013 (a signal ofexpansion in the manufacturing sector). While we remained concerned about the potential for deteriorationin external trade activity (particularly the potential for a renewed downturn in the Chinese economy), thegrowing domestic demand for manufacturing goods could increase demand for non-residential buildings to

support production activity.



Staying Strong

Vietnam - Purchasing Managers' Index

Source: BMI, Markit/HSBC

Residential Sector: Early Signs Of Recovery

The residential building sector is also showing early signs of improvement (see 'Early Signs Of A Recovery,But No Property Market Boom In Sight', August 14 2013). Although the sector is still suffering fromsignificant oversupply and falling prices, unsold inventory of new residential units have fallen back to more

moderate levels by historical standards. Unsold apartments as a share of total units under construction fell

from 30.3% in Q412 to 27.7% in Q213, while unsold villas and townhouses fell from 54.3% to 10.7% overthe same period. In addition, the rate of decline in housing prices is slowing down, which could indicate

growing demand for property. As the accompanying chart shows, the Vietnam Real Estate Index, which

tracks transaction prices of highly liquid apartments in Hanoi and Ho Chi Minh City, fell by 8.2% y-o-y in

August 2013, significantly lower than the contraction of 15.2% y-o-y in August 2012.



Signs Of Bottoming

Vietnam - Real Estate Index

Source: BMI, Bloomberg

Lastly, the government's plan to increase the supply of social housing to low-and middle-income groups is

accelerating, with several large-scale social housing programmes and projects being implemented. InAugust 2013, the Ministry of Construction announced that there were 50 projects, valued at around US$1bn, registered to convert 34,000 units of commercial houses to social houses.

Infrastructure Sector: Unlocking Capital

In the infrastructure sector, the Vietnamese government is also making progress with the use of public-

private partnerships (PPPs) for infrastructure development. The government launched the initial tenderingstage for its first road PPP project in September 2013 and there could be other infrastructure projects offeredas PPPs over the near term (see 'Skeptical Over Dau Giay-Phan Thiet PPP Timeline', December 6 2013).We have long highlighted that the Vietnamese government does not have sufficient funds to meet the

country's infrastructure needs and the use of PPPs could aid in meeting this deficit (see 'ConstructionRecovery On Track', July 14 2013). According to the Ministry of Planning and Investment, Vietnam will



need US$16-17bn per annum for infrastructure development over the next decade, but the capital raisedfrom traditional channels can only meet 50-60% of the funds needed.

Most importantly, the government has taken an aggressive stance in restructuring its state-owned enterprises

(SOEs, see 'Privatisation of SOEs Highly Positive For The Economy', January 8 2014). We believe thisrestructuring is crucial in unlocking investment for infrastructure development in Vietnam. This is because

it could not only allow the Vietnamese government to raise funds for investment through the privatisation of

these SOEs, but also attract greater FDI due to a less protectionist investment climate. Vietnam's SOEs have

been a leading contributor of the misallocation of capital in the country, due to corruption and a lack of

competition and oversight. This has, in turn, resulted in mounting losses for public sector firms (see 'MoreRestructuring To come For SOEs', September 26 2013). Due to these losses, a number of these SOEs areunable to repay their debts, which the Vietnamese government is obliged to repay. This has undermined the

country's fiscal position and limited the government's ability to finance infrastructure projects.



Macroeconomic Forecasts

Economic Analysis

BMI View: Vietnam's latest real GDP reading, which showed that the economy expanded by 6.0% year-on-

year (y-o-y) in Q413, has reaffirmed our conviction that the Vietnamese economy will begin 2014 on astrong note. Not only are we witnessing more evidence of a sustained pick-up in production activity andemployment in the manufacturing sector, but we also expect foreign direct investment (FDI) inflows toaccelerate as the economic recovery gathers pace over the coming quarters. We forecast real GDP growthto come in at 5.9% in 2014, versus Bloomberg consensus of 5.5%.

In line with our view that the Vietnamese economy would accelerate forcefully into the final months of the

year (see 'Economy Picking Up Pace', October 4 2013), latest data released by the General Statistics Office(GSO) showed that the economy expanded by 6.0% year-on-year (y-o-y) in Q413. This translates into full-year growth of 5.4% for 2013, just slightly above our forecast of 5.3%. The latest GDP reading, combinedwith the strong set of economic data we have seen in recent weeks (accelerating foreign direct investmentinflows, remittances, and merchandise trade exports), have reaffirmed our conviction that the Vietnameseeconomy will begin 2014 on a strong note.



Looking At A Strong Start For 2014

Vietnam - Real GDP Growth, % (LHS) & Contribution By GFCF & Private Consumption, pp (RHS)

Source: BMI, General Statistics Office. (e = estimates, f = BMI forecasts)

Signs Of Improvement

Despite the lack of progress with regards to banking sector reforms and efforts to ease lending conditions

(credit growth is estimated to have expanded by around 9% in 2013, well under the State Bank of Vietnam'sinitial target of 12%), the economy appears to be holding up well. Not only are we witnessing moreevidence of a sustained pick-up in production activity and employment in the manufacturing sector (see'Strong PMI Reading Reinforces Outlook On Growth', November 5 2013), but we also expect foreign directinvestment (FDI) inflows into the export sector to accelerate as the economic recovery gathers pace over thecoming quarters.

Private Sector Investment To Drive Recovery

According to figures published by GSO, FDI-related exports made up an estimated 67% of the country's

total exports for the first 11 months of the year. Thus, although increased FDI inflows could potentially

result in a temporary deterioration in the country's trade and current account dynamics due to a burst of



capital goods imports in the near term, we believe that this is a long-term positive for the economy.

Furthermore, we view FDI inflows as a crucial source of economic growth over the coming quarters given

that the Vietnamese government is struggling to unlock domestic lending. We forecast real gross fixed

capital formation (GFCF) growth to come in at around 10% in 2014, contributing around 2.7 percentagepoints (pp) to our real GDP growth forecast of 5.9%.

Expenditure Breakdown

Private Consumption: We expect private consumption to grow at a relatively resilient pace of 6.5% in

2014. However, we note that the risk of further bankruptcies among SMEs could potentially lead to

widespread job losses, especially in export-driven sectors. Uncertainties over the outlook for employmentcould, in turn, prompt households to cut back on spending.

Gross Fixed Capital Formation: We foresee a pickup in private sector investment growth in 2014, partly

led by increased foreign direct investment inflows. We believe lending rates will gradually ease over the

coming months as the effect of rate cuts in 2013 by the SBV begins to kick in. We are also seeing evidence

that credit conditions are improving. Accordingly, we expect gross fixed capital formation growth to

accelerate substantially from 4.1% in 2013 to 10.0% in 2014.

Public Spending: We expect total public spending to remain relatively resilient in 2014, expanding at a

respectable pace of 6.5%. However, there is limited room for the government to increase spending further

owing to concerns over the need to finance a potential bailout of ailing state-owned commercial banks.

Net Exports: Net exports remain the biggest downside risk to our outlook for the Vietnamese economy,

although we expect external demand to pick up in 2014. Vietnam's trade account has fallen back into

deficits in recent months, but we see the case for a substantial pickup in external demand on the back of a

rebound in regional growth over the coming quarters. Accordingly, we still expect exports to expand at a

moderate pace of 5.6% in 2014.



Table: Vietnam - Economic Activity

2011 2012 2013e 2014f 2015f 2016f 2017f 2018f

Nominal GDP,VNDbn 3 2,779,880.2 3,245,419.2 3,584,261.0 4,012,847.7 4,494,844.6 5,033,219.9 5,616,365.8 6,269,265.3

Nominal GDP,US$bn 3 134.6 155.6 170.6 195.1 221.1 249 280.8 316.6

Real GDPgrowth, %y-o-y 3 6.2 5.2 5.4 5.9 6.4 6.6 6.4 6.4

GDP per capita,US$ 3 1,497 1,713 1,860 2,108 2,368 2,643 2,957 3,309

Population, mn 4 89.9 90.8 91.7e 92.5 93.4 94.2 95 95.7

Industrialproduction, %y-o-y, ave 1,5 10.9 7.0 5.9 7.7 8.4 8.6 8.6 8.5

Unemployment,% of labourforce, eop 2,6 3.6 3.2 3.7e 3.5 3.5 3.6 3.5 3.5

Notes: e BMI estimates. f BMI forecasts. 1 at 1994 prices; 2 Urban Area Only. Sources: 3 Asian Development Bank,General Statistics Office; 4 World Bank/UN/BMI; 5 General Statistics Office; 6 General Statistics Office/BMI.



Industry Risk Reward Ratings

Asia - Risk/Reward Ratings

The Real Estate Risk/Reward Ratings provide a regional country-by-country comparison of the risks and

rewards for the real estate market. They evaluate the industry's current size and growth potential, and take

into account issues that could affect the industry's development, such as commercial bank lending, financial

infrastructure, per capita GDP, urbanisation, real estate prices and lending rates. The score also covers

country- and industry-specific factors, such as political and economic stability, that could inhibit or

encourage development in the real estate sector.

Table: Asia Real Estate Risk/Reward Ratings

Industryrewards

Countryrewards Rewards

Industryrisks

Countryrisks Risks

Overall real-estate rating rank

South Korea 55.0 74.6 61.9 93.3 69.7 85.1 73.5 1

China 80.0 48.4 68.9 90.0 50.1 76.0 72.5 2

Australia 65.0 91.6 74.3 60.0 74.7 65.1 69.7 3

Hong Kong 52.5 91.7 66.2 63.3 74.6 67.3 66.7 4

Malaysia 55.0 59.5 56.6 83.3 60.1 75.2 65.9 5

India 87.5 37.2 69.9 73.3 38.4 61.1 65.5 6

Singapore 55.0 97.6 69.9 46.7 82.3 59.2 64.5 7

Taiwan 60.0 67.0 62.4 70.0 59.2 66.2 64.3 8

Japan 57.5 84.6 67.0 53.3 73.7 60.5 63.7 9

Indonesia 80.0 35.3 64.4 73.3 37.6 60.8 62.6 10

Philippines 65.0 37.4 55.4 73.3 51.3 65.6 60.5 11

Pakistan 70.0 29.3 55.8 76.7 43.4 65.0 60.4 12

Thailand 45.0 40.1 43.3 83.3 63.4 76.3 59.8 13

Vietnam 65.0 20.0 49.3 73.3 50.5 65.3 57.3 14

Scores out of 100, with 100 the best. Source: BMI



Vietnam - Risk/Reward Ratings

BMI View: Vietnam achieves a score of 57.3 out of 100 in BMI's Asia Pacific Real Estate Risk/RewardRatings (RRRs), unchanged from last quarter and last out of the 14 countries surveyed.

Despite this low score, and the mixed fortunes of the commercial real estate market over the recent past,

BMI believes that Vietnam's real estate market is actually one of the fastest-moving business environments

in the region. Rapid expansion has moved ahead of the regulatory environment and the country is a clear

outperformer among the emerging South East Asian countries in rewards analysis. However, prolonged

instability in the banking sector, corruption and delays to project development continue to representsignificant downside risk.

Rewards

Industry Rewards

Vietnam scores 65 in this category, the same as last quarter. This is indicative of a dynamic emergent

market and reflects our view that Vietnam will continue to be one of the most active and attractive

infrastructure markets in the region. Demand for new developments, especially in the retail sector, continues

to outpace supply as the population becomes more urbanised and disposable incomes grow. While many

projects faced setbacks during the economic contraction in 2012, the government is working hard to attractadditional foreign investment, particularly promoting new industrial parks and economic zones. Meanwhile,

the booming tourism real estate market should have a positive impact on retail real estate.

Country Rewards

In terms of country structure components, which include financial and labour market infrastructure,

Vietnam scores well below the regional average, on only 20 out of 100. The predominant cause is a lack of

sufficient financial infrastructure. Lending in Vietnam is characterised by poor operating standards and

dominated by the four state-owned banks, further complicating access to foreign capital. Government

attempts to combat inflation saw interest rates rise to historic highs in 2012. Although this subsided in 2013

and rates have returned to normal, many banks remain unwilling to lend to foreign investors to protect their

interests. Sub-optimal lending standards have also resulted in very high loan to deposit ratios in Vietnam's

banking sector. In the event of a liquidity shortage, or insolvency triggered by economic stress, a financial

crisis would be a plausible scenario, further restricting funding to the construction sector. Despite these

challenges, the government recently introduced a proposal to remove foreign ownership restrictions on



publicly-traded companies, a move widely seen as an attempt to boost the country's stock market and attract

increased FDI into a stabilising economy.

Risks

Industry Risks

Although there is definite optimism that economic conditions will improve in 2014, after the economy grew

by 5.4% in 2013, after many projects stalled in 2012 investors remain wary of a second downturn. Officeand retail rents slid to historic lows and increasingly favourable incentives were required to boost long-term

occupancy rates, although we believe the sector may have turned a corner. On the plus side, foreign direct

investment (FDI) from regional partners such as Japan, Singapore and South Korea remain strong and thecountry is increasing its economic ties with China and the US. Vietnam scores 73.3 in this indicator.

Country Risk

Instability in the banking sector including prevalent bad debts and geopolitical tensions in the South China

Sea remain the most significant country risks. Corruption also remains a large issue, contributing to the poor

scores within the country risk ratings. Investors see official corruption as one of the biggest hindrances to

running a business in Vietnam, with anecdotal evidence suggesting that 30% of a project's value is pocketedby the contractor to pay bribes to relevant parties. However, the long-term economic outlook is improving

and legislative structure governing the infrastructure and real estate sectors is also improving, providing a

higher score for country risks than previously, at 50.5, up from 48.4 last quarter.



Market Overview

BMI View: Recently characterised by high interest

rates, problematic inflation, real estate oversupplyand government imposed capital controls, Vietnam's

property market remains significantly affected byeconomic declines and government crisis

management that is only beginning to relent.

Although the fundamentals for economic growth

look favourable for 2014, we note the impediments

of an unstable banking sector and project financingdifficulties. The ongoing gloom in the European

economy, rising tensions with China, and questions

of long term Japanese investment, have furthered

dampened a real estate sector dependent upon

investment within an export-led economy.

Nevertheless, the government has achieved

significant progress in addressing the deep

macroeconomic imbalances in Vietnam, which has

helped to curb inflation, reinforce confidence in the currency and led to the country's first trade surplus

since 1993. This will be of particular benefit to the retail real estate sector as rising incomes boost retail

spending, and have a corresponding benefit for retail rent rates. It will also benefit the industrial sector as

we believe rising consumer demand for manufactured goods will act as the impetus to spur the development

of Vietnam's domestic manufacturing industry, this will entail additional industrial spaces be built to meet

this burgeoning demand.

In 2013 the economy grew by 5.4% year-on-year (y-o-y), boosted by Q413 GDP growth of 6.0%, and withaccelerating foreign direct investment inflows, remittances, and merchandise trade exports, we have a

positive near-term outlook for the Vietnamese economy, which is translating into optimism in the real estate

market.

GDP, Inflation And Interest Rates

Real GDP Growth (% y-o-y), Consumer PriceInflation (% change, end of period) And

Central Bank Policy Rate, 2008-2018

Real GDP growth, % y-o-y (LHS)Consumer price inflation, % y-o-y, eop (RHS)Central bank policy rate, % eop (LHS)

2008

2009

2010

2011

2012

2013

2014

f

2015

f

2016

f

2017

f

2018

f0

10

20

0

10

20

e/f = estimate/forecast. Source: Asian Development Bank,

General Statistics Office, State Bank of Vietnam



Positive economic growth, the curbing of inflation

and stable interest rates mean that there is increasing

private investment in Vietnam, and in particular

foreign direct investment, including into the real

estate sector. Vietnam Plus reported that in January

2014 there was US$176.3mn of FDI into Vietnam'sreal estate sector, the second highest proportion

(after processing and manufacturing).

The government is committed to spending on

industrial parks. The country has invested heavily in

the development of industrial parks (IPs) andeconomic zones (EZs) and remains committed toattract in a more diversified portfolio of foreign

investment, especially from the US and China.

Foreign investments in Vietnam's industrial parks

(IPs) and economic zones (EZs) reached more thanUS$110bn by the end of June 2013. Vietnam has 289 IPs, 15 coastal EZs and 28 border EZs. IPs attractedaround 4,665 foreign direct investment (FDI) projects totalling US$70bn, while coastal EZs and border EZshad drawn around US$40bn and US$700mn investments respectively. Total aggregated registered capitalreached US$7.9bn in H113, representing more than 80% of the new investment capital. Vietnameseinvestors invested more than US$713.9mn in the country's IPs and EZs in H113. IPs and EZs' contributionto the state budget has increased 26% y-o-y to around US$1.4bn.

FDI Growing

Inward FDI, 2002-2012 (US$mn and % changey-o-y)

Inward FDI stock, US$mn (LHS)Inward FDI stock, % change y-o-y (RHS)

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

0

50,000

100,000

0

20

40

Source: UNCTAD, BMI



Another area that is benefiting the retail real estate

market is tourism. The country is becoming an

increasingly popular tourism destination, and the

number of hotels and tourist complexes is rising,

with accompanying significant investment from

property developers. As these are often mixed use,

and as Vietnam increasingly has sophisticated,

Western-style malls, tourist spending on retail will

surely rise.

It is also worth mentioning the housing market,

which although not directly linked to commercial

real estate can have a bearing on investor

confidence. The residential market is affected by

oversupply at the luxury end of the market, with

developers increasingly interested in social housing.

Meanwhile, demand at the lower end of the market

is high, and average selling prices have been falling

in the residential market. This may in turn drive

investor interest in commercial real estate, which is in a more healthy state across the country.

Steady Growth

Tourist Arrivals, 2008-2018 ('000 and % changey-o-y)

Total arrivals, '000 (LHS)Total arrivals, % y-o-y (RHS)

2008

2009

2010

2011

2012

2013

e

2014

f

2015

f

2016

f

2017

f

2018

f0

5,000

10,000

0

25

e/f = estimate/forecast. Source: General Statistics Office of

Vietnam, Vietnam National Administration of Tourism, BMI



Hanoi

The capital of Vietnam, Hanoi, is the country's second largest city. Hanoi is set to be the fastest growing

city in terms of GDP when measured between 2008 and 2025. Industry and trade are important facets of

Hanoi's economic makeup, which has historically benefited the industrial rental sector.

The city's central business district (CBD) is centred on the Hoan Kiem neighbourhood, with Trung HoaNhan Chinh emerging as a site for development in the south west of the city. According to Do Thi

magazine, the latter was named as the urban area most in demand in Vietnam before the property market

slump. At present, continued office construction in the city's outskirts, most notably the Cau Giay district,

may reduce demand for CBD space where rents are significantly higher.

Recently completed developments include the Keangnam Hanoi Landmark Tower in addition to the

recently renovated Trang Tien Plaza shopping mall, both located in Hanoi's CBD.

Ho Chi Minh City

HCMC is the largest economic centre in Vietnam with its primary industry being the services sector,

followed by the construction industry. In addition to being the most populous city in the country, HCMC is

a transport, trade and commercial hub both domestically and as a trade gateway to the international arena,

particularly South East Asia. In spite of the currently subdued real estate market, the city is well positioned

to weather the current tumult in the real estate market, with prime retail rents showing particular resilience.

Previously, it was reported that companies are returning to the centre of HCMC as office rentals continue to

plunge in value. However, companies that signed leases at the height of the property market boom in

Vietnam are now considering breaking their contracts and accepting the penalties in order to move to

downtown buildings with better facilities. The second half of 2013 continued to be a tenants market,

especially for large corporations looking to secure favourable long-term leases with upfront cash deals. As

with Hanoi, construction on the city outskirts have continued to suppress CBD rents as companies take

advantage of even lower rents in outer developments. However, much of the construction planned for

HCMC office developments was put on hold during 2012 and has yet to fully resume.



Da Nang

Da Nang is a major transport hub with important commercial links due to its port on the South China Sea,and is the leading industrial area in Vietnam. Historically, the industrial real estate sector is particularly

vulnerable to rental depression when the export-led economy is suffering. Despite the country's first trade

surplus in 20 years, international demand is not forecast to improve in the near future, making it unlikely

that this sub-sector will see a dramatic recovery.

The Da Nang commercial property market remains a bright spot in the Vietnamese real estate sector as

growth, especially in the hospitality centre, continues as international hotel chains capitalise on Da Nang's

tourist friendly location and historically low rents. The city's central location and access to costal and

cultural landmarks has attracted increasing levels of foreign investment, especially from South Korea, Japan

and Singapore. The Da Phuoc International New Town, a $250mn planned urban area on reclaimed land, inaddition to the recently completed Hyatt Regency Da Nang Resort and Spa, are prime examples of this

trend.

Because of its bright prospects, Da Nang is expected to draw people from Hanoi and HCMC. It has

relatively low real estate prices. It offers social stability and is a region of commercial growth.

Office

BMI View: Although rents in the office sector have been declining, we believe the sub-sector is beginning

to turn a corner. Having said that, the fall since the global financial crisis has been a steep one, and we

continue to expect a trend for active deal searching among tenants including relocation and quality

upgrades.

It has been reported that rates in Ho Chi Minh City (HCMC)'s central business district (CBD) have halvedsince their pre-global financial crisis peaks, and in general the Vietnamese market has become much more

tenant-favourable.

Supply And Demand

Despite increased incentives for large-scale leasing, occupancy rates in all major central business districtshave not increased, our in-house sources out Hanoi's occupancy rate at 60%, with the threat of more



pressure from planned developments outside city centres. Many of these projects, initially stalled due tofinancing issues, have now resumed construction.

In HCMC we note the lack of new supply coming online or in the pipeline, which should make the market

turn more favourable to landlords, potentially driving rents up and vacancy rates down in the longer term.

In Da Nang, meanwhile, one of the main drivers of the office market is companies looking to downsize to

smaller premises, which is holding up the lower end of that city's market.

Table: Historic Rental Costs, 2012-2013 (US$ per m2/month)

January-June 2012 July-December 2012 January-September 2013

Min Max Min Max Min Max

Hanoi 20.00 58.00 15.50 43.50 17.50 35.00

Da Nang 8.00 20.00 10.50 17.50 08.50 15.50

Ho Chi Minh City (Saigon) 18.00 50.00 13.50 45.00 19.00 45.00

Source: BMI

Rents And Yields

While rents at the top end of the market have been falling over our review period, notably in Hanoi, where

they fell from US$58 per square metre (sq m) per month in H112 to US$35 in the first nine months of 2013,rents at the bottom end are beginning to pick up, although only slowly. Hanoi's bottom end rents grew from

US$15.50 in H212 to US$17.50 in the first nine months of 2013, while in HCMC rents rose considerably,from US$13.50 to US$19.00. Only in Da Nang did we see another fall, but this was after a rise betweenH112 and H212.

In HCMC, as a result of new supply, we are expecting a slight increase in rents of 1% in 2014, and we see

flat rental rates in Da Nang over 2014, although we do see scope for Hanoi's rents to fall further.

Yields narrowed again in late 2012, after widening in the first half of the year in Da Nang and HCMC.

Meanwhile, yields overall rose in Hanoi over the same period, from 5-8% to 7-8%. Although yields in all

three cities are down markedly from 20% in the first half of 2011, we believe that they are now set for more

stability.



Table: Net Yields, 2011-2012 (%)

January-June

2011July-December

2011January-June

2012July-December

2012

Hanoi 20 8-10 5-8 7-8

Da Nang 20 5-8 8-14 8-10

Ho Chi Minh City (Saigon) 20 8-10 8-15 8-10

Source: BMI

Recent Events

The falling rental rates and stalled real estate projects in Vietnam over the past few years have meant onlylimited activity in the office real estate market. We note that according to press reports in mid-2013 the

Center Point building in Phu Nhuan, HCMC, was sold to Mapletree Vietnam.

In late 2013 Gemadept Corp sold the Gemadept building in HCMC to subsidiaries of South Korean firm CJGroup.

Table: Terms Of Rental Contract/Leases, H113

Lease terms, yearsRent-free months,

if any

Hanoi 1-45 1-3

Da Nang 2-5 1-2

Ho Chi Minh City (Saigon) 1-50 1-2

Source: BMI



Retail

BMI View: The retail sector in Vietnam has notably

outperformed both the industrial and office sectorsas an increasingly urbanised young middle class has

raised both overall consumption and demand levels,

prompting increased investment from internationalbrands.

Supply And Demand

The Vietnamese population is increasingly

urbanised, as disposable incomes rise, so too does

demand for Western-style retail formats. Some of

the most successful Vietnamese real estate

companies, for example, Vingroup, focus on retail

real estate, and the number of shopping malls and

other Western-style outlets has risen dramatically.

Mass grocery retail (MGR) continues to be asignificant growth area, and we see sales in this area growing significantly over our forecast period, to 2018,

mirroring the rise we see in household incomes.

A number of Western operators now operate in Vietnam's MGR in the market. The latest Western MGR to

consider entering Vietnam is rumoured to be French major Auchan. Elsewhere in the retail sector, there aresignificant levels of foreign investment, not only in terms of foreign real estate companies, but also foreign

retailers moving in to Vietnam. MacDonald's opened its first Vietnamese restaurant, in Ho Chi Minh City

(HCMC) in February 2014.

Rising Income And Spending

Total MGR Sales (US$bn) And Gross IncomePer Household (US$), 2008-2018

Total mass grocery retail sales, US$bn (LHS)Gross Income, per household, US$ (RHS)

2008

2009

2010

2011

2012

e

2013

e

2014

f

2015

f

2016

f

2017

f

2018

f0

5

10

15

5,000

10,000

e/f = estimate/forecast. Source: Company information,

Trade press, National statistics, BMI



Table: Historic Rental Rates, 2012-2013 (US$ per m2/month)



Hanoi 20.00 70.00 24.00 67.50 27.50 50.00

Da Nang 3.00 25.00 10.00 30.00 8.50 26.50


Source: BMI

Rents And Yields

Rental rates have had mixed fortunes over our review period, although have had a better showing than

office retail estate. HCMC remains the most expensive location for retail space, given that it is both the

largest city and economic centre in Vietnam. Rental rates at the lower end grew from US$25.00 per squaremetre (sq m) per month in the early part of 2012 to US$60.00 in the first nine months of 2013. The increasewas significantly smaller in Hanoi, while in Da Nang, where rents have traditionally been lower than in the

other two cities we cover, there was a significant increase, although from a very low base. Da Nang was the

only city to see a rise in top-end rents, alghough only a slight one, while in Hanoi and HCMC rents fell.

However, optimism remains in the retail real estate market, and we note both that yields in this sub-sector

have fluctuated less than in the office sub-sector, and that there were several significant completions and

transactions in 2013.


January-June 2012 July-December 2012January-September

2013

Hanoi 5-8 7-8 8-10

Da Nang 8-14 8-10 5-8

Ho Chi Minh City (Saigon) 8-15 8-10 8

Source: BMI



Recent Events

In late 2013 Vingroup's Vincom Mega Mall Times City, in Hanoi, opened. The mall contains 300 stores,

almost 90 restaurants, a cinema, acquarium and other attractions. Earlier in the year, in July 2013, the

company officially opened the Vincom Mega Mall Royal City, in Hanoi. The mall has more than 600 shops,

making it the largest mall in Vietnam, as well as an ice rink, more than 200 restaurants, a cinema complex

and other attractions.

Meanwhile, MGR expansions continued throughout 2013, with Son Ha and Ocean Retail among those

opening new stores, and Malaysia's Parkson and South Korea's Lotte opening new shopping centres.

Ramping up its presence in Vietnam, Japanese retailer Aeon is planning to build seven shopping centres in

the country, its first shopping mall due to be completed by early 2014. Aeon's announcement comes closely

after the Vietnamese government gave the regulatory nod for it to establish a local subsidiary in the country.

Aeon will be able to establish its own-branded supermarkets, shopping malls, department stores and

specialised stores. With competition quickly heating up in the Vietnamese mass grocery retail (MGR)market, Aeon's plans to establish shopping malls should give it a greater control over its operating leases for

its grocery retail outlets and equip it with a strong competitive foothold.

Table: Terms Of Rental Contract/Leases, H113

Lease terms, years Rent-free months, if any

Hanoi 1-10 1 - 3

Da Nang 3-10 1 - 3

Ho Chi Minh City (Saigon) 1-50 1 - 2

Source: BMI



Industrial

BMI View: The performance of the industrial sector throughout 2012 and into 2013 was understandablyinfluenced by significant macroeconomic uncertainty, with disappointing growth amid already low rates inall three cities that we cover. However, we believe have a positive outlook for the industrial real estatesector, driven by increasing foreign direct investment (FDI) into Vietnam and the country's growing statusas a manufacturing export hub

A continuing lack of confidence in the banking sector, despite decreases in inflation and lending

restrictions, prompted many overseas investors to look elsewhere in the short term. Indeed, financing

options, especially for foreign managed projects, remain problematic as many domestic banks are unwillingto risk loans to previously postponed developments.

However, we note that FDI into Vietnam is increasing significantly, and is bringing increased demand for

industrial real estate. According to a report in Vietnam Plus, citing figures from the Ministry of Planning

and Investment, in January 2014 the manufacturing and processing industries attracted the largest

proportion of FDI, at US$189mn.

We also note that the government's continued support for the development of economic free zones and

industrial parts continues to create a sound basis for investment in industrial real estate.

Table: Historic Rental Costs, 2012-2013 (US$ per m2/month)



Hanoi 2.50 10.00 03.38 08.75 03.38 09.25

Da Nang 2.50 3.50 02.75 05.50 02.50 05.00


Source: BMI

Rents And Yields

Industrial rents are significantly lower than rents for the other two sub-sectors we cover. However, despite

the turbulence elsewhere in Vietnam's real estate industry over the past few years, industrial rents have

remained fairly flat at both the top and bottom ends of the market, and across all three cities that we survey.



Rents are highest in Hanoi, at US$9.25 per square metre (sq m) per month at the top end, and lowest in DaNang, at US$2.50 at the bottom end.

Meanwhile, yields have narrowed considerably in all Da Nang, from 10-14% in H212 to 6-7% in the first

nine months of 2013, with a smaller narrowing seen in Ho Chi Minh City and stability in Hanoi.


January-June 2012 July-December 2012January-September

2013

Hanoi 5-8 7-8 7-8

Da Nang 13-14 10-14 6-7

Ho Chi Minh City (Saigon) 8-15 8-10 7

Source: BMI

Recent Events

We note that improvements to the country's infrastructure should boost its industrial sector, making exports

easier and cementing its appeal for foreign firms seeking a manufacturing base in the region.

Recent announcements on new road projects include the Phap Van-Cau Gie highway build-operate-transfer(BOT) project, the expansion of the NH-1A Cam Ranh City-Cam Lam District (Khanh Hoa province) BOTproject, the Danang-Quang Ngai expressway and the Ho Chi Minh City (HCMC)-Long Thanh-Dau GiayExpressway. Meanwhile, a north-south high-speed railway line is also a possibility, as is a high-speed line

connecting Laos and Vietnam.

Meanwhile, although curtailed, port development is still underway. The Vietnam Maritime Administration

announced in early 2013 that it would focus on building large deep-sea ports in Hai Phong's Lach Huyen

and Ba Ria-Vung Tau's Cai Mep-Thi Vai port complexes, as well as converting the remaining ports in the

central region and the Mekong Delta into special-use ports to transport materials for thermo-power plants.

Construction at Lach Huyen port project started in April 2013. The port, due for completion in 2016, willhave modern cargo handling equipment. It will be capable of handling container ships of up to 8,000

twenty-foot equivalent units (TEUs).

Vietnam Real

Documents

BMI Vietnam Real Estate Report Q2 2014