With the current vacancy rate at 28.0% and the supply forecast to increase by as much as 33.0% in 2012, there is little wonder that many investors would declare Ho Chi Minh City (HCMC) Grade A office space as oversupplied. Indeed, HCMC dropped one spot to number four in terms of office property ‘Buy’ recommendations in the latest Emerging Trends in Real Estate Asia Pacific 2012 survey.
Nevertheless, the recent acquisition of Saigon Tower by Osaka-based developer Daibiru Corporation seems to be a heavyweight rebuttal to claims that this sector is no longer on foreign investors’ radar. So, what lies ahead? From a researcher’s perspective, and as researchers we are supposed to be unbiased, I would argue that while the overall outlook for this sector is one of uninspiring expectations, it is not to the extent to which investors can afford to ignore.
My key proposition is that market trends aren’t everything. And I believe this is even more true for an emerging market like Vietnam. By nature, studying market trends involves arriving at statistics intended to describe the overall market. While this is a must-have starting point, the use of market statistics alone may significantly oversimplify idiosyncratic characteristics in emerging markets, and consequently mislead investment strategies. There is already substantial academic literature suggesting that emerging market investment returns cannot be completely characterised by regular statistical measures. In technical terms, there is significant skewness and kurtosis. In simple terms, there are too many outliers in emerging markets. And outliers can be either good or bad.
Take the overall market vacancy rate of 28.0% for example. That seems very high indeed! However, three-quarters of the Grade A office properties we monitor in HCMC have healthy vacancy rates near or below 10.0%. The remaining quarter contains the majority of vacant space in the market. This is an example of how bad outliers can make market statistics misleading if they are used alone.
Having previously followed the Singapore office market, I have been surprised to encounter many cases in both HCMC and Hanoi where several office properties consistently enjoy strong rental performance while those of comparable grades struggle with rental declines. One may argue that in Vietnam a lack of information and immature market dynamics may result in certain tenants not being able to follow market norms. But I believe there are also other fundamental factors such as property management quality and developer profile that make certain properties outperform the rest. This is an example of good outliers being overshadowed by negative market trends.
Whilst overall market trends do impact on the investment prospects of every single office property, there will be certain individual properties that can buck the trend. In this light, I believe attractive risk-adjusted returns in HCMC offices are still available, albeit on a selective basis. We at Jones Lang LaSalle Research are committed to providing investors a fair, accurate and complete picture of both the trends and the outliers in the market.
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