Competition to attract FDI in Vietnam: Land rental is not a “heavyweight” factor

When the industrial land rents continue rising, there are still some investors making investment decisions in Vietnam.

Investors have to consider the factors affecting the efficiency of investment projects. Image: VIR

Land rental is not a problem

Land rental is important, but it is only the factor that the tenant/project investor must pay fixedly once, or annually during the agreed leasing cycle. It is not the key factor for the investor to make the final decision is whether to invest or not.

Goertek, a supplier of electronic equipment and components for technology “giants” in the world – is building a new factory in Nghe An province and the total investment capital of the project is 2,300 billion VND, equivalent to 100 million dollars. The new factory of Goertek Vina Precision Industry Co. Ltd. belonging to Goertek Technology Group (Hong Kong), has a 40-hectare scale in WHA Industrial Zone 1 – Nghe An, is expected to be put into operation in 2022 and focus on manufacturing electronic products, media, network equipment, and multimedia audio products.

The rental price of industrial land in Nghe An is not so high, in terms of the national level. According to data compiled by Hiep Phuoc Industrial Park Joint Stock Company from CBRE, the price range of industrial park land rent in Nghe An in 2020 ranges from 38 – 65 USD/USD/m2/rental cycle, not equal to the lowest rates in key industrial areas in the North and the South, especially in Hanoi and Ho Chi Minh City, with the highest industrial land rentals at 260 USD/m2/rental cycle and 300 USD/m2/rental cycle, respectively depending on the position. For WHA Industrial Zone 1 – Nghe An, the land rental price here posted by Invest Global International Investment Promotion Union on its website is 80-100 USD/m2/rental cycle.

In fact, the rental price is not a big issue when making the final investment decision, but the factors that affect the efficiency of the investment project are what makes investors have to consider. To make a construction investment decision, it is necessary to consider several key factors, such as geographical location, traffic infrastructure, population, the situation of industrial development, the Government’s planning in the future for industrial zones …

Representatives of Goertek said that at the time of 2013, when this investor embarked on a project to build a factory in Bac Ninh, the land rental price in Bac Ninh was relatively high compared to other provinces, but infrastructure and Traffic in Bac Ninh are relatively complete, the foundation of the electronics industry is relatively good, the advantage of the population and the geographical location is superior. Therefore, in general, the land rental price is not a big issue. “So, Goertek is quite satisfied with the land rental rate in Bac Ninh,”.

Potential risks of the rising land rental

The continuous increase in industrial land rental prices during the Covid-19 period, even setting a peak in the middle of the epidemic, made people startled to look back at the price increase roadmap in recent years. In the past few years, the land rental price of industrial zones has increased by 3-4 times, even in some localities, it has increased by a dozen times.

According to CBRE Vietnam, industrial park real estate is the only segment that has witnessed positive growth in both rental and occupancy rates in the context of Covid-19. Particularly, in 2020, the land rental price in some industrial zones in the North and the South will increase by 20-30% over the previous year.

As for JLL Vietnam, the increasing demand for industrial land is due to the prospect that Vietnam will become a promising industrial center of the region. Most developers in the southern markets have the advantages when negotiating and offering land rent to a record 109 USD/m2/rental cycle in the fourth quarter of 2020, an increase of 7.9% over the same period 2019. In the North, developers also maintain a great bargaining power, despite the epidemic crisis. This brings industrial land rental to a new peak of 102 USD/m2/rental cycle in the third quarter of 2020, an increase of 7.1%.

The main reason indicated is that the demand is constantly increasing, in the context of a lack of supply, and the occupancy rates of industrial zones in key industrial areas are all high.

Mr. John Campbell, Head of Industrial Real Estate Division of Savills Vietnam said: “The increase in land rental rate will affect the occupancy rate, as this is one of the main concerns of many investors. from high-value industries such as electronics and technology equipment. Special attention should be paid if the land rental price exceeds the average threshold. However, the land supply will increase with 561 industrial parks in the future, which is expected to have a large impact on land rental rates. Currently, the key provinces have high occupancy rates, which means that the remaining land bank will be expensive”.

Business environment, institutional quality … just decisive

From the perspective of the direct investor, the senior leaders of Goertek noticed that, in recent years, Vietnam’s development speed is very strong, the land rental price has also increased rapidly. “In Southeast Asia, Vietnam is one of the countries with relatively high land rental rates. However, Vietnam’s geographical position is preeminent, the human resource is abundant, the transport infrastructure is increasingly completed, plus the Government has many policies to attract foreign investment. That is an important point to attract foreign investment into Vietnam ”, emphasized Goertek representative.

The above sharing of Goertek representatives coincides with the conclusion of the group of experts from the Viet Nam Institute for Economic and Policy Research (VEPR) and Prakarsa Research Organization (Indonesia) that, the new business environment is the key factor in the decision to select investment locations of foreign direct investment (FDI), while tax incentives and non-tax incentives pushing the race to attract FDI.

In the report “Towards a sustainable ASEAN development”, the group of experts on empirical research shows that the business environment indicators are an important factor determining the investment location of FDI inflows. Economic stability, political stability, raw material costs, domestic market, transparency of the legal framework, and availability of skilled workers play a key role in the investment decisions of multinational companies.

“There is no evidence that tax incentives and non-tax incentives, especially land incentives, are seen by foreign investors as a key factor in their decision-making process,” said the expert from VEPR and Prakarsa.

Meanwhile, the results of analyzing the correlation between business environment and FDI attraction also showed a positive relationship between decisions about investment locations and the motivations of the macroeconomic environment, institutional quantity, and level of market development.

This group of experts said that the Government should allow rent adjustments to a 5-year cycle, instead of fixing rent for the entire leasing period. Instead of providing land incentives, it is necessary to coordinate the use of resources and budgets to develop infrastructures such as roads and utilities, especially in industrial zones and economic zones, in order to attract FDI.

In order to attract investors to Vietnam, Mr. Matthew Powell, Director of Savills Hanoi, said that infrastructure and transport are some of the issues that Vietnam needs to improve. “Compared to ASEAN, the quality of Vietnam’s infrastructure is lower than the regional average across all segments. This is a great opportunity for the Government of Vietnam to improve its infrastructure network and attract more investors, ”said Matthew Powell.

The real estate expert suggested: “The Vietnamese government should make a future plan to ensure the quality of the infrastructure is more developed, not only catching up with Indonesia, Thailand and other countries in the Southeast Asia region, but it also needs to go beyond the common standard”.

ASL LAW is the top-tier Vietnam law firm for doing business in Vietnam. If you need any advice, please contact us for further information or collaboration.


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