Deutsches Haus, a modern 27-story Grade A energy-efficient office building in Ho Chi Minh City’s (HCMC) central business district (CBD) that opened in September, is already at 60% occupancy despite asking the highest rents in town.
Deutsches Haus, the site of the German Consulate among other German government institutes, is currently asking rents of US$55 per square meter per month (sqm/m), compared with the average US$45 sqm/m for similar space last year.
HCMC Grade A office rents jumped about 12% in 2017 and now exceed other Southeast Asian capitals such as Bangkok, Jakarta, Manila and Kuala Lumpur, according to a James Lang LaSalle (JLL) regional survey conducted in mid-2017.
With a healthy inflow of foreign direct investment (FDI) last year, up to US$17.5 billion compared to 2016’s US$15.8 billion, and no new office buildings set to come on the market in the next two years, HCMC’s rentals are set to soar.
A good gauge of the market will be the asking price at Deutsches Haus, the new kid on the block.
“If demand continues to grow, that US$55 per square meter per month could be US$65 psm/m by the end of the year and could be US$75 psm/m by 2019,” predicted Peter Dinning, chairman of Colliers International (Vietnam) and a 20-year veteran of the Vietnam property market.
Dinning has seen the dramatic rise and fall of HCMC office rents over the past two decades, starting in 1997 when he arrived when the average asking price for Grade A office space was US$40 psm/m. That quickly fell to US$15 psm/m in the aftermath of the 1997-98 Asian financial crisis.
“Then in 2006, at the peak of the economic boom here the rents were US$85 psm/m and then in 2008/09 they dropped again to US$25 psm/m because of the global meltdown, and now we’re back to US$45 psm/m,” he told Asia Times.
Price fluctuations add to other uncertainties property developers face in HCMC, where total supply of both Grade A and Grade B office space is about 1.2 million square meters.
“For site acquisition, licensing and construction of an office building in [HCMC] you need a minimum of five years and then when you look at the price fluctuations its quite risky,” Dinning said.
Colliers’ estimates that another 500,000 square meters of new Grade A office space will hit the market by 2020, but no new launches are expected in 2018/2019. That’s good news for Deutsches Haus, which is the now the only Grade A office with space available; the average occupancy rate of Grade A office space is now 98% in HCMC.
Deutsches Haus, or German House, is a unique property deal by any standards. The land on which the office stands (about 3,500 square meters) was bought after the establishment of the Republic of Vietnam (South Vietnam) in 1955 by then-West Germany with the idea of setting up an embassy.
After the outbreak of the “American War” in 1965, the embassy plans were shelved. In the aftermath of the war’s end and communist takeover in 1975, West Germany considered using the land for a consulate general.
The German consulate plans never materialized and the land which sits adjacent to the current British, French and US consulate generals in the city was left vacant, although it was actually occupied by a host of illegal squatters including a grocery market and a bus stop.
After the reunification of East and West Germany, both of which had embassies in reunified Vietnam, Germany was left with a noticeable surfeit of diplomatic property.
Rather than just sell the diplomatic land or hand it back to Vietnam for free, in 2007 Germany kicked off negotiations with the Vietnamese to transform the HCMC consulate land into a semi-commercial property with the goal of promoting Vietnam-German business relations.
The unique concept culminated in a bilateral treaty signed in 2011 by visiting Chancellor Angela Merkel and former Vietnamese Prime Minister Nguyen Tan Dung called the 1st Government Agreement for Deutsches Haus Ho Chi Minh City.
A 2nd agreement was signed in 2013, spelling out the specifications for the building, and an investment certificate was approved for the property in 2014. The land was already owned by Germany, but in theory all land in Vietnam, even diplomatic land, is owned by the people.
To clarify matters, “A symbolic thing was done, in that it was agreed that the land was to be leased to Germany for one Vietnamese dong for 99 years, with an option for another 99 years,” said Elmar Dutt, marketing director for Deutsches Haus Ho Chi Minh Stadt Ltd. (At 22,700 dong per US$ dollar, one dong is worth virtually nothing.)
Under the terms of the treaty, the German government called a tender for a public private partnership (PPP) and build operate and transfer (BOT) contract with a private developer to construct Deutsches Haus and manage it commercially for the first 30 years.
Not surprisingly, a German-Vietnamese consortium won the tender. The building will be officially handed over to Germany on March 19.
“One of Germany’s conditions was they wanted to have a Consulate, fully equipped, for 30 years, rent free,” Dutt said. Germany will also get a US$5 million flat payment for use of the land over the next 30 years.
Besides the German consulate, other German government-related institutions such as Goethe Institut, German Development Institute and German Development Agency (GIZ) will be based at the Deutsches Haus, creating a bit of a one-stop shop for all Germany-related services.
Deutsche Bank will move in this April and Siemens Ltd (Vietnam) has also booked space. Deutsches Haus does not exclude non-German tenants. “[US tech giant] Apple chose our building because of energy efficiency and because of our security standards,” Dutt said.
Not everyone, though, is willing to pay Deutsches Haus’ high rents. “It’s a beautiful building and relatively eco-friendly and all the things you want to be, but its too hard to make a living there,” said Frederick Burke, managing director of Baker & McKenzie (Vietnam) Ltd.
But for many multinational newcomers to HCMC they will have little choice. “Over the next two years, there is absolutely no Grade A office space coming on the market,” Burke said.
Meanwhile, demand for Grade A office space is also on the rise among emerging local private sector companies, many of which are getting listed on the stock exchange and seeking head office prestige.
Masan Corp, for instance, a newly listed Vietnamese food producer, recently rented 3,500 square meters of space at M Plaza, one of HCMC’s Grade A office buildings. The good news, local property consultants say, is that the shortage is attracting more developers.
“Over the past 24 months we’ve seen a huge influx of people starting to look again from Japan, Korea and Singapore,” Dinning said. “Ho Chi Minh is certainly back on the map again.”