Increasing office supply in Vietnam is rapidly outpacing demand, sparking debate as to whether or not prices have actually bottomed out yet.

A director of an office building in Ho Chi Minh City’s District 1 said more clients were looking for leases toward the end of the year as their current contracts were about to expire.

He said many felt that prices were low and were willing to ink new contracts immediately, the director said.

Many landlords have said that after sharp declines earlier this year office rents have begun to stabilize.

According to the Vietnam office of the world’s largest real-estate broker, CB Richard Ellis Group Inc., overall asking rent across all grades in the third quarter posted the lowest decline of 2.9 percent since the second quarter of 2008.

With Kumho Asiana Plaza coming on stream in September, overall Grade A asking rent climbed to US$41.3 per square meter per month, an increase of 1.2 percent over the second quarter, CBRE said in its quarterly report.

Rock bottom?

Still, there are worries that office rents have not bottomed out yet. Experts forecast the local office market may remain weak for some time as the global economic slump continues to linger.

According to real estate services firm Jones Lang LaSalle, the pressure on exporters, financial markets and service providers will continue to affect local office demand next year.

Landlords said they once expected the government’s stimulus package to enable many local companies to expand their businesses and move into new offices. But few private firms benefited from the stimulus, adding only a slight boost to the office market.

An office building owner, who wished to be unnamed, said he had been unable to attract any new foreign firms this year due to the downturn.

“Most businesses here this year were already here last year. They’re just moving around town to places with lower rents.”

“Without a lot of newcomers, we’ve had trouble dealing with high vacancy rates,” he said.

Overall vacancy still stood at 17.5 percent in the third quarter, only down slightly from the previous quarter’s 18.1 percent, CBRE said in its report. Grade A vacancy alone stood at 26.3 percent, the firm said.

New supply

CBRE said 158,976 square meters of net floor area remains empty in Vietnam. Office supply is forecast to increase by another 134 percent by the end of 2010 across all grades.

Hanoi’s largest office complex, the 27-story Charmvit Plaza, will open in the first quarter next year. UK real estate service provider Savills estimated that more than 1.1 million square meters of office space would enter the capital city’s market in the form of 50 different projects over the next three years.

Meanwhile, future completions in HCMC include the Bitexco Financial Tower, Vincom Tower, BIDV Tower and Times Square, Jones Lang LaSalle said in its third quarter report.

“With new supplies scheduled for completion, coupled with the weakening a demand forecast for the next 12-15 months, we expect to see further downward pressure on rents,” the firm said.

Le Quoc Chinh, an investment manager at Hanoi-based IDJ Financial, said in an interview with the Vietnam Economic Times earlier this month that had it not been for the economic slump, the pressure on the market could have been even greater.

“Without the crisis, there would have been many office buildings, driving supply way up beyond short-term demand and making competition tougher,” Chinh said.

“The economic crisis has caused many investors to delay or even cancel their building projects. New supply has therefore been at least partly restrained.”

Realistic strategies

CBRE said in an increasingly competitive market, “new landlords are making more creative offers to try overcome tenant’s financial constraints.”

Many landlords, instead of offering lower rents and hence devaluing their building, choose to give more perks to tenants, Tuoi Tre newspaper reported.

For example, occupiers can have two months free of payment to decorate their offices. They are now required to pay only one month of rent in advance, instead of the usual three-month down payments.

ASIA PACIFIC OUTLOOK

According to Jones Lang LaSalle, overall leasing demand in Asia Pacific remains weak but is starting to improve as occupiers take advantage of major rent corrections.

“In most office markets, rents are starting to stabilize following typical falls of 40 to 60 percent from their peak,” the firm said in a global market report this month.

“Leasing conditions will continue to be favorable to occupiers until at least mid-2010 in most markets, with supply-constrained markets likely to see the earliest turnaround in rents,” it said.