EVFTA and Covid-19: Reverse Effect on Industrial Real Estate

10:47:20 AM | 10/3/2020

Free trade agreements (FTAs) and global trade networks will continue to push Vietnam to become a major destination for FDI flows, although this will also make the economy more vulnerable to a slump when global demand shrinks.

EVFTA impacts

The European Parliament (EP) officially adopted the EU - Vietnam Free Trade Agreement (EVFTA) and the EU - Vietnam Investment Protection Agreement (EVIPA), a momentum to boost Vietnam's economic prospects. There is only one more step to bring the full agreement into force: The approval of the National Assembly of Vietnam, which is expected to take place in May this year.

Mr. John Campbell, Senior Consultant for Industrial Services at Savills Vietnam, said, the EVFTA facilitates the Vietnamese economy to shift from exporting low-value products to higher value goods such as high-tech equipment, electronics, vehicles and medicines. Global trade networks will help Vietnam reach many different partners and make imported inputs or intermediate goods cheaper, thereby boosting the competitiveness of exports. In addition, through enhanced partnerships with foreign companies, Vietnam can reap benefits of know-how and technology transfer coupled with investments.

“As Vietnam opens its doors to EU industrial manufacturers such as food and beverage, fertilizers, ceramics, and building materials, tariff eliminations will also benefit the country’s key export industries to the EU, including the manufacturing of electronics and smartphones, textiles and garments, and agricultural products,” he said.

Vietnam’s economic outlook in the medium to long-term is mostly positive. The World Bank forecast that the country’s real GDP growth will remain robust at 6.5% in 2020 and 2021, Mr. John Campbell added.

2019 marked 10 consecutive years of FDI inflow growth. By the end of the year, the manufacturing and processing sector drew the biggest share of FDI fund. 2020 also has a good start. In the first 20 days of January, Vietnam attracted as much as US$5.3 billion of FDI, representing a year-on-year growth of 179.5%, according to the Ministry of Planning and Investment. Of the sum, US$4.5 billion was poured directly into new FDI projects. Most inflows were channeled into the power, water and gas sector. The manufacturing and processing sector took second place, attracting US$856.33 million, or 16% of total inflows in the recorded period.

Since last June, more and more industrial real estate developers in Vietnam have grown very confident that EVFTA will promote manufacturing investment and tenants will increase as a result. With the pact approved this year, it will likely see an increase in rental demand from European manufacturers in 2020 and 2021.

The Savills specialist forecast that when the demand further exceeds the supply, especially in key industrial provinces, with the occupancy rate reaching 75% in operational industrial parks nationwide, competition for manufacturing sites located near major cities and major seaports is growing. With a range of new international manufacturers, developers are given the right to select suitable tenants, thereby selecting multinational corporations with high value-added industries. The segment of industrial real estate is growing strongly with a 10-fold growth of foreign direct investment (FDI) in the past decade. Good land supply is facilitating upcoming manufacturing projects with an increase in rental forms and many other solutions.

Effect of coronavirus

Taking into account the giant size of China’s economy, the Covid-19 outbreak will certainly have an effect on the global economy in the first quarter and possibly even in the second quarter of 2020. Vietnam, with its proximity and close trade relations with China, is no exception. 

Although foreign investment into Vietnam’s industrial market will remain strong in 2020, the Covid 19 has raised concerns regarding labor shortages and disruptions in supply chains in the manufacturing sector for the first quarter, Mr. Campbell said. Labor shortage in China, extended from the Lunar New Year holiday (in addition to temporary factory closures due to the Covid 19 epidemic), has shrunk manufacturing, which in turn can affect numerous Vietnamese manufacturers with supply chains linked to China.

According to Trading Economics, Vietnam's index of industrial production (IIP) in January 2020 dipped 5.5% from the same period of 2019 after advancing 6.2% in December 2019. This was the first drop in output since January 2017. The index attributes the drop-in output to the relatively ‘early’ Lunar New Year holiday at the end of January, reducing the number of working days. Therefore, it’s difficult to assess whether this decline is directly linked to Covid-19 or not.

By Huong Ly, Vietnam Business Forum