Kevin Coppel, Asia-Pacific managing director (left ) and Christine Li, Asia-Pacific head of research for Knight Frank in Singapore

When the US-China trade tensions bubbled over in 2018, corporates found it increasingly difficult to carry out business in China due to sourcing uncertainties and rising costs. This trend only worsened in the face of the pandemic and resulting border closures. Businesses responded by pursuing opportunities to set up bases outside of China while still retaining a stake in one of the world’s strongest economies.

The China+1 strategy thus emerged. It is based on diversifying its supply base into other countries in order to minimise the risk of disruptions arising from geopolitical tensions, trade wars and tariffs, as well as rising labour costs. These companies are not abandoning China but rather giving themselves options, enjoying the best of what China and other economies have to offer.

In pursuit of the China+1 strategy, the spotlight is naturally cast on Southeast Asia, where a significant part of the regional economy is still underdeveloped. Often touted for its low labour costs, inflows of foreign direct investment (FDI) peaked in 2019 at $182 billion, making the region the largest beneficiary of FDI in the developing world.

Among the ASEAN nations, Vietnam emerged as the largest beneficiary of this strategy on the back of its economic business environment, proximity to China, and network of trade agreements with other countries. Vietnam’s appeal attracted not only the attention of western countries but also Chinese firms and its Southeast Asian counterparts.

Although investments from China and developed economies like South Korea, Japan, and Hong Kong fell in 2020 as they diverted their investment strategies towards domestic opportunities, there was an increase in FDI activities from Singapore to Vietnam from $2 billion in 2019 to $5 billion in 2020. Based on statistics published by ASEAN, more than 40 per cent of inflows can be traced back to Singapore, making it Southeast Asia’s strongest investor in Vietnam.

Once the second-largest recipient of FDI in 2019, the Vietnamese real estate sector suffered significantly in 2020 as economic uncertainty, concerns about the pandemic and border closures took their toll. The sector secured only $2.3 billion in inward investment in 2020, an alarming drop compared to 2019.

Nevertheless, we see renewed interest in the Vietnamese real estate sector. In December 2021, CapitaLand Development (CLD), the development arm of Singapore conglomerate CapitaLand Group, signed an MoU with Bac Giang People’s Committee. The cooperation will explore the development of CLD’s first industrial park, logistics park and township development in Vietnam. The total projected investment value is $1 billion.

More recently, Boustead Singapore entered into a cooperation agreement with Khai Toan JSC to acquire, develop and own a portfolio of logistics and industrial properties in Vietnam.

While the office sector has been less active than the industrial sector, we are still seeing momentum build more recently.

CLD kickstarted the investment activity in Vietnam in 2022 by divesting their Grade A office building in Hanoi for $558 million to Viva Land, a real estate investment and development company based in Vietnam. Known as Capital Place, the divestment was made at a premium to book value, signifying the high investment potential of the office sector.

Prior to CapitaLand, Nomura Real Estate acquired a controlling interest in Sunwah Tower in Ho Chi Minh City in 2018, marking its first investment in the Grade A office sector in the Asia-Pacific region.

Prolonged lockdowns in Chinese special economic zones have disrupted supply chains in the electronics sector, which is now Vietnam’s most important export earner. This is where Vietnam can pacify the anxieties about the disruption.

Companies like Samsung, LG Electronics, Nokia, and Intel had already made billions of investments in the country. Samsung alone had invested over $17.5 billion as of 2021. More companies are expected to follow suit. Furthermore, as e-commerce is embedded globally, the number of e-commerce businesses is projected to increase sharply, spurring demand for warehousing and logistics services. No surprise, Vietnam has emerged as the preferred option for e-commerce investors and operators, and its role in the global supply chain is growing in importance.

Although the outlook is rosy, foreign investors might still face some regulatory barriers - for example foreign corporates are unable to hold more than 51 per cent of shares in a domestic logistics business. There are also certain regulations for industrial and logistics properties that companies must adhere to.

Commercial real estate will likely see more investment activities as companies with a strong foothold in China diversify their business into Vietnam, leveraging on the favourable business environment Vietnam offers, particularly in relation to development opportunities. Demand and rental performance for commercial real estate spaces is expected to rise as firms set up manufacturing bases and headquarters, driving up the sector’s investment potential.