The first anniversary of the establishment of the ASEAN Economic Community looms at the end of the year and it seems the trading bloc of 10 Southeast Asian nations is at something of a crossroads.
Following the surprise U.S. election result, the shape of future multinational trade deals remains hazy given the likely demise of the Trans-Pacific Partnership. We are seeing increasing impetus for the Regional Comprehensive Economic Partnership, a proposed free trade agreement led by China that includes all 10 ASEAN member states as well as India, Japan, South Korea, Australia, and New Zealand. Indonesia's trade minister has called for RCEP talks to be concluded in 2017 to better enhance ASEAN's position.
A year into the AEC's ambitious project of economic integration in Southeast Asia -- a collective market of $2.6 trillion and 622 million people -- ASEAN economies continue to grow at a healthy clip of around 5 percent annually compared to a global growth rate of 3.52 percent per year. Against this backdrop of increased opportunity as well as ambiguity, what is the outlook for those of us in the real estate business?
Momentum in Vietnam
While some member states, including Malaysia and Singapore, have faced the challenge of slowing growth, others have been riding an upswing. Vietnam, in particular, has been a strong performer, delivering growth in gross domestic product of around 6 percent so far this year, with its real estate sector hitting its stride since 2015. A number of recent government reforms, such as stronger financial requirements for property developers and the relaxation of rules on foreign investment, have served to make the country an increasingly attractive destination, particularly for investors from Singapore and Japan.
The flow of foreign capital into Vietnam is likely to hit a record $15 billion this year as announced by Vietnam's Prime Minister, Nguyen Xuan Phuc, at a conference in Hanoi. Investment into real estate reached $983 million in the first ten months of 2016 with Ho Chi Minh City -- the commercial hub of the country -- a standout. Look no further than the construction of the Thu Thiem New Urban Area, a 657 hectare site east of Saigon River designated to be the new central financial district. It is set to be home to more than 150,000 residents and 200,000 office workers. This new district is made up of a $2 billion eco-smart city, the 86-storey Empire City Tower; the Thu Thiem Financial Center; and the Dai Quang Minh eco-complex, which incorporates a 28-hectare public square and riverside park.
The retail and hospitality sectors are also growing. In August, Ho Chi Minh City welcomed Vietnam's largest department store, Takashimaya, in the new 590,000 sq. foot Saigon Centre. Meanwhile, the Hoi An South Integrated Resort is currently being constructed, with its first phase to be completed in 2019; and Halong Bay got its first five-star property, Wyndham Legend Halong Bay, in June.
However, Vietnam, like many other countries in the region, is still grappling with several structural issues. Its State Owned Enterprises are in need of reform, while its banking sector would benefit from greater transparency and improved compliance.
Eyes on the Philippines
As with Vietnam, investors are also keenly watching the Philippines. Both have big populations with more than half of them under the age of 40. Like Vietnam, the Philippines boasts a healthy average GDP growth of about 6 percent per year. As with Vietnam, the Philippines has a lot at stake amid the current climate of increased uncertainty given the geopolitical jostling between the U.S. and China.
The Philippines' offshoring and outsourcing industry continues to drive real estate growth, creating demand for office space. Vacancy rates have declined, and rents grew 7.8 percent in Q3 2016 compared to the same period last year. Five office developments have been completed in Q3, adding more than 700,000 square feet of office space to the existing stock in Metro Manila. The country's growing middle class means that the retail sector is looking increasingly robust with healthy demand from both international and local retailers.
ASEAN's traditional challenges have been well documented, from the vastly differing stages of development of its member states to the diversity of its population along linguistic and cultural lines. Other issues make integration tricky, among them underdeveloped infrastructure in countries such as Laos, Cambodia and Myanmar, and a lack of political unity required to push through policies.
But despite the uncertainties, as the AEC enters its second year, there's much to look forward to. There is a palpable energy in Southeast Asia, something I'm experiencing firsthand, having moved to Singapore this year and in quick succession visited the Philippines, Malaysia, Thailand and Vietnam.
Among the colleagues and clients I meet, there is a positive sense of burgeoning opportunities in the real estate sector as urbanization and infrastructure development gains pace. ASEAN leaders have much to ponder as they figure out how the trading bloc fits into the increasingly complicated world trade dynamic.
Anthony Couse is the Asia Pacific CEO at JLL.