On October 5 a total of 12 Pacific-Rim countries including Vietnam reached a historic deal on the most sweeping trade liberalisation pact after five years of negotiation – The Trans-Pacific Partnership (TPP).
This deal is set to cut trade barriers and set common standards for member countries that comprise 40 percent of the world’s economy and over half of global production.
What is the TPP?
The Trans-Pacific Partnership is the world’s largest free trade agreement on goods and services between 12 countries bordering the Pacific, including: Brunei, Malaysia, Singapore, Vietnam, Japan; Canada, Chile, Mexico, Peru, USA; Australia and New Zealand. Notably China is not involved in this negotiation.
The TPP aims to reduce trade barriers among these countries by lowering tariffs on goods such as trucks, rice, and textiles.
The TPP is not only a pure free trade agreement, but it also requires participating countries to adopt certain legal standards, including but not limited to stricter labour and environmental rules, common framework for property, stronger legal protections to drug companies, and the prolongation of copyright protection term.
The TPP is the expanded version of the Trans-Pacific Strategic Economic Partnership Agreement (TPSEP), which was signed by Brunei, Chile, New Zealand, and Singapore in 2006. In 2008 the other eight additional countries joined the discussion for a broader agreement. The TPP reached its landmark deal after 19 official rounds of meeting with more than 20 Chief Negotiators Meetings and Ministers Meetings.
How will the TPP impact Vietnam?
As the least developed country among all TPP members, Vietnam is most likely to become the largest beneficiary of the agreement with an increase in GDP, more inward foreign direct investment, more exports of manufactured goods, lower cost of imports, and higher productivity due to more external competitors. The TPP is expected to increase Vietnam’s GDP by US$ 46 billion in 10 years from its current US$ 200 billion.
Sectors that will benefit the most are garment and textiles, fisheries and agriculture products. The current tax of 17-20 percent of Vietnam’s garment and textile industry on U.S. importers will be exempt once the deal becomes effective. Japan also committed to eliminate 66 percent of its fish and seafood tariffs and 32 percent of its agricultural imports.
Other tariffs will be reduced or eliminated gradually over the next 20 years. Australia, Malaysia and New Zealand will also end more than 90 percent of their agricultural tariffs immediately when the deal is in place.
Although CBRE Thailand believes the impact of TPP on the local real estate market will not be as significant as the industries mentioned above, real estate-related sectors such as industrial parks, warehouses and logistics may see a boost in demand resulting from increased foreign investment. Demand for offices and accommodation is also expected to rise to meet the space requirement of foreign companies and expatriates.
Signing an agreement that requires stringent disciplines is definitely not an easy job for Vietnam, especially for weaker areas like labour and government procurement. Vietnam must be able to maintain a stable macroeconomic environment that permits adjustment and encourages long-term investments.
What does it mean for Vietnam real estate?
Regardless of the long term impact of TPP, real estate stakeholders still have a very positive attitude towards the deal.
Industrial land and warehouse: TPP will spur more investments into Vietnam, especially from countries that are big importers of Vietnam products like the U.S. and Japan. U.S. investment in Vietnam remain modest compared to South Korea and Japan. American companies will increase manufacturing activities in Vietnam and reimport ‘Made-in-Vietnam’ products thanks to the country’s tax exemption on major products such as garment and textile. They will likely target at industrial land in the Southern provinces of Vietnam, where a number of existing garment and textile factories locate.
Similarly, manufacturers from other countries will certainly consider switching from non-TPP countries like China, Thailand, Cambodia, Indonesia, and India to Vietnam to enjoy extra-low tariffs. This will lead to more demand for industrial land, warehouses and factories, not necessarily from TPP countries but also from non-TPP ones like China, Hong Kong or Taiwan who want to front-run the TPP.
In this context industrial park developers and construction companies will benefit the most when a great number of textile/fisheries companies migrate to Vietnam
Logistics: Increasing trade flow will result in higher demand for logistics services. There will be a greater need for infrastructure, including roads, railways, seaports and airports to facilitate the logistics sector.
Office and Accommodation: Increasing foreign investment and growing demand for foreign companies to set up in Vietnam will drive demand for international-standard office space. Given the limited supply of high quality space in both Hanoi and Hoh Chi Minh City, future office developers might want to review their development plans to speed up the office development process. The anticipated growth of foreign companies coming to Vietnam also means higher demand for serviced apartments, apartments for lease and even apartments for sales.
Pursuant to the new Housing Law which permitted foreigners to buy homes in Vietnam since July 1, 2015, more foreign buyers will be encouraged to own an apartment in Vietnam instead of leasing, especially when the housing price in Vietnam is considerably lower than those in other regional countries.
Land prices: Although it might be too early to conclude the possibility of land price increase, growing demand for industrial land and limited supply of quality land are the two factors that will drive the price of land, especially in areas most sought after by textile and garment manufacturers like Binh Duong, Dong Nai and Long An.
How should Vietnamese property developers prepare?
The great thing about TPP is it moves the reputation of Vietnam forwards. There is going to be a larger need for development of industrial parks, commercial and residential projects, as well as the country’s infrastructure to build better roads, better ports and better connecting services. There are going to be a lot more activities for developers across the fields, and they should prepare well in advance in terms of their labour force, technical transfer and training, productivity and compliance to front-run these golden opportunities.
In conclusion, development of the TPP is undoubtedly a valuable boost for the Vietnam’s export-focused economy. The next couple years will definitely be very exciting for Vietnam – but only if the pact is passed in other member countries.