When it comes to real estate opportunities in Vietnam, the residential sector has historically attracted the most attention from overseas buyers. Yet, in 2016, the country’s commercial segment started to catch the eye of institutional investors.

A number of trophy properties changed hands last year, including Kumho Plaza in Ho Chi Minh City’s (HCMC) central business district and Keangnam Landmark 72 in Hanoi, the country’s tallest skyscraper. Both were sold to foreign investors (Kumho to Singapore’s Mapletree and Keangnam to Korea’s Mirae partnered with AON), which are increasingly eager to participate in Vietnam’s continued development as their home markets offer fewer growth opportunities.

Other companies active in the market include CapitaLand (Singapore) and Fujita and Mitsubishi (Japan). Perhaps the most prominent foreign property investor is Singapore’s Keppel Corporation, which is nearing the completion of the second tower of its Saigon Centre development in HCMC’s CBD and has taken a stake in the mixed-use Empire City project under construction in Thu Thiem, a new urban area being developed across from HCMC’s CBD.

The greater attention Vietnam has received comes off the back of a robust property market driven by the country’s economic growth. With its gross domestic product growing more than 6 percent over the past two years, and expected to hit between 6.5 and 6.7 percent in 2017, Vietnam’s development continues to be among the strongest in the world.

A stable currency, manageable inflation, a rapidly expanding middle class, low labor costs and a young, educated population of more than 92 million are just a few of the factors that have made Vietnam a destination of choice for multinational companies looking to establish or expand operations in the country. Foreign direct investment in 2016 was a record $24 billion, up from nearly $23 billion in 2015.

With Vietnam’s economy expanding, it is little surprise that ‘Class A’ office space has been in demand in Ho Chi Minh City and Hanoi, as both domestic and foreign companies are eager to expand or upgrade their office space in the market. As of the fourth quarter, CBRE pegged the vacancy rate for Class A buildings at 8.0 percent and 15.8 percent for HCMC and Hanoi, respectively.

However, the strong interest from both Vietnamese and foreign investors far outweighs supply for quality assets, which are still scarce in today’s market. In HCMC, the total office supply was estimated by JLL at approximately 18.84 million square feet. JLL estimates 1.37 million square feet across all classes of office space coming online in HCMC in 2017; approximately 807,300 square feet in 2018; and approximately 1.72 million square feet per annum from 2019 onwards.

While other major cities in the region also offer compelling growth stories, HCMC and Hanoi can provide investors with one thing the other markets do not: the world’s highest effective yields for Class A office space, at 8.97 percent and 8.63 percent, respectively, according to research from Savills. Combined with a risk premium that has fallen dramatically over the years, it is clear why these investors are committing capital and effort to the Vietnam market.

Yet, while the 12-month outlook for Vietnam continues to be very positive, there are some potential challenges that bear monitoring, including changes in US trade policy that could affect exports, higher interest rates and inflation.

Other barriers include the availability of prime sites that are cleared, licensed and ready for development and competition from both local and offshore investors and developers. It is the local players that hold the upper hand, such that they are able to efficiently navigate the complexities around land title and approvals. However, it is worth noting that both Vietnamese and foreign investors can only obtain a leasehold, rather than an ownership interest, for commercial use property, usually for a period of 50 years and with the ability to extend.

With current office supply considerably behind other countries in South-East Asia, Vietnam has a lot of catching up to do in office, retail and hotels. Therefore, expect the annual GDP growth and demand for commercial space to continue for the foreseeable future.