Choosing the Best Factory for Lease in Vietnam: Short-Term vs. Long-Term Lease, Which One Is Better?

Finding just the right factory for lease in Vietnam is critical for the manufacturing company. Certainly, the duration of the lease has a major influence on this decision. Both short- and long-term leases carry with them different sets of advantages and challenges.

While short-term leases allow for flexibility, they may come at a premium. Longer-term leases, instead, offer some security but demand deep commitment. For a potential taker, it is vital to know the advantages and disadvantages of each type of lease.

This editorial highlights the differences between the two types of leases to help firms decide which one is better suited for their operational requirements. Leasing contracts should be signed taking into consideration all aspects, be it flexibility or savings in cost.

Short-Term Lease Contracts

1. What is the Short-term Lease?

Generally speaking, a short-term lease of the factory for lease in Vietnam can last for a period from one to three years. This contract is perfect for businesses that require a degree of flexibility or are still uncertain of their long-term plans. Tenants most often choose short-term leases while testing a new market, launching a new production line, or waiting for a larger facility to become available.

In searching for a factory for lease in Vietnam, tenants find short-term leases more common around developing industrial zones. The landlords in such areas may prefer short-term arrangements to keep their factories for rent in Vietnam open for more value-adding tenants in the foreseeable future.

Short-term leases may allow tenants some flexibility, yet the constant relocations and repeated negotiations could present financial and operational difficulties that must be endured. 

2. Advantages of Short-Term Leases

2.1 Flexibility

Flexible and highly desirable for businesses in fast-changing industries, short-term leases are ideal for manufacturers who are testing a new product or market and need the ability to move quickly when demand changes.

For example, a startup may first rent a small factory for lease in Vietnam just to gauge market demand. Should it respond to market demands quickly and then decide to go big, it will not be tied to a long-term contract.

The flexibility of this sort comes in very handy for tenants leasing the factory for rent in Vietnam’s emerging industrial zones. If infrastructure improves or some other incentives are offered by businesses, tenants have the flexibility to move without penalty to a better location.

2.2 Lower Upfront Costs

A key advantage of short-term leases is the reduced financial commitment. Landlords often require a lower security deposit and fewer upfront costs, making it easier for businesses to manage cash flow.

For small and medium enterprises (SMEs), this means they can invest more in production rather than tie up capital in long-term lease agreements. This is particularly beneficial when leasing a factory for lease in Vietnam, where securing a prime location can be costly.

Additionally, tenants are not locked into fixed rental rates for an extended period. If market prices drop, they have the flexibility to negotiate a better deal when renewing or moving to another location.

2.3 Easy Exit

Businesses speedily adaptable tend to use short leases because they are less hassle if an exit strategy is required. A tenant can pack up and leave if the factory for lease in Vietnam becomes inadequate due to space constraints or logistical hindrances without a major loss.

For instance, a manufacturer facing dwindling orders might look into cutting space. The short-term lease allows moving into a smaller acreage or one that entails a lower cost to operate.

On the contrary, long-term agreements generally provide for penalties on termination before the agreed time. This makes short leases a viable option for tenants who cannot reasonably estimate their long-term production needs when renting a factory for lease in Vietnam.

3. Disadvantages of Short-Term Leases

3.1 Higher Rental Rates

One of the biggest downsides of short-term leases is the higher rental price per square metre.  Landlords typically charge more because they take on the risk of frequent tenant turnover.

Thus, while tenants may have lower outlays initially, the aggregate costs for short-term leases may not be economically efficient as compared to long-term commitments made. Potential manufacturers for rent in Vietnam are encouraged to carry out this trade-off between flexibility and cost-effectiveness.

Also, when the lease and rental fees are renewed, the landlords of the factory for lease in Vietnam can increase their rents, leaving the tenants to face higher costs than anticipated. Such fluctuations can hamper the budgeting process in those businesses that tend to have thinner margins.

3.2 Less Stability

With its short-term nature, a lease does not provide long-term stability for a business and may further be difficult for those whose plans require some time. Manufacturing operations often need unbroken supply chains, trained labour, and regulatory approvals, all of which are made more difficult by frequent relocations.

For instance, when a tenant has a prime piece of property on which to locate a factory for rent in Vietnam, they might not have their lease renewed after the initial term. Thus, the tenant either stays on, paying over the odds to keep the factory, or allows production to be disrupted while it searches for a new factory for lease in Vietnam.

Stability is especially important for businesses investing in expensive machinery that is costly to move. In such cases, a short-term lease may not be the best option.

2.3.3 Risk of Rent Increases

Short-term tenants are very susceptible to increases in rents. When the need for a place goes up, then the landlord has the right to raise rental prices exorbitantly upon the next agreement.

Sometimes, this can be a huge disadvantage to companies that have limited bargaining power. First, a company operating on very tight margins really cannot afford the costs of the sudden increases and will, therefore, have to relocate, notwithstanding the fact that the premises they occupy meet all the other operational requirements.

Therefore, rental trends become very important for those who wish to take a factory for lease in Vietnam. While flexibility exists in the face of short-term leases, they expose a business to unpredictable financial vagaries. 

Long-Term Lease Contracts

1. What is the Long-term Lease?

Generally, a long-term deal will last anywhere from five to twenty years. Established companies with stable operations usually prefer to enter these kinds of agreements.

Tenants of a long-term lease in Vietnam mostly seek in-city locations inside major industrial hubs where the availability of infrastructure, logistics, and even labour supply is assured. Working under long-term leases helps these tenants fix their production in place with no fear of sudden relocations.

However, there will be a higher financial commitment for long-term leases, but with some savings in the long run. Many landlords will give preferential rates to tenants willing to sign long-term arrangements.

2. Advantages of Long-Term Leases

2.1 Cost Stability

Long-term rentals protect tenants from volatile rental prices. This stability allows firms to plan operational costs more effectively.

For example, a company producing consumer electronics can obtain ten-year rental prices that will have fixed costs. When searching for a rentable factory in Vietnam, such an arrangement allows firms to avoid market forces’ price increases.

2.2 Increased Bargaining Power

Firms acquiring long-term leases will have negotiating power to bargain for better terms, such as lower rent, additional facilities, or flexibility of expansion.

As an illustration, a manufacturer accepting a 15-year lease will be able to bargain for maintenance work of the factory for lease in Vietnam’s development without additional fees.

It is a vital advantage for tenants to find a factory for lease in Vietnam because acquiring long-term benefits can decrease business risks.

2.3 Location Security

Long-term leasing guarantees that businesses will be in a location for many years, providing stability to the supply chains, staff, and operations continuity.

It matters to many businesses with significant investments in speciality equipment because, in many cases, moving costs a lot of money and impacts operations adversely.

A stable base also guarantees a good relationship between businesses and suppliers, reducing logistics expenses to operate from a factory for lease in Vietnam.

3. Disadvantages of Long-Term Leases

3.1. Massive Initial Capital Expenditure

Long-term leasing is associated with massive initial capital expenditure. Renters typically have to pay a huge deposit, remodelling costs, and even prepayment of rent. It may cause a strain on the cash flow, especially for small and medium-sized businesses.

For example, a company that secures a factory for lease in Vietnam for ten years may have to spend a lot of money on installing machinery, and it may be difficult to change direction if market conditions shift. Unlike short-term leases, these contracts do not allow companies to easily reallocate capital when new opportunities arise.

3.2. Reduced Flexibility

Entering into a long-term lease commitment means giving up the ability to relocate or expand quickly. If the business environment shifts—tax policy changes, infrastructure improvements, or changes in competitor concentrations—tenants may find themselves locked into a building that is no longer ideal.

A Vietnamese factory’s tenant may discover after a while that a different province is more appealing from a tax-break point of view, but it can be expensive to terminate a long-term lease. Such rigidity may take away strategic growth.

3.3. Increased Financial Risk During Market Declines

A long-term lease commits companies to a fixed cost base, which can be a significant drawback in case the market situation deteriorates. In the event of falling demand, companies might find it difficult to meet rental expenses while remaining profitable.

For example, a company leasing a massive factory for 15 years might be overpaid if the factory for lease in Vietnam’s market is in decline. Short-term leasing, where the tenants can negotiate or relocate, is different from long-term leasing because the latter exposes companies to greater financial risks.

Top 4 Key Issues to Consider When Choosing a Lease Term

1. Business Growth and Expansion Plans

Firms that plan to grow quickly must ask themselves if the lease is long enough to fit their growth strategy. A brief lease offers the ability to relocate to a larger factory for lease in Vietnam if production levels increase, but a long-term lease accommodates slow growth stability.

A tenant in search of factory rentals in Vietnam should decide if they foresee themselves outgrowing the space within a couple of years. In this event, negotiating growth clauses in long-term leases can provide stability and adaptability.

2. Financial Stability

Companies that have sufficient cash balances can opt for long-term leases due to cost savings in the long run. However, companies whose income streams are less predictable will prefer short-term agreements in order to avoid locking themselves into long-term expenses.

As an illustration, a new production company entering the economy of Vietnam may opt for a short-term lease to try out production levels prior to big-scale facility involvement. This keeps expenses minimal with flexibility.

3. Market Trends and Rental Price Fluctuations

The Vietnam industrial real estate market is still evolving. The rental in certain locations may rise due to increased demand, while some other locations may become less competitive.

Tenants should research trends before they sign up for a factory for lease in Vietnam. If rental rates are going to go up significantly, locking in a long-term lease at a set rate can guarantee cost stability. Conversely, in areas where prices are going to drop, a short-term lease allows tenants to renegotiate better terms down the road.

4. Location and Infrastructure Development

Infrastructure improvements can affect the desirability of an industrial location. If a business is prepared to wait for the establishment of better logistics chains, new highways, or industrial zone improvements, then a short-term lease is ideal.

For example, a manufacturer may find a factory for lease in Vietnam in an emerging area with future plans for infrastructure expansion. In this case, entering into a short-term lease allows them to try out the benefits of the new infrastructure without committing for the long term.

Read more:

• How to Choose the Perfect Factory for Lease in Vietnam for Manufacturing Needs
• Choosing a Factory for Lease in Vietnam: The Essential Role of Logistics
• Factory for Lease in Vietnam Guidance: Overcoming Difficulties and Solutions While Leasing

The choice between a short-term and long-term lease depends upon the financial situation, development strategy, and needs of an industry firm. While flexibility is ensured through a short-term lease, this may lead to added cost and volatility. Conversely, cost-effectiveness and safety are ensured through long-term arrangements but require an additional investment.

For businesses seeking a factory for lease in Vietnam, one must comprehend such trade-offs. Leasing experts must be consulted and long-term operational needs examined to allow the tenant to make the best decision.

If you’re new to Vietnam and looking for a factory for lease in Vietnam, CORE5 Vietnam provides excellent options tailored to your needs. Their factories are strategically located, offering prime access, spacious layouts, and modern facilities designed to enhance your operations. Dedicated support ensures a smooth leasing process and long-term satisfaction.

Stay updated on their latest developments to secure the perfect space for your business. Schedule a tour of their factory village to explore options that align with your requirements. With a commitment to delivering high-quality factory for lease in Vietnam and exceptional customer service, CORE5 Vietnam helps you find the ideal location to grow your operations and thrive in Vietnam’s dynamic industrial market.