With a bevy of development projects in the works, and a strong year-end performance projected, Vietnam is carving out a spot in the emerging property market. A revitalized stock marke; rebounding global economy; and strides in the nation's infrastructure are contributing to the favorable investment outlook.
To learn more about the real estate market in Vietnam and the opportunities available for foreign investors, I caught up with Mr. David Blackhall, deputy Managing Director, Real Estate, VinaCapital.
VinaCapital is one of the largest property investors and developers in Vietnam. VinaCapital Real Estate (VCRE) is the real estate advisory and development service for VinaCapital Group, which manages three closed-end funds that trade on the AIM Market of the London Stock Exchange. These funds are among the largest vehicles for investment in Vietnam, and include VinaLand Limited (VNL), with net assets of USD694 million. VNL invests in residential, retail, office, mixed use and hospitality assets across Vietnam. VinaCapital will launch a new non-listed Vietnam Real Estate LP/GP structured Fund in Q2 2010 that will `capitalize on this exciting market.
The company is responsible for managing and developing over 40 of Vietnam’s top real estate assets. In addition to a team of over 70 of Vietnam’s most qualified real estate professionals, VCRE also works closely with VinaProjects, a newly established construction and project management joint venture between VinaCapital and inProjects from Hong Kong. Together, VCRE and VinaProjects will work to deliver truly international standard real estate projects. Work is currently underway on several major residential and retail projects in Danang, and the Dai Phuoc Lotus township project in Dong Nai, near Ho Chi Minh City.
Vietnam’s urban landscape is being transformed as the country undergoes unprecedented development that has seen an average annual growth rate of over 7 percent for the past decade. An important part of Vietnam’s development is the complete transformation of its urban and industrial landscape. As incomes rise, Vietnam’s growing middle class is demanding new, well-planned residential areas, and modern retail space and leisure facilities.
In the current market, the residential sector is gaining the most headlines, as middle-class consumers are showing high demand for new housing, and a second-home market has emerged for higher-end residential resort properties. The mortgage market is developing quickly, which will facilitate investment in projects focused on first home, low- and mid-range consumers (previously an area with very low margins). Demand for low- and medium-end projects in 2010 is expected to increase fourfold against 2008.
In Vietnam’s largest city, Ho Chi Minh City, CB Richard Ellis’ fourth quarter 2009 research update states that 60,000 housing units are expected to be completed by 2012, which remains far below expected demand of more than 110,000 units. By 2020, CB Richard Ellis estimates almost half a million new homes will be needed. In this environment, where demand is far outreaching supply, developers looking to bring affordable, good-quality modern housing to the market are increasing as there is great reward potential at hand.
The retail market also is an area seeing significant activity, as there is a very low supply base of modern shopping space in major cities — less than 800,000 square meters in Hanoi and Ho Chi Minh City. Vietnam rated sixth on A.T. Kearney’s 2009 list of the world’s top emerging market retail markets. There are many new developments on the drawing board, but large foreign hypermarket and supermarket chains are still actively pursuing opportunities. Sites with the right blend of size, location and cost are very hard to secure, and this has kept the pace of foreign investment in this sector relatively slow to date.
The hospitality sector was inevitably hit by the global economic slowdown. Hotel occupancy and average daily rates dropped significantly in 2009 as tourist travel to Vietnam was down 20 percent for the year. The market is not expected to fully recover in 2010; however, the long-term potential remains strong with tourist visits expected to top 5 million by 2013. Domestic travel also is increasing rapidly as more budget airlines enter the market. Currently, three- to four star business hotels in city centers are attracting the most attention from international investors.
The sector hardest hit by recent macroeconomic trends is the office market, where a significant increase in supply coincided with the global economic crisis. Vacancy across all office grades was 14.5 percent in Ho Chi Minh City at the end of 2009. Class A office buildings in Ho Chi Minh City have seen rents fall from more than US$60 per square meter in early 2008 to around US$35 per square meter currently. With a further 350,000 square meters of supply expected during 2010, rents are expected to soften an additional 10 percent to 15 percent.
For investors new to Vietnam, recognizing some of the basics is important. There are no REITs in Vietnam, and listed real estate equities are either small-cap or, if larger, are often part of diversified conglomerates that may not interest overseas institutional real estate investors. There are, however, numerous other routes to invest in Vietnam’s real estate sector. Overseas investors are usually best served by partnering with an experienced real estate developer that has in-depth exposure to Vietnam. A team with a strong network, local expertise and a deep understanding of the legal terrain is the key to overcoming Vietnam’s complex regulatory environment.
Land leases from the state or other organizations holding a land-use right can be issued to foreign investors for a maximum of 50 to 70 years (Decree 84/ND-CP) for real estate projects. Generally, a land lease is obtained through a native Vietnamese partner that contributes its right to use the land as part of its capital contribution to the joint venture. However, it also is the case that 100 percent foreign-owned entities can obtain investment licenses and land use rights for real estate development. More recently, effective from 1 January, foreigners can own a majority stake in a Vietnamese real estate joint stock company.
Despite the merits of Vietnam’s developing real estate market, there are many issues to consider. Investors should look carefully at the sector exposures and overall context of any investment platform. Investors also must pay great attention to the ability of the investment team to promptly and effectively manage the many issues specific to investing in real estate in Vietnam.
For instance, Vietnam’s legal system and regulatory framework are fast developing, but weak by international standards. There is a resulting lack of transparency in many areas, such as land resettlement, which can take two to three years depending on the scale and location of the development. Urban infrastructure in Vietnam is poor, and the pace of development is slow, so real estate developers should carefully consider the impact of transport and other types of infrastructure on their projects.
Vietnam’s government during the past two years has demonstrated an admirable ability to manage the economy and maintain a path of stable economic growth. The extreme speculation of 2006 and 2007 has been removed from the real estate market and is not likely to return in the foreseeable future. Going forward, investors and developers who are able to recognize issues early on and successfully negotiate Vietnam’s challenges will be rewarded by a market eager for a complete transformation of its built environment.
Vietnam has strong property rental and income rates compared to many neighboring countries. While investors arriving in Asia predominantly look first to China for opportunities, Vietnam offers compelling overall fundamentals with less risk of a bubble emerging as substantial growth and development of the urban environment continues. Vietnam offers a broad resource base, favorable demographics, low labor costs and a central location in Asia. Two-thirds of the population is below the age of 35, with a population growth rate of 3.4 percent per year. Vietnam has 26 million urban dwellers in 2010 (30 percent of the total population of 86 million by 2020, the country will need to provide housing, retail, entertainment amenities and office and for up to 45 million urban dwellers (45 percent of the estimated total population of 100 million).
Vietnam’s cities are low-rise and overcrowded, with outdated electricity, water and drainage services the norm. In short, a complete transformation of Vietnam’s urban environment remains in its early stages. Market yields for property owners are high compared to regional countries. The challenge for foreign investors is to navigate a complex terrain of business networks and legal frameworks that remain opaque.