ASIA FOCUS

Gambling on Vietnamese real estate

As Asia's latest rising star continues its meteoric rise, its property market struggles to cope with a surge in demand

NOLAN CRAWFORD

Though overcrowding, quality control and government corruption are ongoing issues, the property market is still one of the hottest growth industries in Vietnam, a trend that some analysts do not expect to abate any time in the near future.

Motivated by 8% economic growth last year and the potential of easing real-estate regulations, it is not only developers that are cashing in, but also commercial banks and property funds.

The basic overall picture, according to research by CB Richard Ellis (Vietnam) released earlier this month, is rapidly growing demand in all areas - office space, residential, serviced apartment and hotels - and not enough supply. It is a picture they foresee for at least the next three to five years.

"To describe how young and new the market is, just take a look at office space. In Ho Chi Minh City we're talking about 350,000 square metres, whereas in Bangkok we're talking about 3.5 million square metres and in Jakarta four million," said Peter Dinning, the managing director of VinaCapital Real Estate Ltd, in a recent interview.

"As a result, we see almost 100% occupancy in a lot of areas."

Demand in the office segment of the market is being driven by entrepreneurs opening shop, foreign direct investors wanting to set up shop, and local firms deciding whether to trade up for something with modern amenities.

"The office market has been predominantly foreign," said Mr Dinning, "but we've seen a shift in the last two years with local companies wanting to show they can compete in the global market by upgrading, especially now the country is a World Trade Organisation member."

Short supply and strong demand has certainly driven prices higher. CB Richard Ellis quotes Ho Chi Minh City Grade-A office rental space at US$23 a square metre in the first quarter of 2006 and now estimates it at around $29.50.

The hotel segment is seeing similar growth, helped along by an influx of travellers. The Vietnam National Administration of Tourism estimates that international arrivals grew by 3% last year to 3.58 million people.

The government hopes the figure climbs to more than 5.5 million by 2010 as the country taps into the allure of its mountainous regions and 3,000-plus kilometres of shoreline.

As for the residential segment, an emerging middle class that has benefited from decreasing unemployment and consistent economic growth over the past five years is beginning to invest in property.

"Local demand is huge, though the actual number of people who can afford new homes is still very limited," said Nguyen Quoc Tuan, an associate director of research with CB Richard Ellis.This situation is likely to change, said Tuan. The hope is that Vietnam will continue its current trajectory as Asia's third fastest-growing economy through 2010.

In addition, consumers are becoming savvier about various financial products, such as home loans. Commercial banks over the last few years have begun pushing mortgages and are still in the early stages of offering long-term, fixed-rate loans to consumer who have the right credit rating.

"You can get a 12-year long term loan, but rates are still very high [for local consumers]," said Tuan. "That too should change as the market matures."

Mr Dinning added that the residential sector has potential for long-term sustainable growth because of the huge local demand, but of course there will be the usual peaks and troughs in the short run.

In the meantime, the securities market may be an alternative avenue in which to fund housing purchases. Viet Nam News and other publications have run stories in the last two months regarding small investors who have ridden the stock market wave over the past year and are cashing out.

They are taking their newfound wealth and buying real estate, a more traditional investment channel in Vietnam similar to gold and foreign currency.

Despite all the upbeat banter, analysts have issued a number of warnings targeted at consumers, property-fund managers and developers alike.

In its 2006 Real Estate Transparency Index report released earlier this month, Jones Lang LaSalle put Vietnam at 56th, right at the bottom of the list, below regional competitors such as China, in 42nd place, and Thailand, ranked 39th.

The report also indicated a strong correlation between a market's lack of transparency and the level of corruption. Again, Vietnam was at the bottom of the index.

Earlier this month, Nguyen Dinh Than, a director at state-owned Vinaconex, was found with 200 million dong (405,950 baht) in alleged kickbacks from a local contractor. The case is now before the courts.

The government also maintains tight controls on the market. Currently, foreigners are not allowed to own real estate, though there are the usual loopholes if a person is married to a Vietnamese. Secondly, overseas-based development companies must enter a joint venture with a local partner in order to invest.

Under the World Trade Organisation agreement Vietnam signed at the end of last year, lawmakers plan to liberalise the property market from now until January 2009. Foreign developers will supposedly have greater access to the market once new policies take affect.

Another negative factor is potential overcrowding in the market.

"There is a lot of money chasing too few good deals," said Rick Mayo-Smith, the managing director of Indochina Capital.

"If you plan on coming in on your own, it maybe difficult The property market [in Vietnam] is not necessarily the godsend that people say it is."

The key, he says, is a thorough understanding of the local environment and the ability to find good deals, which is not always easy given the transparency issues. He also warned that with about one billion US dollars already invested in the market, competition is tough.

Indochina Capital is expected to make 25-30% returns on its first property fund, but the second fund will be much more difficult "with the market that is much more crowded and expensive", said Mr Mayo-Smith.

Bangkok Post

Saturday March 31, 2007