The road to 'the new China'

ASIA FOCUS : PROPERTY / REGIONAL MARKET OUTLOOK

The road to 'the new China'

Vietnam has become one of Asia's most 'enticing and enigmatic' markets, says CB Richard Ellis

MATTHEW KOZIORA

As Thai companies start to look at Vietnam as an attractive property investment destination, Matthew Koziora, associate director at the CB Richard Ellis Vietnam office, writes about the differences between local and foreign investors looking to put their funds into the booming sector.

Vietnam is attracting much attention from overseas developers and investors because it is one of Asia's most enticing and enigmatic property markets.

The country's appeal is explained by a combination of positive factors.

Strong economic growth over the last 10 years and admission to the World Trade Organisation (WTO) in late 2006 are coupled with dream demographics of a young population, accelerating urbanisation and rising affordability.

These should contribute to sustained and even stronger growth.

With Ho Chi Minh City as its main growth engine, Vietnam is frequently likened to China in the 1990s. There are indeed various similarities between Vietnam today and China 15 years ago. These include a similar communist government structure; growth in export-based manufacturing providing numerous job opportunities, lifting millions from poverty; and a driving urbanisation trend, with a steadily rising middle class demanding more goods and services, including residential accommodation.

There is one big difference between the countries though: 70% of Vietnam's population (of a total of 88 million) is aged under 35, which will directly underpin optimism and buying behaviour over the medium to long term.

To some extent, becoming a member of the WTO is setting the political agenda, with the most recent land law reforms, by way of Decree 84 issued in June 2007, making the property market more attractive to international developers and investors.

Under the law, the ultimate owner of all land in Vietnam is the government, which allocates land-use rights to developers.

The majority of the projects now on offer are residential developments, as the government allows their ultimate on-sale to both locals and foreigners.

Local Vietnamese can purchase leasehold interests for between 50 and 70 years (the latter term being a direct result from Decree 84). Usually, at the end of the initial term, the lease is automatically renewed for an additional 50 or 70 years "times over", at no additional cost to local Vietnamese.

Foreigners are also entitled to purchase, through "assignment" of a long-term lease for the specified term. The only difference for foreigners is that at the end of the term, the property automatically reverts back to the original leaseholder of the development.

There is no difference in pricing for local and foreign buyers. Foreigners are provided exclusivity over the term purchased, and are entitled to "quiet enjoyment" of the property.

We now see more and more foreign investors purchasing property in Vietnam this way. However there are some restrictions:

FForeigners cannot raise funds against the property being purchased. It must be purchased with 100% cash;

FThe property cannot be bequeathed; and

FForeigners cannot sublet the property. They are only for owner occupation.

These restrictions are set by the law and are non-negotiable. We feel that one day in the near future these may be relaxed for foreign investors, however a time line cannot be provided at this time.

Decree 84 also provides other relaxations for foreign investors comprising expatriates and organisations currently entitled to be in Vietnam, and overseas Vietnamese (known formerly as "Viet Kieu").

Foreign organisations and individuals who are allowed to enter Vietnam for three months can purchase a leasehold title for the initial term of the lease. At the end of this term, the title reverts back to the original leaseholder.

Overseas Vietnamese can purchase (freehold) multiple homes if they have long-term investments goals, have made contributions to the state, are returning for scientific or cultural reasons for the benefit of the state, are returning or retiring in Vietnam, are elderly people that receive a pension in their host country or are an overseas Vietnamese who stays in Vietnam for more than three consecutive months.

We further note that if a foreign investor or overseas Vietnamese wishes to re-sell their property to a local party, the leasehold title will revert to freehold at the end of the term and will continue on this basis in perpetuity, conditional on a "long and stable land-use basis". Therefore, the saleability of the property is not affected in any way should such a disposal be required in the future.

We suggest the best tips to consider when buying property in Vietnam should include buying from a developer with a track record, and into a project with a good range of facilities and amenities. Preferable are corner units on an upper floor with views. Always consider the leasability and re-saleability of the apartment, and remember that monthly service and property-management charges are payable for this class of property.

The residential market has experienced a high level of growth over the past two years and this growth is expected to continue in the short to medium term, as a direct result of market fundamentals including a low supply base and growing demand, specifically stemming from a rising middle class.

It is notable that the substantial majority of buyers in the market are locals. But rising number of foreigners including larger institutional "block" buyers are also purchasing in a variety of projects.

There is a perception in the marketplace that the condominium sector is experiencing a "fever" from the success of recent launches in the greater Ho Chi Minh City area. To dampen such speculation, the government has imposed a 25% capital gains tax, coming into affect in January 2009.

While this will have some impact on demand in the residential property sector, we doubt it will have the full impact the government is currently expecting.

Overall, the property market in Ho Chi Minh City is very attractive to astute foreign buyers with some appetite for risk. If timed well, such investments can be substantially rewarded.