A new law permitting foreigners to acquire property is set to open the floodgates of the booming Asian economy’s realty sector.
In November 2014, the Vietnamese National Assembly passed a landmark law, allowing foreigners to acquire and lease property in Vietnam. Three months on, the upbeat Asian economy’s real estate sector is witnessing a sharp upturn, sales volumes in certain segments are touching historic highs and prices are scaling new peaks. And this, when the new law is yet to come into effect – from July 1, 2015. Industry observers opine that the current upsurge is just the beginning of a sustained bull run in the Vietnamese real estate sector. Driven by a robust 6-plus-percent economy, fresh inflows of FDI and massive infrastructural initiatives, Vietnam’s real estate story is on a solid footing for years to come.
Thanks to the Vietnamese government’s adept handling of macro-economic conditions over the past 18 months, where both inflation and interest rates have dropped remarkably, and consumer sentiment has improved, this has resulted in record number of homes being sold. Since joining the World Trade Organisation in 2007, Vietnam witnessed a meteoric rise in market conditions. Though the global financial crisis and domestic economic constraints considerably slowed market conditions over the past five years, the country is now experiencing a return of confidence, backed by stable economic indices.
The waking Asian giant has a population of 90 million people – the 13th largest in the world – with a young and dynamic workforce, and after tough market conditions over the past few years, there are now clear signs that the economy is picking up – with the property market keeping pace. “We anticipate 2015 to be a turning point in the Vietnamese property market and with the introduction of a number of new legislations to attract further foreign investment in the country, we expect an increase in investment activity not only in real estate but across all economic sectors over the next two to three years,” says Stephen Wyatt, Country Head – Vietnam, JLL Asia Pacific. Buoyed by the positivity in the past few months, property commentators estimate between 12,000 to 14,000 homes have been absorbed in Ho Chi Minh City alone in 2014, representing a 140 percent increase year-on-year.
RED CARPET FOR FOREIGNERS
Foreign investments have historically been the engines of growth for capital-intensive emerging economies, and acknowledging this factor, the Vietnamese government has taken a series of legislative and fiscal initiatives in the past couple of years to encourage inflow of foreign investments – and human resources. After initially focusing on attracting FDI in the manufacturing and services sectors, the legislation on real estate is the newest initiative to attract and retain foreign investments and talent. “We believe the change in legislation is a positive step forward for the country and real estate market in Vietnam. It sends a clear and positive message to all foreign investors that Vietnam is open for business and welcomes foreign participation in this dynamic market,” says JLL’s Wyatt.
This is certain to have an impact on the property market, more specifically at the high to luxury end of the residential market, as it gives surety to foreign buyers of residential property. The approval allows any foreigner permitted to enter the country the right to acquire a home for a defined 50 year term that can be extended on expiration. The new laws also allow for sub-letting or leasing of the premises to generate rental income, the ability to raise a mortgage against the asset onshore and the ability to bequeath the asset on death. Given that property prices are now at 2006 levels, this represents an excellent opportunity for foreigners to enter the market at an affordable cost base. “There are an estimated 80,000 foreigners currently living and working in Vietnam, and staying in rental homes,” says Timothy Horton, General Manager, Cushman & Wakefield – Vietnam, adding that these foreigner professionals will be now encouraged to purchase their own homes.
Going further, the new laws will also permit foreigners and organisations to acquire commercial property for owner occupation purposes, which should attract the attention of banks, insurance companies and institutions. “From 2008 to 2013 there were only 126 foreign registered purchasers and this number will surely increase after the new law takes effect. Mature economies such as the U.S. and Australia typically run between 5 percent and 10 percent foreign transactions per year indicating potential in Vietnam for approximately 2,600 foreigner purchasers per annum,” says Troy Griffiths, Deputy Managing Director, Savills Vietnam.
The two main cities of Vietnam – Hanoi, the centrally located political capital and Ho Chi Minh City, the financial capital in the South – are also the country’s big real estate markets, offering the finest real estate projects and also the maximum scope for capital appreciation. “Existing supply and new stock coming onto the market needs to be carefully reviewed as there is still an underlying low supply of quality buildings within the capital cities themselves,” says David Blackhall, Managing Director, Vinacapital Group, adding that Ho Chi Minh City is seeing a huge rollout of road and rail infrastructure, which is likely to create more of an upside in southern Vietnam as opposed to Hanoi over the next couple of years.
In terms of category, residential realty continues to be the most attractive, within which condominiums in good projects proving to be best bets. “In Ho Chi Minh City alone, a good 37 projects were launched in 2014 itself, adding a stock of nearly 15,000 condominiums to Vietnam’s biggest city,” says CBRE Vietnam’s Townsend, adding that of these 60 percent of them have already been sold.
Consistent with the prospects of a healthy, fundamentally sound real estate market, there are attractive opportunities even in the office space and retail, while those with a larger risk appetite and longer outlook can explore opportunities in industrial real estate. “The industrial market represents many opportunities going forward due to the number of large scale free trade agreements due to be signed over the coming months with Korea, EU, ASEAN region and the largest of all – the Trans Pacific Partnership or TPP,” says JLL’s Wyatt.
In terms of return on capital, investments in Vietnamese real estate not only have good potential for appreciation of value, but also accrue the highest rental incomes in the region. While prime properties – both residential and office spaces – in neighbouring big cities like Singapore, Hong Kong and Bangkok command annual rents of less than four percent, properties in Vietnam earn handsome rental incomes in the region of 6-8 percent. For big ticket investors, the new, quality retail spaces are a good investment bet to enter locked long-term rental agreements with flagship stores. In 2015 alone, 200,000 square metres of prime retail space spread across three new malls will be thrown open to the upwardly mobile Ho Chi Minh City consumers.
Take your pick:
Vietnam is a market ripe for cherry picking realty assets. For a passive residential buyer who enjoys holidays on the beach, a villa at Danang, Hoi An or Nha Trang is ideal as they provide the option in generating a rental income as the tourism market is set to continue its impressive growth story. For larger investors, quality hotels and commercial offices will provide solid returns over a medium term horizon due to lack of such assets currently built in the market. “We are also seeing second and third tier cities like Danang, Ha Long, Can Tho and Phu Quoc booming in terms of infrastructure and new projects being rolled out thanks to record levels of FDI still entering the country and a manufacturing boom being witnessed in Vietnam,” says Vinacapital’s Blackhall.