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VIETNAM – AN OPPORTUNE TIME

Vietnam – AN OPPORTUNE TIME
UAE
OVERVIEW VIETNAM KOREA HONG KONG CAPITAL MARKETS

June 2016

With a growing economy and recently relaxed foreign property investment laws, experts say now could be the right time to invest in Vietnamese real estate.

Vietnam has come a long way since 1975. Following the end of the Vietnam War, which left the country unified under a communist government but impoverished and politically isolated, Vietnam embarked on initiating a series of economic and political reforms which began its path towards integration into the world economy.

Efforts started to bear fruit and since 2000, Vietnam’s economic growth rate has been among the highest in the world, with an average growth rate of 6.15 percent between 2000 and 2015 and a projected target growth rate of 6.7 percent for 2016.

In 2007, Vietnam joined the World Trade Organisation (WTO) and in recent years, the nation has been rising as a leading agricultural exporter and an attractive foreign investment destination, leading the World Bank to calling the country a “development success story.” Also, the ASEAN Economic Community was established on December 31, 2015, and is likely to create more opportunities for the country to integrate into regional and global economies.

Bright times for real estate

In line with the positive economic performance and driven by a growing and increasingly wealthier population, further boosted by regulatory reforms introduced in 2015 that improve market access for foreigners, Vietnam’s real estate market is flourishing.

“The year 2015 was a turning point in the real estate market in Vietnam and we expect that to continue throughout 2016,” says Tram Nguyen, Research Manager of JLL Vietnam.

“Residential witnessed strong supply and demand dynamics throughout 2015 in all sectors of the market, whether it was affordable, mid-end or high-end, condominium, villa or resort. One of the biggest success stories of 2015 was the introduction of the new legislation for foreigners to buy in Vietnam. The legislation came at a very opportune time as other markets in the region struggle and an increased focus has been placed on Vietnam. The market is developing and maturing at a faster rate than previously seen. Developers, investors, banks and government authorities are more alert to market dynamics and prudent in their actions and roles,” she adds.

While it’s only a matter of time for Vietnam to catch up with its richer Asian neighbours, it still offers good value for foreign investors. The sector has witnessed increasing FDI over recent years which in Q1 2016 was registered at USD 4 billion, marking an increase of 120% y-o-y, according to CBRE data.

Favourable regulatory reforms

Since the law that allows foreigners to purchase property in Vietnam came into effect last year, JLL has witnessed the number of enquiries as well as transactions from foreign buyers increase significantly.

JLL says it recently carried out an international marketing campaign on residential projects in Vietnam and received a considerable amount of interest and feedback from foreign investors from Singapore, Hong Kong and Japan.

“Some projects in Ho Chi Minh City reported that foreign buyers are aggressively interested in their projects and there are no available units for foreign buyers due to the limitation of the law on the foreign ownership portion of each development. The total number of foreign buyers has reached more than 1,000 units, versus a few hundred recorded before the new law was introduced,” Tram Nguyen explains.

Dung Duong, Director at CBRE Vietnam Research and Consulting, says that CBRE is seeing a lot of interest from Singaporean, South Korean, Japanese and Malaysian buyers who live and work in Vietnam, mostly buy-to-let investors.

However, Duong thinks this trend is still weak and will only fully take off once other market factors ameliorate. “Although the number of foreign buyers is more encouraging than our expectations, it accounted for a humble proportion in the housing ownership pyramid. Many potential buyers are still awaiting more guidance and progress in implementation. As agent for this group of buyers, CBRE have observed that professionalism, language proficiency and ease of credit card payment are some of the key concerns,” she says.

The new law however seems to have sparked a new project development wave, helping Vietnam to strengthen its role in the region. “The combination of the change in the foreign ownership rule and uptake in the market has meant a large increase of developments being launched and strong absorption numbers. Vietnam finally takes its place on the regional stage as a place to invest not just in terms of garments, footwear, and furniture but also real estate,” CBRE’s Duong says.

Which asset classes are most attractive?

The major cities of Hanoi in the North and Ho Chi Minh City in the South are the focal points of current development. Looking at sector activity, both in terms of investment as well as development, CBRE says residential definitely stands out.

“Since mid-2014 Vietnam’s residential market has been recovering [from the burst of the property bubble in 2007], firstly in the affordable segment. Entering 2015 the picture has become much clearer and we can confirm that the condominium market is on a firm path towards recovery. Interestingly, the majority of successful transactions have rippled from the affordable segment during 2012-2013 to the high-end segment more recently. Entering 2016, the continued strong growth in the residential market, particularly in HCMC, have encouraged more M&A deals in the sector,” Duong says.

Apart from residential, CBRE also believes that hospitality, both city-based hotels and resorts will continue to attract foreign investors, operators, as well as individual buyers from around the region. “On the back of the hopeful TPP between the 10 member countries, Vietnam will continue to be the strong alternative to China for Korean, Japanese, Taiwanese and North Asian investors who come to look for industrial and warehouse spaces,” Duong explains.

Beyond the major cities

Apart from Hanoi and HCMC, several other areas of Vietnam are witnessing strong growth, particularly with regards to resort and other tourism related development.

JLL expects the strong interest in the resort and hospitality sector to continue over the coming years. “The hospitality sector in general in Vietnam is in its infancy compared to other countries in the region; therefore, investors and home buyers can see the potential for strong future growth. In terms of location, I believe Phu Quoc, Nha Trang and Da Nang are cities with the potential to attract foreign buyers, as they are very popular with international tourists because of their beautiful beaches and the many resorts and hotels along the coastal road,” Tram Nguyen says.

With regards to resort development, CBRE mentions Phu Quoc Island as an interesting emerging market. “During the past 5 years, the number of local and international visitors to the island grew constantly. The market only has 15 four- to five-star hotels at the moment, as such a lot of potential for hotel investors and operators to come in,” Dung Duong says.

The Mekong Delta Region also has a lot potential for cultural discovery and ecotourism purpose, the CBRE expert adds. “According to Vietnam tourism, in 2015, there were more than 7 million tourist arrivals, in which 540,000 visitors were international, an increase of approximately 21 and 14% compared to 2014, respectively,” Duong says.

Positive outlook despite challenges

Investing in emerging markets always comes with a unique set of challenges. For JLL, although “Vietnam has come a long way in the past five to ten years,” these are mainly the lack of transparency, bureaucracy, corruption, and the lack of an effective legal system. Investors have also experienced some issues with compensation and land clearance, land title, and dealing with local partners, all of which “are common challenges faced at this time,” Tram Nguyen says.

However, she adds, “there are opportunities to tackle all these issues and we hope the Vietnam investment environment will improve in the near future.”

With the Vietnam property market expected to continue its upward trend for the next two to three years, the capital value of the residential segment is expected to increase around 1-2% per quarter, as per JLL. For the luxury office segment, JLL expect the average rent will rise from 5% up to 10% in the next several quarters.

This however raises the question of sustainability, as CBRE’s Duong expresses it: “At this amount of production and new projects, how sustainable is it compared to the affordability of the local market?” In a painful memory of 2007-2013, when the Vietnamese property bubble burst, the government now intends to tighten the capital entering the real estate market in an effort not to repeat the previous scenario, Duong explains.

Since developers rely heavily on bank funding for the acquisition of land and the mobilisation of construction, funding, sustainability and affordability are the key challenges the Vietnamese market will face in the short to medium term, according to CBRE.

However the firm maintains a positive outlook for the market in the short to medium term. “Vietnam is in a very nice place at the moment, we are at the lowest interest rate in 13 years and lowest inflation. The currency has depreciated over 10 years but is reasonably stable at the moment and we are waiting for the closing phase of signing TPP and FTAs.

“We’re getting to see more and more real estate investments as well. The good thing is that we start to see new investor groups coming from Japan or South Korea interested in affordable and middle income-housing, not just high-end and luxury,” Dung Duong concludes.

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