Monday, September 17, 2007

Vietnam's property and real estate overview

“Homebuyers used to pay more to live on the third floor rather than the 12th, as it meant there were fewer stairs to walk up and down when there were power cuts,” says Marc Townsend, Managing Director of CB Richard Ellis (Vietnam). “Now, it’s all about the view and paying to live on a higher floor.”

The observation provides a stark indication of how property construction standards in Vietnam are rising in line with its fast-growing economy and expanding middle class, with a raft of local and international property developers and consultants targeting the growing demand for good-quality housing.

Vietnam is currently at an exciting stage in its development, comparable to China in the mid-1990s, and its current GDP per capita of US$729 is similar to China’s in 1996.

Over the past five years, the country’s GDP growth rate has averaged 7.4% per annum, second only to China in the region. The manufacturing sector is growing at a rate close to 17% per annum and the services sector is also moving up strongly, driven by the growing retail and tourism industries. Vietnam’s growing role in the international marketplace was strengthened when it became the 150th member of the World Trade Organisation (WTO) last November

“With the entrance into the WTO and new laws, it’s a more even playing field than before,” says Brett Ashton, Managing Director of Savills Vietnam, a company formed this year by the merger of Savills with Chesterton Petty Vietnam, the country’s most established international property consultant, founded in 1995.

“The country has opened up to foreigners in many industries like banking, retail, logistics and distribution. Furthermore, with the growing emergence of the ‘China plus one’ theory (so companies reduce their dependence on China and spread their business risk), Vietnam is the ‘one’ most of the time, as labour is cheaper here and generally better educated.”

The country’s economic future looks in safe hands due to a large and young population, with people under 35 making up more than 70% of its 85 million people, a total that makes it the world’s 13th most populous country. For political and social stability, Vietnam is ranked by political risk consultants as the second ‘safest’ country in Asia, behind only Singapore.

However, rapid urbanisation is the primary driver of the current economic boom and emerging wealth, best exemplified by the staggering growth of Ho Chi Minh City (HCMC), the country’s largest city and still commonly known as Saigon.

From a population of about 1 million in 1990, urbanisation and immigration have caused HCMC’s population to swell to 8 million, a total expected to top 10 million by 2010 and 13.5 million by 2020, according to the Asian Development Bank. “It’s the country’s urbanisation that has created the huge demand for property,” Townsend confirms.

Modern-day Vietnam took shape in the late 1980s as it became an open economy, and in the early 1990s it welcomed the first wave of foreign companies, investments and international organisations. Following the lifting of the American veto on multilateral loans to the country in 1993, Vietnam became a member of the World Bank, the International Monetary Fund and the Asian Development Bank, as well as the Association of Southeast Nations (ASEAN).

The country’s first burst of international flavour was exemplified by the construction of golf courses around the country, a revealing symbol of ‘capitalist’ culture as people from around the world started to visit, work and invest in the country. The property market peaked in 1996-1997, but foreign investment, primarily from Southeast Asia and East Asia, started to dwindle at this time, as many international firms packed their bags, disillusioned with the country’s legal framework, inconsistent regulations and poor banking.

“For the construction sector, the focus in the early 1990s was on industrial zones, offices and serviced apartments,” recalls Ashton, who has worked in Vietnam since 1995. “However, the major problem in the property market by 1996-97 was over-supply, which was then compounded, but not caused, by the Asian economic crisis.”

Second wave
Vietnam has since committed to increased economic liberalisation and enacted structural reforms to modernise its economy and produce more competitive, export-driven industries. Its economic growth has led to a growing middle class and a demand for improved housing and facilities, and among the host of international developers very active in Vietnam are Singapore’s Keppel Land and more recently CapitaLand, Southeast Asia’s largest property developer.

In HCMC, the first ‘high-quality’ condominium, My Canh in Phu My Hung, was only built in 1999 and today there are still only an estimated 35 high-quality apartment projects in the city, with 7,900 units. However, CB Richard Ellis (CBRE) estimates that there are about 80-90 projects under construction in the city, with over 30,000 units becoming available in the next three years.

“The Vietnamese are very proud and have their own tastes, and they’re also a very aspirational population,” Ashton says. “Seven years ago, it was tough for Vietnamese to go on holiday. Now, many more Vietnamese are travelling and being exposed to the world, and they want better living standards.”

They also want their own portfolio. According to real estate companies, about 50-60% of home and land buyers in Vietnam are investors or speculators. “Speculation fever has recently resurfaced due to many people making money from the stock markets,” Townsend says. “Since the middle of 2006, people have taken their profits and ploughed them into land, villas and condos.”

“The problem is that many people buying properties in the Central Business District (CBD) aren’t tenants, they’re just speculators,” Ashton says. “This didn’t happen so often two years ago.”

While this activity reflects a more wealthy local population and purchases by many overseas Vietnamese (Việt Kiều), property supply is still lagging behind demand in HCMC, a city that still suffers from a lack of basic infrastructure, such as a decent public transport network.

Most condos sell out quickly to local buyers and occupancy for serviced apartments is at 97.5%. There’s a shortage of top-quality offices, with HCMC’s five ‘Grade A’ offices fully occupied since late 2005 and Grade B buildings at 99% occupancy since early 2006, according to CBRE.

Furthermore, the deregulation of the banking sector is expected to have a sustained impact on demand for real estate, similar to what happened in China’s major cities with the country’s entry into the WTO. Demand for residential, office and retail space in Vietnam’s major cities is set to increase significantly as international banks enter the market to set up their head offices and retail networks in the country.

Already, the current supply of high-quality residences represents only a fraction of the total demand, and it’s estimated that by 2010 over 100,000 apartments will be required in HCMC alone in order to meet the forecast demand. So, with properties being snapped up by the growing domestic market and an increasing proportion of the 3 million overseas Vietnamese, where does the foreign investor stand?

Foreign restrictions
Supply aside, the main concerns for potential foreign investors are the 28% capital gains tax on property, the unavailability of mortgages for foreigners and the fact that most properties are only available on a 50-year leasehold (which takes effect from the date the developer is granted the ‘land use right’ certificate, so it’s really 50 years minus the construction period).

“There’s a legitimate concern about foreigners outpricing the market,” Ashton explains. “However, there’s a genuine wish for foreigners to live in and invest in Vietnam.”

On the positive side, foreign owners can rent out their properties to both Vietnam nationals and foreign residents, and re-sell when they want, and plans have been announced to offer extended leases of 70 years.

Furthermore, prices remain very affordable in comparison to Asia’s other major markets, with the average price paid by foreigners in the region of US$1,200-$1,400psm. Even the highest prices, between US$3,000-$4,000psm, are a fraction of Singapore’s luxury sector. “There’s a lot of room for prices to grow,” Townsend says.

Tim Murphy, founder of Intellectual Property, a Hong Kong-based property firm with interests in Vietnam, is enthusiastic about the market but also says potential investors to do their research.

“Vietnam is one of my favourite markets, mainly because of its economic growth and prices,” Murphy says. “In Ho Chi Minh City five years ago, only 1% of the population was making US$1,000 a month or more, and today that figure is 11%. Furthermore, a property may cost you US$200,000-$250,000, which would buy you a garage in Hong Kong! However, buyers have to ask who’s going to rent it? Because when the property market goes up, people buy and the rental market slows. Also, liquidity is vital. Who will buyers sell to in the future?”

Currently, the number of expatriates in Vietnam is still small, in the tens of thousands, mainly from East Asia and Southeast Asia, as well as smaller groups from Europe and North America. Yet with the country’s increasing internationalisation, this sector is set to grow and become more influential.

“A foreigner can live well in Vietnam. Food, medical and dental care, and overall living is cheap, and there are more shops and cinemas now. However, Vietnam is still very Asian, with a rich culture. There’s no Starbucks or McDonald’s,” Townsend says. “All of these residents are looking for schooling for their kids, places close to work, apartments with facilities. As such, we’re just starting to see property developers targeting expats with their projects.”

From city to coast
Certainly, most of the country’s major property activity is centred around HCMC and the capital of Hanoi in the north, which has a population of 2.5 million and remains the country’s political centre. “Hanoi started building condos much earlier than HCMC and has pushed developments to the suburbs, while developers in HCMC are looking closer to the city centre for rental yields,” Ashton explains.

Other emerging property markets include the coastal cities of Danang, Vietnam’s fourth-largest city (Haiphong is third), Nha Trang further south, Vung Tao and Ho Tram, both close to HCMC.

Although most urban residences currently focus on the local market, foreign buyers are being actively targeted for Vietnam’s increasing number of resort properties, many along its beautiful 3,000km coastline. Such properties are often packaged in the same way as many resort properties in the likes of Phuket and Bali, where owners can use the unit for a limited numbers of days each year allow the resort rents it out for the rest, enabling the owner to receive a guaranteed return each year.

“Condos will do well in the next one and two years, but now’s the time to get in for beachfront villas,” Ashton says, due to the fact that genuine beachfront plots are currently available and affordable. “Vietnam’s one of the safest places in the world, it’s still relatively cheap and tourism is going up.”

The resort property market is proving popular due to Vietnam’s increasing tourism traffic, which increased from 2.1 million in 2000 to 3.6 million visitors last year. By 2010, tourism authorities are hoping to attract between 6 million to 8 million visitors, enticed by Vietnam’s rich culture and history, warm climate and spectacular scenery, which ranges from beaches to cities to mountains.

The Nam Hai, located on China Beach near Hoi An, is the country’s first super-luxury villa development, opening last December. Its 40 one to five-bedroom pool villas range in size from 300-750sqm, with land plots of 1,500-3,200sqm, and are priced from US$1 million upwards. Buyers have come from Europe, America and Asia Pacific and only a handful of villas are still available for sale.

A more affordable coastal villa development targeting international buyers is Aquaba Luxury Resort in Phan Thiet, east of HCMC, consisting of 135 beachfront villas (US$480,000-525,000), townhouses (US$190,000-200,000) and apartments (US$65-140,000). Aquaba has seen 30% growth for its buyers since its first launch last year, according to Intellectual Property, and has benefited from the city’s tourism boom, with visitor arrivals rising an average of 35% per annum for the past three years.

Overall, Vietnam’s economic growth, increased living standards, rapid urbanisation, emerging tourism industry and growing foreign investment offer good opportunities for foreign and domestic property investors. However, there’s still much to be done to attract a significant sector of international property buyers.

“Foreign buyers should look at how you exit - how to get their money out - and at the reputation of the developer,” Ashton warns. “Soon, people will start to recognise Vietnamese developers, but buyers need to know who they’re buying from, especially as legal structures are still fairly loose.”

Vietnam’s property market is best described as both “promising and opportunistic” by Buu Le, Senior Manager, Consultancy and Research for Jones Lang Lasalle, which officially opened its first Vietnam office in HCMC in March.

“Despite the optimism, challenges exist, such as the country’s low administrative efficiency, low transparency, an underdeveloped legal system and its requirements for significant infrastructural improvements,” he states. “Vietnam’s attractiveness to foreign investors remains, but they require long-term commitment, deep pockets, flexibility, patience and persistence.”

Who’s building what and where
Major developers are building major developments all across Vietnam

Indochina Land, the real estate division of Indochina Capital, is one of Vietnam’s leading developers and best known internationally for The Nam Hai, its super-luxury beachfront villa resort development near Hoi An.

Its major projects in HCMC include the 210-unit River Garden Executive Residences, now fully sold, and the 152-unit Saigon Riverside Apartments, which both enjoy views of the Saigon River and are within a 15-minute drive of downtown HCMC. Another of its major HCMC projects is Park City, a 55-hectare mixed-use development that will feature 1,000 residential units and commercial, retail and theme park components.

In Danang, the company is building the 95-unit, 24-storey Indochina Riverside Towers, touted as the city’s first international-standard residential property and offering views of the Han River, China Beach and Cham Islands.

Indochina Land also acquires, operates and develops hotels, resorts and related leisure assets, including golf courses. The Nam Hai on China Beach near Hoi An, a 30-minute drive from Danang’s international airport, is the most famous of these, offering 40 pool villas and 60 villa-hotel rooms on a 31-hectare site that also includes a top-quality spa.

The new Evason Hideaway and Six Senses Spa on Condao Island, a 45-minute flight from HCMC, is also set to attract international attention when it opens in late 2008, offering 16 luxury residential villas and 35 villa-hotel rooms on a 13-hectare plot, with over a kilometre of beachfront.

Indochina Land’s other assets include two historic hotels in Dalat, the Dalat Palace Hotel and the Hotel Du Parc, and the Dalat Palace Golf Club, while in Phan Thiet it owns the Ocean Dunes Hotel and the neighbouring Ocean Dunes Golf Club, designed by Nick Faldo.

Singapore-based Keppel Land was one of the first international developers in Vietnam, entering in 1992, and its portfolio includes International Centre, Sedona Suites Royal Park and Vietcombank Towers in Hanoi, and PetroVietnam Towers in Vung Tau, the coastal city close to HCMC on Vietnam’s southeast coast. In HCMC itself, Keppel is currently developing the 64-hectare Saigon Sports City, a master-planned township in HCMC.

Earlier this year, Keppel announced joint ventures in HCMC to develop The Estella, a development of 1,500-1,600 apartments in An Phu Ward in District 2; a 500-unit waterfront development on the Saigon River in the Binh Thanh district; and a 2,400-unit waterfront development on the Ca Cam River in District 7. The latter two projects, set to launch in 2008, are Keppel’s second and third waterfront projects in the city and follow the success of the 101-unit Villa Riviera in An Phu Ward, which has been fully sold. Keppel is also working on Saigon Centre, a mixed-use development featuring serviced apartments, international-class office buildings and retail.

In July, the firm announced a joint venture to build a waterfront residential township on a 509-hectare site in fast-growing Dong Nai, which attracts the third-highest foreign investment of any province in Vietnam, after HCMC and Hanoi.

Leveraging the 2km frontage on the Dong Nai River, the site is a 45-minute drive from HCMC’s CBD and is set to include about 14,000 homes, with the first phase expected to launch in 2009. Situated next to District 9, where Hi-Tech Park, home to Intel’s new US$1 billion facility, is being developed, the township is also just 20km from the future Long Thanh International Airport, which is set to be completed in 2011 and eventually replace the existing Tan Son Nhat International Airport.

In Hanoi, Keppel has signed Memorandums of Understanding to form joint-venture companies to develop two residential townships. One development is on a 407-hectare site in Sai Dong in Long Bien District and is envisioned to be a new downtown to complement the CBD. The other, in North Thang Long in Dong Anh District, comprises two parcels covering a total of 949 hectares and is located 18km from downtown Hanoi, along the highway to Noi Bai International Airport.

CapitaLand recently announced its third joint-venture residential development in HCMC, signing a conditional agreement to build 300 luxury villas on an 11.7-hectare site in District 9. The Singapore-based developer entered Vietnam last year, announcing a joint venture with two Vietnamese companies to develop 1,000 residences in An Phu Ward in District 2, and a partnership with Saigon South Development Corp (Sadeco) to build 600 luxury apartments in Phu My Hung in District 7.

Part of the CapitaLand group, Ascott has three apartment buildings in Vietnam, Somerset Grand Hanoi, Somerset Chancellor Court HCMC and Somerset HCMC, which are all part of the 18-property portfolio under the Ascott Residence Trust (ART), the first Pan-Asian serviced residence REIT.

Frasers Centrepoint Homes, another Singapore-based developer, is building the fully sold 106-unit Saigon Residences in HCMC’s District 1, which will feature a retail podium at ground level and common facilities on the roof.

Korean developer GS Engineering and Construction (GS E&C) is building a ‘self-reliant’ town on a 330-hectare lot in the Nha Be area, 10km south of HCMC, featuring 15,000 households. The developer is also set to build a 36-hole, 200-hectare golf resort with villas and condos in Cu Chi, a commuter city northwest of HCMC.

Meanwhile, Malaysian developer Gamuda Land is entering the Vietnam market with the Yen So Park in Hanoi. Set to be completed in 2015, the development will include luxury properties, a convention centre, office towers, five-star hotels, a 100-hectare botanical garden and a 130-hectare lake network.

by John Higginson

With thanks to JP Morgan’s ‘Vietnam Real Estate Primer’.