Monday, March 24, 2008

Vietnam's property market

Property fever and burnt fingers
23:48' 23/03/2008 (GMT+7)

VietNamNet Bridge - Vietnam’s property market in 2007 underwent numerous ups and downs, with fluctuations varied from each locality. However, some key trends have emerged this year which should see the market develop more soundly, writes Dr. Dinh Van An*.

Nailing down accurate information about the nation’s property market is often difficult.

However, it is clear that in some new urban areas, land prices doubled or tripled last year, with some lots in new urban areas in Hanoi and Ho Chi Minh City increasing from $3,120-3,750 per square metre to $5,000 by the end of 2007. Land prices in old Hanoian streets have exceeded $6,250 per square metre, with a square metre worth $62,500 in some places. It now appears prices have stopped rising and are settling.

However, property price increases have not taken place in all segments or places. Land and apartment prices rose rapidly in such major cities as Hanoi, Ho Chi Minh City and Danang, but remained almost unchanged in other areas. The increases are not sustainable because transaction volumes were not high and the fever caught small segments of major cities’ wider urban property markets. It is thought the fever was also triggered by expanding banks’ property loans.

Regarding the high-end segments in 2007 and early 2008 various investors such as corporations, groups and other large-scale local and foreign firms, jumped into the market with many big businesses channeling funds out of stocks and into the property market. In 2008, real estate has become an important investment channel of many local groups, particularly the emerging corporations such as REE, FPT, EVNLand and LilamaLand.

Contrary to the bustling participation of the non-state economic sector in real estate development, capital for the construction of technical and social infrastructure mainly comes from the state budget.

Meanwhile, the change of agricultural into non-agricultural land shows many discrepancies because the legitimate rights of those who lose agricultural land are not protected as laws state, leading to public petitions.

What caused that fever?

The property market’s institutional matters are showing more discrepancies. During 2003-2007, a series of legal documents and frameworks such as the Land Law in 2003, the Housing Law in 2006 and the Property Trading Law in January 2007 or Decree 84/2007/ND-CP were issued, as part of the noteworthy government’s and National Assembly’s efforts in addressing hurdles to investment, especially related to land ownership and clearance. However, according to Jones Lang LaSalle, one of the world’s leading property consultants, Vietnam still has many legal and policy risks and the market lacks transparency.

The country’s property market remains fragile and short on information and data to pinpoint the market’s developments. No state agency can now provide reliable statistics about property trading volumes and prices, while this is merely a basic piece of information to supervise, evaluate and manage the market. The lack of transparency is even more serious in the primary market, where the state allocates or leases land to project investors and businesses. Banks’ property credit figures are not accessible to outsiders. A lack of information is one of the market’s biggest problems at the moment.

A number of banks like Sacombank, AB Bank and ANZ have offered credits for house buyers with 10 to 20-year terms. The commercial banks, mainly trading short-term capital, seemed to have oversponsored these loans which are basically long-term. By this month, total outstanding property loans of Ho Chi Minh City’s commercial banks reached VND34.5 trillion ($2.15 billion), making up 10 per cent of the whole system’s outstanding loans. Of course, more specific figures are needed to evaluate whether the lending was measured.

That the banks joined the property market directly via establishing trust or investment funds, or trading properties directly, makes insider trading likely. A number banks do property business via its affiliates such as ACB Real, Sacomreal, VPREIT and BIDVLand. More specific figures are also needed to prove if there is insider trading or not.

The communicating effect with the stock market is another reason behind the property’s fluctuations last year. In March 2007, after enjoying robust profits, stock investors withdrew large amounts of capital from the bourse and into the property market, triggering a wave in property price rises. The VN Index rocketed from 883.9 points on August 6, 2007 to more than 1,100 on October 18, 2007 before falling. Many funds and listed firms have channelled capital flows into the property market.

Vietnam is a new investment target of American and European real estate funds. As European and US property markets are on the wane, investment capital travelled to Asian and Middle Eastern nations with Vietnam one of the hottest destinations. Of the total $20 billion of foreign direct investment Vietnam attracted last year, up to $5 billion was sunk into the property market. This month, South Korean investors started implementing the Cantavil project with a total investment of around $250 million, while other foreign investors are seeking property opportunities in Vietnam.

Real demand for property, particularly that for housing, is increasing rapidly. Every year, Vietnam’s population increase by about 1.1 million and if each person requires an average land area of nine or 10 square metres, residential land needs to increase dozens of millions of square metres, per year. Meanwhile, the nation can build just half a million square metres of housing accommodation each year. People’s rising incomes are also increasing the appetite for new soil.

Last but not least, the policy of allowing Viet Kieu and foreigners to buy houses displays more market openness, provoking investors and speculators to seek supposed opportunities.

Major risks of the property price rises in 2007 and early 2008

An economy relying too much on property to develop will sooner or later pay a dear price. Property is a strong force of any economy, but it should not attract too many national resources. It is necessary to prevent businesses and investors from viewing property as an easy way to get rich. The short-term benefit of a minority will cause serious harm to the economy in the long run. A nation’s resources and labour should centre on basic construction, technical, technological and research areas and not be excessively pumped into land and houses.

High land prices lead to several outcomes. Money will move to a small group of responsive speculators, while farmers who sell their land will enjoy small benefits from price gaps. Businesses and investors will be forced to pay higher costs for land access, clearance and compensation. End-users have to pay unreasonably high prices. Poor people, as a result, cannot buy houses at such high prices.

“Debt repayment capacity” of property investors and speculators has reached a seriously dangerous limit. The highly important rate between the money a middle-class family has to pay monthly for buying a house and the post-tax salary is now too high. International practices show a middle-class family uses only 33 per cent of their savings for buying a house but this rate has amounted to more than 100 per cent in Vietnam that possibly leads to a debt crisis. Of note, lending interest rates rose rapidly by the end of 2007 and as a result borrowers have to pay higher than expected.

Property prices in Vietnam now rank as some of the world’s highest. Office rents in Ho Chi Minh City are the 17th most expensive in the world. The rentals for grade A offices in the southern hub have increased by 52 per cent compared to those in 2006 and by 30 per cent in Hanoi. Respective rises for the rentals of grade B offices are 35 per cent and 40 per cent and for grade C offices, 35 per cent and 45 per cent.

Higher rentals cause higher business costs, hence lowering the competitiveness in of Vietnam’s economy in comparison with regional competitors when taking costs into account.One of the top concerns these days is the market’s environment. Finding information for buying and accessing land and houses is obviously difficult. Many projects have been operational and a lot of land has transformed from agricultural purposes to housing. However, it is not easy to monitor the land being traded. This phenomenon, stemming from both businesses and secondary investors, creates an environment of low transparency, leading to high speculation.

The property market in 2007 and early 2008 has grown, but contained several shortcomings. To make it develop soundly and contribute to economic growth, help fight inflation, the institutional, banking, financial and market regulatory measures should be implemented smoothly. Only coordinated policies from management agencies at central and local levels can succeed.

*Dr Dinh Van An is director of the Central Institute for Economic Management.

(Source: VIR)

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