Vietnam – a real estate market in the making

Implications: Vietnam’s economy has shown one of the strongest growth rates in Asia over the past two years (8.4% in 2005 and 8.2% in 2006) and this looks set to be repeated in 2007. This level of growth together with low labour costs and a young and highly motivated workforce had attracted significant overseas interest and increased investment in both the industrial and real estate sectors.

Analysis:

Foreign direct investment in approved projects in 2006 was some US$7.66 billion, including US$1 billion by Intel, while a further US$5 billion of proposed investment was under consideration by the authorities. Membership of the WTO, which was achieved in January of this year, is likely to encourage further large scale investment going forward, particularly as privatization of State Owned Enterprises is expected to be completed by 2010. This should encourage joint ventures and foreign investment in previously non-accessible sectors. The impetus of the recent WTO membership is supported by the announcement of both the Common Investment Law and the Unified Enterprises Law in July 2006 which introduce a common legal framework for all types of enterprise and provide for equal treatment of all investors.

Some 70% of Vietnam’s population of approximately 84 million is below 35 years of age, there are minimal ethnic, religious or political divisions and there is a palpable energy to be felt in the major centers which is reminiscent of Hong Kong and Mainland China in the early days of their economic expansion. Over 106,000 SME’s have mushroomed in recent years, with many families involved in small retail businesses, and this entrepreneurial spirit is also very apparent in the real estate sector.

Prior to 1990, all land in Vietnam was owned by the State and there was virtually no real estate market as there were no laws to regulate the use and transfer of property in the private sector with housing being distributed by the State. However in 1986, the Government introduced the “doi moi” reforms which led to a slow movement towards a more open and market driven economy. The first land laws came into force between 1990 and 1998 when the concept of private “ownership” was recognized. Widespread speculation resulted and land prices soared, with a number of foreign investors undertaking large scale commercial and luxury residential projects on both Hanoi and Ho Chi Minh City. Between 1998 and 2004 revised land laws were decreed to curb speculation and with the onset of the Asian financial crisis many foreign invested projects collapsed, although the Vietnam economy itself did not suffer too severely. Small local developers emerged but no major projects were undertaken as there was little or no interest from overseas. In 2004 the new Land Law attracted increased foreign interest and enhanced real estate funding options. These, together with the improved economic conditions, increasing incomes and shortage of supply in all sectors, encouraged new foreign investment. Land use rights now have to be auctioned when the State sells land, improvements have developed in mortgage lending with 75% loans over 15 years now available, joint venture developers are permitted to build apartments for sale and compensation for losses due to redevelopment are now closer to market values meaning the site clearance is no longer such a long drawn out issue.

All land continues to be held by the State with land use rights (LUR) being sold in very much the same way they are in China. Vietnamese citizens can have effective “freehold ownership” in that there is no time limit on their LUR and can joint venture with foreign investors with the latter also being able to lease directly from the State or from local companies for development purposes. LUR owned by foreign companies are granted for 70 years in the case of infrastructure projects but limited to 50 years for other uses. LUR can be leased, mortgaged, exchanged, transferred or inherited although large scale projects still require the approval of the Prime Minister’s Office.

What is driving the new strong demand for real estate in Vietnam?

·Increased standard of living and rapid urbanization
·Current lack of supply
·Urban infrastructure development
·Increased availability of mortgages
·Growing remittances from over 3 million overseas Vietnamese
·Large young population looking to buy their own homes
·Developing real estate legal framework
·Strong growth in tourism

Where do the major opportunities lie?

The residential sector is very attractive as there is significant latent demand driven by the rising income of the burgeoning middle class. The GDP per capita in Ho Chi Minh City increased by 32% between 2000 and 2004, from US$1,365 to US$1,800 while the average across the country in 2005 was US$620. The young profile of the population means that many are at an age when they wish to marry and have their own home and it is estimated that there is a need for 60 million square meters of urban residential space – almost doubling the current stock. With prices ranging from US$900 per square meter upwards in the mass market and US$1,200 upwards in the luxury sector, there is still no shortage of purchasers.

The office market also offers opportunities in that there is a serious lack of quality accommodation in both Hanoi and Ho Chi Minh City, with both having occupancy rates of 95%. It is only recently that new project of over 10,000 square meters have commenced and the continuously rising rental have now reached the same levels as those seen in Shanghai (i.e. between US$30-35 per square meter exclusive of VAT). Some 540,000 square meters of new office space is required in HCMC by 2010 with the figure for Hanoi estimated at 150,000 square meters, assuming current growth in new businesses continues.

A nascent market for modern retail formats is now starting to emerge and the amount of retail space will need to expand by 5 times over the next 5 years to match stock to population ratios in other Asian cities. There is no real shopping centre in HCMC and only two department stores so that while some projects are under development the market is still wide open. The leisure and hotel markets are other areas of interest with Vietnam billed as the next Thailand – its 3,000 km of coastline is very suitable for resort and villa developments and tourist arrivals have increased 25% since 2004. Four and five star hotels are enjoying very high occupancy rates during peak periods and there are many opportunities for foreign operators to improve service and returns.

In the industrial sector, many of the industrial zones, particularly those close to HCMC, have limited supply of ready built factories available due to recent demand and international newcomers mostly have to build their own facilities so that new industrial parks could prove to be sound investments. There is also mileage in developing new townships and communities in areas surrounding existing urban areas in that “green field” development can be more straightforward and subject to fewer delays in the approval process.

So what are the challenges?

Vietnam is an emerging market and transparency is not yet all it might be. Politics still play a role in economic decisions and delays can arise for reasons which are difficult to understand. However, the new laws and their implementing regulations are improving matters and while projects may progress more slowly, if they are properly structured and funded and designed within the known planning parameters, they should eventually receive the licenses and permits required. In many cases it is an advantage to have a local partner who can steer the project through the various statutory and licensing processes and that choice of partner is, as in any emerging market, critical. Similarly, time and effort spent on diligence, or parting the curtains, and not necessarily accepting everything at face value, is time well spent.

Imperfect the market may be but there is a clear correlation between risk and reward and the ability of the economy to leapfrog many traditional stages of development means that it is already asserting itself as a significant player in the region and attracting investment accordingly.