In a country whose average daily income is less than one US dollar per day, who could afford to invest in high-priced apartments but corrupt officials who have managed to stash away all ill-gotten gains, and now they’re investing (engaging in money-laudering) in luxury apartments, villas, resorts etc.
Pham Nhat Vuong, the billionaire chairman and founder of Vietnam’s largest property developer, Vingroup, is spending more than $4 billion to develop luxury apartments in Ho Chi Minh City, Hanoi, and several of Vietnam’s coastal and provincial cities. “If you give me $10 billion now, I would spend it all on construction because there’s so much more to build,” says Vuong, who with his wife owns about 50 percent of Vingroup, the country’s fifth-largest company by market value, $2.6 billion as of Oct. 29. “There is tremendous demand in Vietnam.”
That’s an optimistic take on the country’s urban real estate market, which is currently suffering from a glut of available apartments partly because mortgage financing is rare—most purchases are cash transactions. Vuong says the lure of a better “living experience” is part of his sales pitch to potential buyers. “They just can’t sit on gold bars underneath their beds,” he says of Vietnam’s famously conservative investment culture. “Eventually they will pull out their gold bars and invest.”
Vuong left Vietnam to study at Moscow Geology University. After graduating in 1992 he moved to Ukraine and launched Technocom, a food producer he sold to Nestlé in 2010. He founded resort developer Vinpearl back in Vietnam in 2001, and set up the luxury real estate developer Vincom in 2002. Vinpearl and Vincom merged this year to form Vingroup, which has controlling interests in 18 mixed-use and resort projects it is building.
Vingroup has acquired land from factories that are relocating from central districts to the outskirts of Hanoi as the city pushes through an urban renewal plan. The company’s scale and financial resources have enabled it to buy land in unique locations, build quickly, and sell its properties at a premium even during the downturn, says Viet Capital Securities analyst Phuong Ton, who recommends holding Vingroup stock.
Another plus, she says, are the quality amenities at Vingroup properties. Its Royal City project, near Hanoi’s central business district, will include the country’s first indoor water park and ice skating rink when finished next year. Buyers of the high-end apartments, which are being sold at $1,800 to $2,500 per square meter, can adapt the design of their units to suit their feng shui. Nearby, Vingroup’s Times City development includes Vietnam’s first hospital to offer single-patient rooms and presidential suites. That project, slated for completion in 2014, will also have residential blocks, a mall, and an international school. “[Vuong] always tells management to continue learning every day, that you can’t be happy, content with what you already have,” says Le Thi Thu Thuy, Vingroup’s chief executive officer and a former Lehman Brothers investment banker.
To fund its Vietnamese expansion, Vingroup is seeking to raise about $300 million by August in a share sale in Singapore. The company sold $300 million of convertible bonds to international investors this year but shelved plans for a Singapore listing last year after the city-state’s benchmark index fell 17 percent. Vuong says he plans to build properties in Singapore or Hong Kong, where some of Asia’s largest developers are based, “when there’s a good opportunity.” He travels to other countries for ideas, once dismantling and reassembling hotel room fittings on the Thai island of Phuket to better understand how they were put together. Vuong hired McKinsey this year to advise Vingroup on its future expansion plans.
Whether there are enough well-heeled buyers for Vuong’s properties is uncertain. Vietnam’s urban population is expanding 3.4 percent per year, with growth concentrated in Ho Chi Minh City and Hanoi, but only about 5 percent of city residents can afford the kind of home produced by large, upscale developers, according to the World Bank. The average monthly income for Vietnam’s urban residents was $102 in 2010, according to the latest data from the country’s general statistics office. Annual inflation spiraled to 23 percent in August 2011 before the government raised interest rates and restricted lending. Still, the apartment units at the Vincom Center in Ho Chi Minh City, which also boasts a spa and fitness center, were sold in 2010 at an average price of about $8,000 per square meter, a national record.
The bottom line: Vietnam’s biggest development baron is spending $4 billion to build high-end apartments, and he’s eager to build more.
Vietnamese Real Estate Market Meltdown
Colliers International reports that the Vietnamese housing market is in freefall and there is little plan or hope of near-term recovery. Selling prices in all market sectors, from low-end apartments to luxury accommodations, dropped as much as 40% in the first quarter of 2012. Both Hanoi and Ho Chi Minh City are suffering a supply glut, the country’s banks are bankrupt, its currency rating has dropped and economic growth is slowing. Meanwhile, rental yields are up although the vacancy rates have been climbing in recent years. For more on this continue reading the following article from Global Property Guide.
Vietnam is facing a housing catastrophe. A disastrous slump has overtaken its housing market. The government is embarrassed, the banks are bankrupt, and the economy is in a mess. Just consider the sheer scale of it all – during the year to end-Q1 2012:
- The average selling price of luxury apartments has plunged 40%
- Mid-end apartments’ average selling prices fell 30%
- The average selling price of low-end apartments dropped 27%, according to Colliers International.
This follows almost three years of house price falls in Vietnam.
Apartment prices in all segments in Vietnam continued the rush to find the bottom during the first quarter of 2012, with demand low, and economic growth weakening. Average house prices dropped 6% during the first quarter. In Indochina Plaza Hanoi or Star City, prices fell by an average of 11% q-o-q.
Colliers’ estimates, though made in the absence of official house price statistics, are supported by Savills Vietnam, which estimates that in the first quarter of 2012 prices of mid-segment apartments plunged 9% q-o-q. Other property experts like CB Richard Ellis Vietnam and DTZ Research confirm that property prices are in freefall in Vietnam, especially in Hanoi and Ho Chi Minh City.
In Q1 2012, the average asking price of apartments was VND26 million (US$1,230) per square metre, according to Colliers International. On the other hand, the average selling prices ranged from VND14.6 million (US$690) to VND42.4 million (US$2,000) per sq. m.
According to DTZ Research:
- Asking prices for affordable condominiums ranged from VND10.6 million (US$500) to VND20 million (US$950) per sq. m. in Q2 2012
- For middle segment condominiums asking prices ranged from VND20 million (US$950) to VND35.9 million (US$1,700) per sq. m.
- For high-end condominiums, asking prices were above VND35.9 million (US$1,700) per sq. m.
Recent statistics show a staggering number of unsold housing units in Vietnam’s two biggest cities. In Hanoi, the number of unsold apartments is about 40,000 units, and it has reached 20,000 units in Ho Chi Minh City.
During the year ending in Q1 2012, the supply of apartments increased by 37% to 119,000 units, according to Colliers International. New apartment supply increased by 32% y-o-y, while the supply of existing apartments rose by 44% y-o-y in Q1 2012.
Vietnam has a substantial number of bad loans. One out of every ten loans in the banking system has stopped paying, according to the central bank. Fitch Ratings believe the percentage of bad loans might be much higher. The total value of outstanding real estate loans in Vietnam is VND180 trillion (US$8.5 billion), though down from peak levels of VND280 trillion (US$13.2 billion).
Many residential projects have stalled in mid-construction (an example being the Saigon Residence, a high-end residential building in Ho Chi Minh’s centre). Many property developers have delayed launching projects.
In an effort to bolster demand:
- A VND5 trillion credit package was given to homebuyers by the Vietnam Bank for Industry and Trade (Vietinbank).
- An exemption of about 10% of the value added tax (VAT) for home buyers is being proposed by the Housing and Real Estate Market Department.
- The local government in Ho Chi Minh City has proposed opening the property market to overseas Vietnamese.
- The State Bank of Vietnam (SBV), the country’s central bank, slashed the refinance rate was lowered from 11% to 10% in July 1, 2012, the fifth consecutive monthly fall this year, as inflation cools. The discount rate was also lowered from 9% to 8% and the overnight inter-bank rate from 12% to 11%.
House price falls are expected to continue in coming quarters, according to Colliers International.
“The condominium market outlook remains bleak for the rest of the year, as purchasers continue to wait for both finance rates and prices to fall further,” says KP Singh, General Director of DTZ Vietnam.
The Vietnamese economy grew by 4.38% in the first half of 2012, its most sluggish rate for three years. Real GDP growth is expected to slow to 5.1% in 2012, from 5.9% in the previous year, according to the IMF.
The second issue was last August’s implementation of Decree 71/2001/ND-CP (Decree 71), providing guidance on the November 2005 Law on Residential Housing. Decree 71 aims to discourage speculative real estate investment. Intended to minimise risks for buyers, Decree 71 requires clearance from the Prime Minister for large-scale developments.
Uncertainty over the implementation of Decree 71 caused developers to accelerate construction of some projects and the purchase of lands, lead to huge price spikes in some areas, while flooding other areas with new supply.
In HCMC, Vietnam’s economic center, residential resale prices in all segments have been steady for the past two years, according to CB Richard Ellis Vietnam.
- In the low-end market, the average asking price was US$726 per sq.m. in Q3 2010
- In the high-end segment, the average asking price was US$1,898 per sq. m. in Q3 2010
On the other hand, Hanoi residential resale prices were up 9% on average during the year to Q3 2010, at US$1,837 per sq. m.
- In the low-end segment, average asking prices jumped 24% y-o-y to Q3 2010, but were up a mere 2.2% from the previous quarter.
- Prices in the luxury and high-end segment fell 1% during the quarter to Q3 2010.
AVERAGE ASKING PRICE (Q3 2010)
|Hanoi Secondary Market||US$ per sq. m.||q-o-q change (%)||y-o-y change (%)|
|Source:CB Richard Ellis Vietnam|
In the third quarter of 2010, the average price of villas located in posh residential areas in Vietnam range from US$1.5 million to US$2 million while villas in new neighbourhoods are priced at US$250,000, according to local real estate analysts.
Under the Ordinance on Foreign Exchange Management, all transactions done in Vietnam must be in VND. However, most real estate projects, especially luxury villas and apartments, are quoted in US dollars. These include projects like:
- Keangnam Landmark Tower, at US$2,800 to US$3,300 per sq. m.
- Indochina Plaza Hanoi, at US$2,800 per sq. m.
- Sky City Tower, at US$2,300 per sq. m.
- Mulbery Lane, at US$1,800 per sq. m.
- Parkcity, at US$3,000 per sq. m.
- Usilk urban area project, at US$1,000 to US$2,000 per sq. m.
- Mipec Tower, at US$1,000 to US$2,000 per sq. m.
- Thanh Cong Tower, at US$1,000 to US$2,000 per sq. m.
- 302 Cau Giay street project, at US$1,000 to US$2,000 per sq. m.
Viet Kieus can now buy unlimited property, just like resident Vietnamese
Decree 71 also contains revisions to the Housing Law allowing Viet Kieu (overseas Vietnamese) to possess as unlimited property just like Vietnamese citizens. The new regulations are expected to create more demand in the housing market. About 70% of the 4 million Viet Kieu retain their Vietnamese nationality, according to the Ministry of Construction.
In addition, even if a Viet Kieu has given up his Vietnamese nationality, he is still given the same homeownership right, provided that:
- He has invested under the Law of Investment
- He is married to a Vietnamese citizen living in the country
- He is working in Vietnam as a cultural activist, scientist or has special skills and he has made contributions to the country
Before the new decree took effect, Decree 81, already in force, allowed certain Viet Kieu to buy property. However after 9 years of implementation, only 140 Viet Kieu had bought houses in their own names, due to red tape.
It is however unclear if the new decree will address the problems of corruption and red tape. In addition, many overseas Vietnamese prefer to purchase property under the names of relatives to avoid tax liabilities and other obligations.
Decree 71 also mandates that residential housing projects with a total of 2,500 housing units (incl. villas, detached houses, apartment buildings, new urban zones and mixed use projects) must be approved by the Prime Minister. Any amendments to the project must also be approved by the Prime Minister. This can potentially lead to delays and more red tape.
In theory, freehold land does not exist in Vietnam. Land can only be leased, even by Vietnamese; though in reality many leases seem to be for indefinite terms. “Buying” land is technically a transfer of leasing rights. The creation of a perpetually renewable lease means that Vietnam now has one of the most open property markets in Asia.
However, the 70 years lease period allowed to foreign investors was reduced to 50 years in 2009.
Under-served low-end market
Demand for affordable housing has risen in recent years, given a rising population, rapid migration from rural to urban areas, and rapidly improving living standards. The demand for affordable houses is now outstripping supply, as residential development has largely focused on high-end customers.
According to RNCOS, a global market research company, many Vietnamese do not have their own houses and more than 70% of households live in temporary wooden houses. RNCOS estimates that Vietnam is deficient of about 20 million permanent housing units.
In Ho Chi Minh City, the country’s largest city, only 14% of the total supply of luxury apartments was sold in the first eight months of 2010, according to a survey conducted by Cushman and Wakefield Vietnam.
On the other hand, about 670 units of newly-built apartments in Hanoi were sold in the 2nd quarter of 2010, or about 48% of the supply in the primary market in the capital, according to Savills Vietnam, a UK-based research firm.
vietnamese and overseas Vietnamese account for about 70% of homebuyers in the country, while the rest are foreigners, according to Nguyen Kim Son of BTA Development Investment.
In the 3rd quarter of 2010, the total supply of condominium units in Hanoi was 75,235 units, up 4.5% from the previous quarter, according to CB Richard Ellis Vietnam. In addition, about 3,000 additional units are expected to be completed in Hanoi in the last quarter of 2010.
TOTAL SUPPLY OF CONDOMINIUM UNITS (HANOI)
|Q2 2010||Q3 2010||Q-O-Q CHANGE (%)|
|Source:CB Richard Ellis Vietnam|
Just like in the capital, other areas in Vietnam are also experiencing an increase in supply. There were around 11,200 newly-built apartments available for sale in the southern city in the 2nd quarter of 2010, up 24% from the previous quarter, according to Savills Vietnam.
In addition, about 28,500 apartments currently under construction are expected to be completed in the next two years. The government also constructed low-income apartments which will be available for sale by the end of 2010.
Underdeveloped mortgage market
The Vietnamese mortgage market is still relatively underdeveloped, with majority of homebuyers paying in cash. In an effort to boost the housing market, developers are now starting to work with banks to offer mortgages to buyers.
However, high interest rates and strict loan procedures are still hindering the local mortgage market from flourishing. The loan-to-value (LTV) ratio rarely exceeds 50% of the appraised value of the property. The term period is usually 15 years.
In the first 9 months of 2010, the average lending rate was 13.5%, up from 12% in 2009. To curb inflationary pressures, the base interest rate was raised by 100 basis points to 9% in November 2010, from 8% since December 2009, based from figures released by the central bank, The State Bank of Vietnam.
Rents up, yields high
In September 2010, the average rent for high to mid-end condominium units in Vietnam was US$10 per sq. m. However, the local rental market is very diverse, with rents differing in each city.
Hanoi has the most expensive housing in the country, with average asking rent at US$30.31 (VND587,311) per sq. m. per month in Q3 2010, up 5.9% from a year earlier, according to CB Richard Ellis Vietnam.
In Hanoi, a 170-sq m. apartment has an expected rental yields of 7%, according to local real estate developers. On the other hand, a same sized apartment located in Ho Chi Minh City has higher rental yields of about 9%.
In Ho Chi Minh City, the overall rental vacancy rate was 16.5% in the 3rd quarter of 2010, slightly up from 16% in 2009, according to the latest report from CB Richard Ellis Vietnam.
The country’s average economic growth was 7.2% from 2000 to 2010, according to the IMF. In 2011, GDP growth slightly slowed to 5.9%.
Slowing economic growth
The country’s economic growth slowed to 4.38% in the first half of 2012, its most sluggish rate in three years, according to the GSO. This was in sharp contrast with the average annual GDP growth rate of 7.1% from 2000 to 2011, according to the IMF.
Real GDP growth is expected to slow to 5.1% in 2012, from 5.9% in the previous year, according to the IMF.
In an effort to boost the economy, the State Bank of Vietnam (SBV) slashed its key interest rates in July 1, 2012 for the fifth consecutive month this year. The refinance rate was lowered from 11% to 10%, the discount rate from 9% to 8% and the overnight inter-bank lending rate from 12% to 11%.
In June 2012, consumer prices rose by just 6.9% from a year earlier, the lowest rate in three years, according to theGeneral Statistics Office (GSO).
Rating agency downgrade
In December, rating agencies downgraded Vietnam’s foreign currency bond ratings. Moody’s lowered its rating from Ba3 to B1 (four steps below investment grade), while S&P rated Vietnam at BB- (three steps below investment grade). They both kept the outlook as negative, implying the future downgrades can be expected.
In their report, Moody’s pointed to the increased risk of a balance of payment (BOP) crisis in Vietnam because imports are outpacing exports. Foreign reserves are being depleted because of capital flight and the effort to defend an overvalued currency. Other factors leading to the downgrade were high inflation, excessive bank lending and the near-collapse of the state-owned Vinashin.
Originally a shipbuilding company, Vinashin expanded to a wide array of industries including tourism and animal feeds. As of June 2010, its total debt reached US$4.5billio, roughly 4.5% of Vietnam’s GDP. The government said that it will not bail out the company but provided zero-interest loans for the salary of its employees.