After an unprecedented period of growth, Vietnam’s real estate market came crashing back to reality in 2008. The market has adjusted, but is now the right time to invest?
Vietnam has received much attention in recent years, and until recently everyone was talking about its’ potential as a tourist destination, entry into the World Trade Organization, or the normalization of diplomatic ties with the United States. Analyzing the future potential of a country that seems to be following in China’s hallowed footsteps of rapid growth had become a pre-occupation of many market commentators.
Last year however, attention turned to the slumping stock market, falling residential prices, rampaging inflation and slowing growth forecasts. While many investors may have retreated, those with longer term objectives have maintained their commitment, albeit slower in the short term, with belief that the future is still bright for this frontier market.
For a country of 86 million people, the real estate market remains grossly undersupplied across all sectors, even with GDP growth forecasts cut back to 5.5 percent for this year, the majority of Vietnamese still believe they are in the midst of an exciting, growth economy.
Residential Market
After an unprecedented period of growth, Vietnam’s residential property market is finally returning to some semblance of reality, with pricing adjustments dictated by economically sound market forces and not rampant speculation. Lines of excited buyer’s queuing overnight to purchase condos off-plan are now a distant memory, with the family gold safely returned to the mattress.
Increasingly tighter fiscal policy during 2008, combined with the worsening global economic climate, is helping restore normality. The high-end luxury apartment market has fallen off considerably following the speculative switch from stocks to real estate, and is estimated to have dropped 40-50 percent since its pre-Tet 2008 (the Lunar New Year) peak. Not surprisingly, developers are also on the back foot having, in many cases, been carried away on the wave of speculative fervor, and are now delaying or pulling out of projects they perhaps would never have attempted in more stable market conditions.
With continuing and significant undersupply across most residential market segments, 2009 is likely to see momentum building once again and prices for completed properties edge consistently higher from their current, post-speculative levels.
Opportunity
Despite the global economic issues, the fundamentals that have attracted significant FDI remain strong. Vietnam’s young entrepreneurial population, undersupply across most real estate sectors, and improving legal infrastructure and government policies all bode well for continuing and long term economic growth.
Customer Understanding
Even though the real estate market remains undersupplied, new developments will require an additional level of customer understanding to ensure their success. This understanding of customer needs and how they relate to a particular project can be categorized through the following research objectives:
Identifying and sizing key segments and market opportunities through an analysis of the competitive set.
Profiling and prioritizing potential buyers through Demographic and Psychographic profilingof a project’s primary target market and key flanker markets.
Developing positioning and pricing strategies for each primary market and key flanker markets.
Any research study should enable developers to determine the potential sales/leasing opportunities and any constraints relating to the proposed development. This better assists the understanding of the profitability of different customer segments, and how better to invest resources to capture and retain the best of them. Knowledge of the needs and profitability of target customer segments is less susceptible to imitation than are the features and amenities of a particular property and will go a long way to effectively position and differentiate the end product. Robust marketing strategies also now needed to be well thought through and executed to achieve sales success.
Financing
With inflation under control, interest rates are now following the global trend in an effort to stimulate growth. For a country with less than 10 percent of the population using bank accounts and far less borrowing, the deleveraging of the West will be less prevalent in Vietnam. As base rates reach single digits a new generation of buyers should be emerge, unlocking the middle class aspiration to own a home.
However, though the fall in interest rates could stimulate bank lending in market sectors that were up until now ‘cash rich’, banks will likely remain cautious and will likely only lend on completed developments or, at the most, on developments that will be completed in the very near future.
Construction Costs
As the global slow down eases the pressure on commodity prices and construction costs in Vietnam have also eased. The global economy slowdown and market volatility are the key drivers for the decrease in construction costs this year, most commodity’s will see a price drop but certain commodities (Iron Ore, Copper and Coal) may increase due to manipulating supply.
The reductions in construction costs along side limited GDP growth will mean a slow down in projects. Contractors will be more competitive forcing suppliers to be more competitive when pricing material.
Outlook
The introduction of affordable mortgage financing, lower construction costs and a better understanding of customer needs across Vietnam’s residential market should present opportunities for economically sound developers.
The biggest question is now will pricing reduce further. It was an unprecedented year of turbulence for the Ho Chi Minh City residential market. Prices continued to accelerate sharply in early 2008 before plummeting after the Tet holiday. During the second half of the year prices continued to fall but at a steadier rate, down 15 percent, 39 percent and 30 percent from Q1 to Q4 for elite, prime and executive condominium, respectively. Cushman & Wakefield’s research indicates that few successful transactions have been completed in the elite resale market.
There is no certainty that prices will not fall further, but it is becoming clearer that 2009 will be a year to invest.
James Austen is associate director - project marketing for Consultants Cashman & Wakefield (Vietnam).
S T R E N G T H S
The targets that the Vietnamese government have set themselves for 2010 are to increase GDP annually by between 7.5 and 8 percent:
With a new law to allow foreigners 70-plus years of leases, Vietnam has become one of the most open markets in Asia
Property prices have doubled in 12 months, nearly tripled in some cases over the past 18 months
40 foreign investment funds will disburse $20 billion worth of capital into the market in 2008
Statistics showed that 85 per cent of the FDI capital flown into Ho Chi Minh City in the first 11 months of the year was pumped into real estate
Analysts say that the real estate market would see the growth rate of 20-30 per cent in 2008
Tourism is a spearhead national industry which brought about US$3.5 billion in 2007
W E A K N E S S E S
The country is suffering from the worldwide surge in the cost of fuels and foodstuffs
The country has witnessed many wars along it’s history
The Communist Party remains the single political force
Infrastructure development is currently one of Vietnam’s main problem from property investors’ point of view
Territorial rivalries between China and Vietnam
http://www.empadvisers.com/pages/vietnam-strengths-and-weaknesses
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