Vietnam property seen rising again in two years

Cool market: Four years after a real estate boom that saw investors camp in the streets to pay cash for unbuilt apartments, Vietnam’s once hot market is in a chill. — AFP

FOREIGN property developers should take a serious look at Vietnam despite the country's macro-economic challenges amid a struggle to subdue double-digit inflation without dampening growth, according to commercial real estate firm Colliers International research director Naim Khan-Turk.

While noting that the property market in Vietnam is currently in a downturn, Naim is expecting the situation to improve in two years.

Naim's expectations are not without foundation as a few years ago, Vietnam was seen as a fast-growing “Asian tiger” with an emerging market of about 86 million people and a low-cost labour force.

Today, Vietnam is grappling with rising consumer prices, a weakening currency and a tight credit policy while trying to revive optimism concerning its economic growth.

Naim, who has been based in Ho Chi Minh City for more than seven years, recalls that from 2005 to 2009, it was a boom time for the development and growth of the real estate market in Vietnam.

“A few years ago, at the peak of the cycle in the real estate market, there was plenty of money swimming around for developers to use. At that time, we had every fund in the world coming into Vietnam wanting to do this and that. Now, the situation has gone the other way, and developers cannot get their hands on money to finance their projects,” says Naim, who spoke to StarBizWeek on the sidelines of the two-day Mixed-Use Development 2011 conference, organised by Trueventus Sdn Bhd in Kuala Lumpur, which gathered experts in property development in the Asia-Pacific region.

In October, inflation in Vietnam accelerated to 21.59% from a year earlier.

The high consumer price index (CPI) for October meant that inflation had slowed for a second month, after climbing to a high of 23% in August.

This month, in order to subdue Asia's highest rate of inflation, Vietnam's central bank also raised its refinancing rate to 15% from 14% previously, while maintaining its base interest rate at 9%.

“What this means is that the credit crunch in Vietnam has resulted in the real estate market becoming very compressed, and a lot of property developments are slowing down or not starting. Certain projects are still moving along but things have been put on hold to a certain degree,” says Naim.

Naim also reiterates that property development in Vietnam is a long-term process for investors.

“In the past, many foreign investors did not realise how things in Vietnam work. Things do not happen quickly - planning, purchase of land, construction permits and licensing - it could be over two years in some cases before you get to the ground.”

He cites examples of companies such as CapitaLand Ltd. “They have been in Vietnam for five years now, and had to spend their time getting the projects through.”

Naim says foreign property developers in Vietnam need to allocate time to build their networks, establish contacts and secure land.

“What you can obtain is a 50-year lease term on the land. In some cases, it can be up to 70 years. That allows you to develop.”

According to Naim, the process of obtaining an investment license in Vietnam has been made easier nowadays.

“It used to take up to a year. Now, as long as your paperwork is in order, getting an investment license should take between three and six months.”

He points out that Vietnam is an emerging market offering many opportunities.

“It is a question of whether you are willing to overcome the hurdles or not. It is not for the faint-hearted or those with the mentality that they can just walk in there and do something; then they are going to come unstuck.”

Naim says foreign companies that have been successful in Vietnam are the ones that took the long-term view, and cites Malaysian examples such as SP Setia Bhd, Berjaya Corp Bhd, Gamuda Bhd, WCT Bhd and Ireka Corp Bhd.

“Although the real estate market does not look very rosy now, this is the right time to come in because of the time scale it takes to get projects going in Vietnam. Land can be acquired at much cheaper prices compared with a few years ago.”

According to Naim, margins can be 23% to 25% for a typical property development in Vietnam.

Also, he says there is strong demand for office space. “At the moment, occupancy is around 85% across all grades of office space. Following the global downturn in 2008, Grade A office rentals are now around US$35 (RM109.40) per sq metre.”

He recalls that office rentals in Ho Chi Minh City peaked at US$70 (RM218.80) per sq metre before the global financial crisis in 2008.

“One of the things that made Vietnam so attractive was that a few years back, office rents were one of the highest in the world, in Ho Chi Minh City and also Hanoi.”

Naim notes that new commercial buildings are steadily growing taller and with more modern designs.

“The 68-storey Bitexco Financial Tower in Ho Chi Minh City is Vietnam's tallest building (opened late last year). There will be a taller 72-storey structure in Hanoi soon.”

By The Star