Vietnam real estate market on steady foundations
Here are the opinions of local and foreign industry players on Vietnam's property market.
Given the great number of positive signs regarding economic development, Vietnam’s property market is expected to further expand across sectors in 2019. Domestic investors still dominate in terms of transaction volumes thanks to advantages in access to land sources as well as market insight. Foreign investors are more active in the market, however, especially those from China, Singapore, Hong Kong (China), South Korea, and Japan.
Vietnam is fast becoming a new technology hub in ASEAN in the era of Industry 4.0 and the trend towards digitalization is now entering every corner of the country’s economy. Digitalization can be seen in different markets, from personal online retail shopping, virtual residential walkabout marketing, and automated features in serviced apartments / hotels, to a growing integrated logistics industry that requires more high-tech systems, as well as modern manufacturing / warehousing areas.
For local real estate developers, there are opportunities and challenges to stand out in the game. It is recommended that local developers joint-venture with foreigners, who may be ahead of us in terms of technology and experience in developing / operating new types of products.
Local developers always have a better understanding of market demand and local customers’ preferences and can utilize this knowledge to their advantage. For example, in designing new condominiums or a new hotel, local developers can combine digitalization by adding smart automated features with local design or themes, so they can create unique characteristics for products and attract both local and foreign buyers or tenants.
Given the large supply of similar offerings, these unique projects can breathe new life into the market and make a good impression. Local developers should always keep in the back of their minds that real estate is becoming more and more competitive with the help of technology and the trend towards modernity is a big wave they can’t afford to miss.
All real estate sectors are expected to be lucrative for investors, while industrial real estate will likely receive the most attention thanks to the relocation of factories from China and Vietnam’s recent signing of multinational trade agreements. With property prices still much lower than in neighboring countries, the luxury segment presents investors with great upside and opportunity for long-term returns as Vietnam continues its remarkable growth.
Another asset class that has been drawing interest from foreign investors is public infrastructure. Most notably, Ho Chi Minh City has recently called for investment in 85 projects in transportation infrastructure and 36 projects in public infrastructure worth more than $40 billion.
At the other end of the spectrum, Japanese investors are also investing in a range of residential properties in the affordable and mid-end segments to capitalize on growing demand.
However, it’s common for foreign investors to encounter a lot of bureaucracy and lack of transparency when they do business in Vietnam. There is often an overlap in jurisdiction by many government ministries and agencies, which most often leads to a lack of consistency in government policies.
In Vietnam, individual provinces can select and implement their own infrastructure projects, but they lack certainty in the availability of investment funds from year to year. This results in the inefficient selection of projects and the areas to receive investment. On the bright side, this presents ample opportunities for foreign companies to pursue investments in the form of public-private partnerships (PPPs).
The majority of buildings today will not be fit for purpose in ten or 20 years. Developers should therefore consider how their buildings can be adapted as occupier demand and needs change with time, and how to integrate new technologies as they become available.
Tenants will develop the need to scale up or down quickly as their business evolves and transforms, which can have an impact on the way lease structures are designed and implemented.
Industry 4.0 is blurring the lines between traditional sectors, and real estate developers must work with technology and infrastructure providers to ensure they can satisfy the modern time-poor tenant.
As buildings become more connected, and more customer data is collected, great care must be taken to ensure data is protected and that companies are compliant with information technology regulations. Connectivity is more important than ever, and real estate developers must provide reliable wi-fi access to tenants at all times. In the foreseeable future, IoT-equipped office space, stores that can print personalized products on-site, and fully-automated warehouses and vehicles will become mainstream staples. They will deliver value for money, convenience, and an elevated customer experience.
Q1 2019 showed GDP growth falling to 6.8 per cent from 7.3 per cent in Q4 2018. This is hardly catastrophic, but is an indicator that headwinds coming from the perceived / anticipated China slowdown when combined with the less-than-exciting global growth story are creating a drag on Vietnam’s external-orientated sectors. FDI is still the main driver of growth, with newly-licensed enterprises at the highest level for the last five years.
A noticeable difference compared to Q1 2018 is that we are seeing sustained, consistent interest from regional investors seeking high yields. Managers whose strategies mandated the buying of core properties in prime markets are moving into secondary and regional markets and higher up the risk curve. This means that appetite for investment-grade yielding assets in Vietnam has become stronger and will continue to do so over the short term. The challenge for sellers is keeping valuations realistic; there is a limit to how much investors can stomach as prices are pushed higher and higher.
Specifically talking about developers, we are still seeing most offshore groups being heavily weighted into residential and they will continue to be in this position as they work to unlock their current pipeline. If I were new to the market, I would be considering de-centralized commercial projects and leaning more towards pure office with limited to zero retail exposure.
The number one challenge we are seeing and being asked to explore is what happens when a Land Use Regulation Certificate (LURC) expires and when there will be clarity from the State by way of a legal framework and valuation mechanism around this.
Investors need confidence that when they buy a project or property there will be some form of renewal mechanism over the ground lease. It is becoming a live issue and one that will need addressing in the not-so-distant future, as it is having an adverse effect on property values.
FDI in property will increase in 2019 and 2020 if US-China trade tensions expand and foreign investors choose Vietnam as the new destination for their operations. FDI in property will be poured into three key segments: industrial property, high-premium, and hospitality property.
New construction projects in super-luxury apartments are few in number, as capital sources and demand are not large, and money flows are tending to seek opportunities. Super-luxury apartments are a pilot option. At the same time, Vietnam may be a destination for businesses and entrepreneurs. Such apartments are desirable among entrepreneurs. Consequently, FDI in this market segment may increase. The industrial segment is expected to attract greater attention if Vietnam becomes an alternative destination due to the impact of US-China trade tensions.
In the hospitality segment, villas and condotel investments were down 22 per cent in the first two months but remain a focus of FDI in 2019 and perhaps in 2020. Forecasts for this year show there is a new flow of FDI into this segment.
Apartments and office space for rent are also focuses of FDI attraction in 2019, as well as other sources. As domestic capital sources have not changed much and are even tighter than in 2018, FDI becomes more likely. Apartments will be the product segment invested in by individual foreign investors in 2019, accompanied by FDI in industrial property.
Obstacles in the Land Law, the Investment Law, the Construction Law, the Housing Law, and the Real Estate Business Law have been removed for the country to be more open to foreign investors. Certain progress has been made in land leases, project approval, and improvements in the business environment in 2015-2018. However, the issue of site compensation and clearance still needs improvement in order to promote the elimination of barriers to bolster the competitiveness of the economy and the business environment, to increase foreign investment attraction.
In the context of US-China trade tensions, more foreign investment may come to real estate in Vietnam. Redirecting investment into Vietnam would benefit the local real estate market, especially industrial real estate, as well as office space for rent. Investors opening a factory and then an office is common in Ho Chi Minh City, with Grade A office occupancy at up to 90 per cent and Grade B office space and rental housing also growing handsomely.
In the first four months of 2019, FDI in property accounted for the largest proportion of investment in the country as a whole and represented the largest proportion in Ho Chi Minh City for the first time. FDI in real estate is usually in second or third place in terms of sectors. In my opinion, attracting more FDI into production, business and services, and agriculture would be better than real estate. Regarding the form of FDI, the joint venture model is in the majority because the main obstacle facing foreign investors is land banks.
Foreign investors can often face difficulties due to their reliance on their Vietnamese joint venture partner working with local authorities. Foreign and domestic enterprises are still concerned about the lack of policy stability and the ability to predict the market. VN Economic Times
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