HO CHI MINH CITY
- Vietnam's emerging middle class, eager for quality housing and happy
to pay hefty cash deposits up front, is spurring an
apartment-construction boom. If banks offer easier
mortgages, that boom could last - assuming the economy
stays on track. Meanwhile, resort projects targeting
foreigners look set to take off in the next few years,
competing with Phuket and Bali.
Decades of war
and economic stagnation left housing construction
severely lagging as families grew. What got built were
poor-quality apartments, especially in big cities. But
things are changing as, having seen to needs such as
color television, air-conditioning and motorbikes,
upwardly mobile Vietnamese now want a home to match
their status.
"There's a massive undersupply of
housing for the Vietnamese, particularly for the
burgeoning middle class. The purchasing power here is a
lot higher than any official statistics show," says
Brett Ashton, property consultant Chesterton Petty's Ho
Chi Minh City director.
Officials forecast that
Ho Chi Minh City would require 10 million square meters
of housing by 2010, of which they could build perhaps 2
million square meters. That was two years ago. With few
investment alternatives available, Vietnamese families
are now sinking their money into real estate, driving
prices north and starting the country's first
condominium property cycle.
"Urban populations
are at the point now where they have the means, they go
to the bank and borrow and buy their first apartment or
villa. We think we're at the beginning of the very first
long property wave," says Peter Rider, fund manager with
Indochina Capital.
Some fear there may be a
bubble developing. Yet with decades of pent-up demand
and a booming economy, it may not burst for quite some
time. That restrained bank lending, partly because 11%
interest rates are fairly high, has not stopped
speculation or dimmed interest is perhaps testimony to
the market's inherent demand. "It's all fairly new -
interest rates are high and the percentage they are
prepared to lend is 50% for around seven years," says
David Clarkin, an Australian developer and consultant
operating in Ho Chi Minh for more than a decade.
Developers are relishing the appetite for
property as people rush to buy apartments that exist
only on paper, handing over fat deposits - about 30% of
the sale price. That cuts financing costs. Projects cost
about US$18 million to $40 million, depending on unit
numbers and size, which vary widely as developers test
the market to see what niches work and what don't.
Relatively few foreign developers, despite
investment laws allowing full ownership, are working on
major projects right now. But most big property groups
from Hong Kong and Singapore are looking, or working on
small developments while they suss out what will work in
Vietnamese market. Vietnamese developers quite often
employ foreign architects, design teams and project
managers, bringing at least some international best
practice and standards. "I think the Vietnamese are very
quick to catch on to the importance of quality.
Certainly the better Vietnamese developers have realized
that if you want a quality international product, you
need quality international teams," says Clarkin.
Differences will emerge between Hanoi and Ho Chi
Minh, partly because of climate, but also because people
in the two cities have different outlooks, attitudes and
needs. "Every market develops its own attributes. We are
too early in the development of each market for these to
come to the fore. This may emerge in the next couple of
years," says Rider.
A flood of apartments over
the next few years is likely to see some Vietnamese
owners renting to foreigners, sapping rents in apartment
blocks built with foreign residents in mind over the
last decade. However, while the outlook for the foreign
market - largely consisting of serviced apartments -
seems subdued, it may well change later this decade as
the strong economy attracts more foreign investors and
employees and the government eases ownership
restrictions.
Currently, foreigners cannot
buy land-use rights - only 49-year transferable leases,
as land remains the state's property. (Corporate entities are the
exception; even a 100% foreign-owned firm can, subject to
government approval, buy land-use rights). That China now allows
foreigners to own land suggests that at least some
easing on lease terms will come to Vietnam as well.
Ownership is but one kink in the market. As apartments
begin to rise, the law has a lot to catch up with. Laws
and regulations governing common areas and maintenance
funds will reduce the scope for disputes and help ensure
good care and management for apartment buildings. "In
apartment buildings there is no condominium or strata
law. Even ownership of an apartment is an evolving issue
because it is up in the air," says Clarkin.
Even
when a developer legally acquires land-use rights from
the government, it can still take years to negotiate the
departure of those living on or using that land. Returns
are potentially not as good as other markets because of
financing problems, although this is improving. "There
is still not absolute private land ownership. Debt is
extremely hard to come by for development projects,
therefore requiring large percentages of equity,
lowering the absolute returns on your invested capital,"
says Clarkin.
Construction costs are also
forecast to rise, a trend that could accelerate quickly
if supply shortages become acute as infrastructure and
other projects get under way. "Early next year, you are
going to see cranes popping up all over the Saigon
skyline, probably doubling construction activity. Over
the whole of the inner city area you would have to
expect 20-30 projects of a substantial size to start
next year," says Clarkin. (The name Saigon, which
formerly was used for the entire city, was retained for
the city center after the official name change to Ho Chi
Minh City.)
Hotels and resorts are also going to
see increasing activity as Vietnam's tourism star
continues its rise. Much of Vietnam's 2,000-kilometer
coastline, fringed with plenty of pristine beach, is
within a few hours' drive of an international airport.
With the right license, resorts may well be able to sell
or offer timeshare ownership. Da Nang and Nha Trang in
central Vietnam are considerably closer to Hong Kong
than Thailand and Bali are.
"People are already
contacting us about this market. Phuket, Samui and Bali
are considered overpriced, overbuilt," says Ashton.
"Over the next couple of years, you'll see a lot of
this. Look for some foreign involvement and management,
which will be key to maintaining the asset value and
rentals."
Cool hill stations, developed by
French colonials seeking respite from the heat, such as
Dalat near Ho Chi Minh, the Central Highlands and places
north of Hanoi may also experience a renaissance,
especially if more casinos open. Dalat will likely be
first, probably around 2006, when work upgrading its
airport to handle international flights should finish.
Put the hotels and resorts with apartments and a
broad market is starting to develop, likely drawing a
lot of attention from foreign developers over the
remaining half of the decade, during which foreign
vacations, especially short breaks, will become normal
for urban Chinese living along the booming coast.
"I think property in Vietnam, for foreign
investors, has very good potential going forward, as
opposed to back in the 1990s when the whole investment
opportunity here was smoke and mirrors. We certainly
wouldn't be launching a fund if we didn't believe that.
Today it is reasonably well developed - a foundation has
been built for sustainable, profitable
medium-to-long-term projects," says Rider.
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