Vietnam's property market boils
over By Karl D John
HANOI - Is Vietnam's explosive economic
growth inflating a property bubble? Some
Vietnam-based analysts think so judging by the
number of new developments mushrooming across the
country.
The 1997-98 financial crisis that
hit other countries in the region such as
Thailand, Indonesia and Malaysia had only a
marginal impact on Vietnam, which had then only
recently emerged from decades of economic
isolation. Now, however, Vietnamese property
developers are rapidly building new commercial and
residential developments that some analysts
contend have glutted the market. And there is no
end in sight of new building projects.
With the transition from a centrally
planned to a market economy and a recent record of
strong economic growth, up and coming
Vietnamese increasingly
demand better quality housing and business
facilities. Vietnam continues to go from strength
to strength, averaging annual growth of 6-7%. That
demand had in recent years pushed up land and
house prices in Hanoi and Ho Chi Minh City and
provided developers commercial incentive to build.
More recently, however, property
speculation has pushed prices up and beyond the
reach of most Vietnamese. Judging by property and
land turnover rates, many Vietnamese have invested
in property rather than depositing their money in
low-interest bank deposits or even in the lightly
regulated new stock exchange. Local property
experts estimate that only 5% of the population
has the wealth required to buy property at current
inflated prices.
For instance, a square
meter of street-front land in Hanoi and Ho Chi
Minh City's downtown now fetches about US$5,000,
while a square meter of apartment space can run
between $300 and $1,000 or more - prices far
beyond the reach of average national incomes,
which now hover between $1,500 and $2,000 per
year.
Many investors, on the other hand,
leveraged into those extremely high prices on
borrowed money and are still sitting on their
property hoping that Vietnam's accession to the
World Trade Organization (WTO) will generate
deep-pocketed foreign interest in the market. But
even by international standards Vietnamese
property prices are sky-high and arguably are
leading to major distortions in the broad economy.
One measure: a recent survey by Mercer, a
US human-resource consultancy, found Hanoi ranked
29th out of 144 global cities ranked on cost of
living, directly following Berlin and ahead of
other major cities such as Taipei, Guangzhou,
Chicago and San Francisco. A property bubble would
also have a major impact on the banking sector:
about 18% of total bank loans are now tied up in
property-related investments. And with the
property market grinding down, banks have recently
stopped lending money for new property
investments.
Rapid
reforms Vietnam-based property experts
contend that rapid market reforms are partially to
blame. A new land law passed in 2004 established
private land-use rights, legislation designed to
phase out communist policies that made the people
and state custodian of all lands. The law aimed
specifically to level the competitive playing
field, ensuring that all enterprises, whether
foreign-invested, state-owned or private, would
have equal opportunity to lease or be allocated
state lands at market, rather than government
determined prices.
Historically, about
70-80% of all land transactions took place without
a paper trail, meaning that authorities were
unable to tax or manage the sector effectively.
The new law aims to change that by standardizing
land transactions, providing legal disincentives
for unofficial property transactions and
prohibiting companies from dividing land and
selling it in smaller lots.
Property
analysts blame the ban on parceling plots as one
reason for over-speculation in land and
large-scale developments. It also has pushed many
smaller-scale developers, who lacked bank
financing and the ability to acquire large tracts
of land, but arguably were more in tune with local
buyer preferences and real spending power, out of
the market.
There are tell-tale signs that
large-scale property developers have overshot the
market. And the new legal requirements for
property transactions have created major confusion
in the market and hence led to fewer transactions.
Land and house transactions have come to a
near standstill over the past year, according to
industry experts. At the end of 2005, property
transactions were 70% lower than before the new
land law took effect. Now, officials and
developers worry about a possible collapse of the
real-estate market due to inactivity and
development.
"Land prices being higher
than their actual value, combined with the
psychological effect and changes in real-estate
law, were the main reasons for the decrease in
land and house transactions," said Le Dinh Thang,
head of the Real Estate Trading Faculty at Hanoi
National Economic University.
Persistent
rumors about possible new taxes on property
ownership have recently deterred speculators from
buying into the overbuilt market, he said.
Dang Hung Vo, deputy minister of the
Ministry of Natural Resources and Environment,
recently said: "Reducing land prices to levels
affordable for most of the population would help
reignite the market. We cannot let land prices
stay so high, because it is at the expense of most
people and economic development."
That's
easier said than done, however. Now that market
reforms have been introduced, if the government
were to intervene directly in the property market
it would send a worrying signal to foreign
investors. Instead, the government would be well
advised to create policies that curb speculation
and allow for asset pricing clearing by allowing
the market to bankrupt those developers that made
poor commercial decisions.
Pham Sy Liem,
deputy president of the Vietnam Construction
Association, suggested: "When buyers are not
interested to buy property, it is necessary to
lower the price. Those holding property should
realize that in order to sell, they'll have to
accept less than they anticipate and salvage what
they can of a bad investment."
Foreigners to the rescue? The
government is acutely aware of the important role
the real-estate sector can play in maintaining
economic growth and is now encouraging foreign
interests to join with Vietnamese companies to
bolster the sector.
While Vietnamese banks
are bearish on the market, some foreign fund
managers are bullish. VinaCapital, which is listed
on the London Stock Exchange, recently increased
the size of its Vietnam Opportunity Fund to $171
million, and its $205 million Vinaland Fund was
Vietnam's best-performing fund last year. Both
funds provide financing for construction in
Vietnam's apartment, office, hotel and
trade-center sectors in Hanoi, Ho Chi Minh City
and some provinces in the central region.
VinaCapital's property investments focus
on foreign companies that aim to set up operations
in Vietnam after the country accedes to the WTO
this year and the foreign tourism sector. Still,
memories of the 1997 regional financial crisis
linger. Recent revelations about large-scale
government corruption in certain infrastructure
projects have spooked foreign investors, financial
analysts say.
The government is rushing to
allay those concerns. For instance, the
Construction Ministry recently sponsored the
formation of the Vietnam Real Estate Association
(VREA) to provide guidance to the market and
maintain contact points with potential foreign
investors.
Both the VREA and the
government have recently tried to send positive
signals to foreigners. The VREA carefully studied
the Chinese approach to property-market
development, and although it replicated some of
China's reform initiatives, the body finally
concluded that the ideal real-estate brokerage
model for Vietnam should be the United States, not
China.
Moreover, many delegates to the
current session of the National Assembly have
focused on clarifying definitions of the
real-estate business, transactions and types of
real estate. Delegates also demanded that
transactions among the population, including state
agencies, army and police units, should be clearly
legislated to ensure transparency.
Last
month, the National Assembly passed the Real
Estate Trading Law, which aimed to provide
regulations on property development and
transactions. The new law eases the way for
foreigners and overseas Vietnamese to enter the
real-estate market, allowing them to provide a
wide range of services relating to real estate,
including brokerage, pricing, buying and selling,
consultancy, auctions, advertisements and
management.
The law includes for the first
time the concept of a "real-estate exchange",
where all real-estate transactions are required to
take place. Individuals and organizations may
establish their own real-estate exchanges, the
establishment and operation of which are subject
to statutory requirements. And while foreign
investors are still barred from buying an existing
structure, investment in building houses or making
improvements is allowed.
Some
Vietnam-based property analysts believe the new
law sufficiently tightens the legal framework
enough to avoid the market chaos witnessed in
recent years.
"It is essential to have a
real-estate law in order to address problems in
the real-estate market, such as illicit
transactions, speculation and stagnancy, to make
the market healthier," said Chu Van Chung, head of
the legal department at the Construction Ministry.
"The law will make it legal and more convenient
for individuals and organizations to conduct
real-estate transactions." However, whether
those legal tweaks are enough incentive for
foreign investors to bail out Vietnam's broad
property sector at current inflated prices still
seems doubtful.
Karl D John is
chief executive officer of The TCK Group
(www.tckgroup.org), a Vietnam-based investment
consulting group. He has more than a decade of
involvement with Vietnam.
(Copyright
2006 Asia Times Online Ltd. All rights reserved.
Please contact us about sales, syndication and republishing
.)
