Developers reap benefit of change
VietNamNet Bridge – Since CBRE was established in Vietnam 12 years ago, managing director Marc Townsend has witnessed many changes in Vietnam’s real estate market. He recaps on his decade in the country.
Local developers have matured to change the real estate market
In 2001, I was sitting in the building at 63 Ly Thai To, preparing for the first video conference between Vietnam and Hong Kong. Looking down the street, a car would appear every 5 or 10 minutes surrounded by a sea of bicycles. But times have changed. Now it’s cars! One of only two latest Mercedes S series in the world can be easily spotted in Ho Chi Minh City.
The gap in all aspects of technology, education, business environment and living standards has begun to shrink, and increasing numbers of multinational companies have come to invest in Vietnam.
This trend is extremely significant for the market to take a further step forward, but a most interesting and noticeable phenomenon that has taken me 10 years to figureout, is that Vietnam hasn’t changed and won’t change because of what foreigners tell them to do, but rather, it changes because the Vietnamese people, especially the young people, developers, and lobbyists actually want change.
As for the real estate industry, the biggest changes over the last 10 years are the changes in competition, supply, and the physical buildings themselves. In September, the 65-storey, state-of-the-art, Lotte Centre Hanoi was opened. From what we observe in this building, very little is different between what developers would build in China and what they have built here. The gap is being narrowed, but there is still a lot of work to be done, especially in terms of infrastructure, which has exhibited least change over the last 10 years.
However, infrastructure development is undoubtedly changing every day and making huge differences in all aspects of the urbanisation process. Metro lines are under construction, new inter-provincial highways are being built, and overpasses have been built attempting to facilitate travel throughout the country and solve traffic congestion in the bigger cities. These are the changes that developers and people have longed for.
Pricing is one of the most prominent changes in the real estate market that one couldn’t help mentioning. In terms of pricing, we are now back to where we were in 2006. Pricing has been highly volatile over the past 12 years. Take the residential projects along Hanoi Highway in Thao Dien in Ho Chi Minh City for example. Average price here was around $1,300 per square metre, then went up to $2,600, and now is back to $1,300 - $1,400 again. That’s boom and bust in the real estate market.
I used to be told that land prices in Vietnam never fall. But then when the global financial crisis hit the country, coupled with the gyration of inflation and interest rates, land prices did actually go down. The reason why nobody in Vietnam expected land prices to go down is because in the past, everybody was fixated on land. Land was the asset class of choice, besides gold, and banking services were still a foreign concept. Nowadays, the asset classes that young people choose to hold have come to include more sophisticated investments such as equity and debt instruments, besides land titles and gold.
In terms of financing, things also have changed. When looking to buy a property, many young couples these days won’t choose to borrow money from their parents or relatives because they don’t want to hold an IOU with family members as financial independence has been valued much more. Instead, they’d rather use bank financing, and are ready to take a long-term responsibility to pay for it.
The evolvement of financial markets has also changed the way people look at property investments. 20 years ago, everybody just looked at one thing: capital appreciation. People never looked at yield or income streams - factors which would potentially make their bankers happy without having to send them a huge bottle of whisky because income streams would lessen bankers’ anxiety in debt repayments ability. Now, Vietnamese developers, investors, and family businesses have started looking at income producing assets the same way as foreigners do.
The role of the government is different among countries. In Vietnam, basically, the Land Law only allows people to rent, as opposed to own, land from the state. Quite a few multinational companies like Samsung want to keep their options open with low cost production, but the decision isn’t always easy because of a lack of suitable land. We found that it’s relatively easy to invest in Vietnam, but it is often very difficult to restructure that investment when there is a need to. The investment law wasn’t yet set up for investors to sell a piece of land and then move on to other pieces of land to grow their plant.
But the real problem is, in a modern commercial sense, the global economy has been changing and moving more quickly than the current Vietnamese land, commercial and investment laws, with the WTO, EU Free Trade Agreement, the formation of the ASEAN Economic Community and hopefully, the Trans-Pacific Partnership.
As Vietnam is right in the epicenter of these agreements, it has no other choice but to go along with the flow requiring it to continue improving its legal framework. Finding geopolitical balance is one matter but one important point Vietnam will need to address is the issue of global warming. Environmental issues affect people’s living standards, population, government spending and infrastructure, and are just as much a problem here, as it is in Japan or Switzerland.
In the past, when gold, the US dollar, and land, were the benchmarks for almost all other assets; the Vietnam dong was the last choice for an asset class of investment. Luckily, the government then realised that the dong was their own currency, and therefore it was essential to benchmark everything else including prices of coffee, food, labour, hotel rooms, rents, and capital values in dong (they really should have done this sooner, like the Thais and the Filipinos who had done this 25 years ago).
That was a big change and an important step to gain back the value of dong and settle the overheated economy which resulted in currency devaluation and high inflation. This also gave mortgages and home loans a chance to emerge. There is now hardly a day gone by when you don’t see or don’t hear a bank advertise attractive lending programmes, especially for young working couples who certainly dream about a home of their own.
For local developers, the only one choice used to be to borrow from local sources. Now they have a much bigger choice, which would bring their companies to the next level: raising money offshore. The trend has been led by Vingroup, and now more and more companies start to look at the possibility of selling convertible bonds overseas, like what Nam Long did 8 years ago when it received money from Goldman Sachs.
Now if you look at the 75 listed property companies, at least 50 of them have some form of foreign ownership. It comes from all kinds of funds, from a teachers fund in Wisconsin to the very active Global Emerging Markets Group fund. The range of funding options is almost unlimited from foreign groups coming here to see things that are available without not necessarily being distressed.
Vietnamese companies now realise that they need to have transparent accounts in order to talk business and money matters with foreigners. A lot of local companies have started using foreign banks, foreign valuers and accounting service providers to help them make sure that they are projecting professionalism, reliability, and regional standard bi-lingual materials for any transactions in the stock market, and any decisions or major changes in ownership.
A lot of things can potentially derail this nubile and thus unstable market and hold the economy back such as family businesses, regulations, or tall poppy syndrome. Time consuming investment process could see developers hesitate to invest here as they can make twice as much in half the length of time and gain more experience in another country.
People are in hurry to get back some of the time that they’ve lost over the last six years. But at the same time people need to focus on quality and actually strive for quality like what the Japanese have been doing.
In summary, we’re in the most interesting time in Vietnamese trade and geopolitical history with all these possibilities and the benefit will be felt in trade, manufacturing, funding, infrastructure, and the law. Multinational companies will come to invest here and real estate will pick up.