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Vietnam A Real Estate Market in the Making
Analysis of: HCMC property bubble keeps getting bigger | www.thanhniennews.com
This analysis is solely the work of the author. It has not been edited or endorsed by GLG.
Analysis By:
Nicholas Brooke
Chairman, Professional Property Services Limited
Implications: Vietnam’s economy has shown one of the strongest growth rates in Asia over the past two
years (8.2% in 2006 and 8.5% in 2007) and this level of growth is anticipated to continue into 2008.
Strong economic growth together with low labour costs and a young and highly motivated workforce had
attracted significant overseas interest and increased investment in both the industrial and real estate
sectors. Foreign direct investment in approved projects in 2007 amounted to some US$1517 billion, a
significant increase from the US$10.2 billion secured in 2006. Membership of the WTO, which was
achieved in January of 2007, has encouraged further large scale investment interest, particularly as
privatisation of State Owned Enterprises is expected to be completed by 2010. This should encourage
joint ventures and foreign investment in previously nonaccessible sectors.
Analysis: A precursor to WTO membership was the announcement of both the Common Investment
Law and the Unified Enterprises Law in July 2006 which introduced a common legal framework for all
types of enterprise and provided for 2007) and this level of growth is anticipated to continue into 2008.
Strong economic growth together with low labour costs and a young qual treatment of all investors.
Some 70% of Vietnam’s population of approximately 84 million is below 35 years of age, there are
minimal ethnic, religious or political divisions and there is a palpable energy to be felt in the major
centers which is reminiscent of Hong Kong and Mainland China in the early days of their economic
expansion. Over 106,000 SME’s have mushroomed in recent years, with many families involved in small
retail businesses, and this entrepreneurial spirit is also very apparent in the real estate sector.
Improving legal infrastructure
Prior to 1990 all land in Vietnam was owned by the State and there was virtually no real estate market as
there were no laws to regulate the use and transfer of property in the private sector with housing being
distributed by the State. However in 1986, the Government introduced the “doi moi” reforms which led to
a slow movement towards a more open and market driven economy. The first land laws came into force
between 1990 and 1998 when the concept of private “ownership” was recognized. Widespread
speculation resulted and land prices soared, with a number of foreign investors undertaking large scale
commercial and luxury residential projects on both Hanoi and Ho Chi Minh City. Between 1998 and 2004
revised land laws were decreed to curb speculation and with the onset of the Asian financial crisis many
foreign invested projects collapsed, although the Vietnam economy itself did not suffer too severely.
Small local developers emerged but no major projects were undertaken as there was little or no interest
from overseas. In 2004 the new Land Law attracted increased foreign interest and enhanced real estate
funding options. These, together with new and continuing reforms in the regulatory and legal structures,
the improved economic conditions, increasing incomes and shortage of supply in all sectors,
encouraged new foreign investment.
New land tenure measures
At present only Vietnamese nationals can own land or houses, only being able to rent land and build
houses to sell or lease although “sales” of 50 year leases have been quite common for some years.
However, it is understood that further reforms could also be on the way with the Ministry of Construction
drawing up plans for an experimental project to permit foreigners to buy houses and own land in
Vietnam for a maximum period of 70 years subject to legal conditions being met. Land use rights now
have to be auctioned when the State sells or leases land, improvements have developed in mortgage
lending with 75% loans over 15 years now available, joint venture developers are permitted to build
apartments for sale and compensation for losses due to redevelopment are now closer to market values
meaning the site clearance is no longer such a long drawn out issue. All land continues to be held by the
State with land use rights (LUR) being sold in very much the same way they are in China. Vietnamese
citizens can have effective “freehold ownership” in that there is no time limit on their LUR of residential
land and can joint venture with foreign investors with the latter also being able to lease directly from the
State for development purposes. LUR owned by foreign companies are granted for 70 years in special
cases such as projects with large capital requirements or those located in underdeveloped socio
economic areas and limited to 50 years for other uses. Such periods will be renewable for further similar
terms subject to the investor meeting the conditions that there is a need to continue using the land, the
project is fully compliant with the regulations regarding land use and such continuation of land use is in
accordance with the government’s master planning. LUR can be leased, mortgaged, exchanged,
transferred or inherited although large scale projects still require the approval of the Prime Minister.
What is driving the new strong demand for real estate in Vietnam?
• Increased standard of living and rapid urbanization
• Current lack of supply
• Urban infrastructure development
• Increased availability of mortgages
• Growing remittances from over 3 million overseas Vietnamese
• Large young population looking to buy their own homes
• Developing real estate legal framework
• Strong growth in tourism
What are the major opportunities?
Strong residential demand from newly weds
The residential sector is very attractive as there is significant latent demand driven by the rising income
of the burgeoning middle class. In 2006 the GDP per capita in PPP terms across Vietnam was some
US$3,100 while in actual terms the level reached US$820. Actual per capita GDP in Ho Chi Minh City,
the commercial centre of the country, rose to US$1,970. The young profile of the population means that
many are at an age when they wish to marry and have their own home and it is estimated that there is a
need for 60 million square meters of urban residential space – almost doubling the current stock. With
prices ranging from US$900 per square meter upwards in the mass market and US$1,200 upwards in
the luxury sector, there is still no shortage of purchasers.
Limited quality office accommodation available
The office market also offers opportunities in that there is a serious lack of quality accommodation in
both Hanoi and Ho Chi Minh City, with both having occupancy rates of 95%. It is only recently that new
project of over 10,000 square meters have commenced and the continuously rising rental have now
reached the same levels as those seen in Shanghai (i.e. between US$4050 psm pm exclusive of VAT).
Some 540,000 square meters of new office space is required in HCMC by 2010 with the figure for Hanoi
estimated at 150,000 square meters, assuming current growth in new businesses continues. Few real
shopping centers as yet A nascent market for modern retail formats is now starting to emerge and the
amount of retail space will need to expand by 5 times over the next 5 years to match stock to population
ratios in other Asian cities. There is no real shopping centre in HCMC and only two department stores so
that while some projects are under development the market is still wide open. The leisure and hotel
markets are other areas of interest with Vietnam billed at the next Thailand – its 3,000 km of coastline is
very suitable for resort and villa developments and tourist arrivals have increased 25% since 2004. Four
and five star hotels are enjoying very high occupancy rates during peak periods and there are many
opportunities for foreign operators to improve service and returns.
Demand for new urban centers
In the industrial sector, many of the industrial zones, particularly those close to HCMC, have limited
supply of ready built factories available due to recent demand and international newcomers mostly have
to build their own facilities so that new industrial parks could prove to be sound investments. There is
also mileage in developing new townships and communities in areas surrounding existing urban areas in
that “green field” development can be more straightforward and subject to fewer delays in the approval
process.
Where do the challenges lie?
Vietnam is an emerging market and transparency is not yet all it might be. Politics still play a role in
economic decisions and delays can arise for reasons which are difficult to understand. However, the
new laws and their implementing regulations are improving matters and while projects may progress
more slowly, if they are properly structured and funded and designed within the known planning
parameters, they should eventually receive the licenses and permits required. In many cases it is an
advantage to have a local partner who can assist with relocation issues and steer the project through the
various statutory and licensing processes and that choice of partner is, as in any emerging market,
critical. Similarly, time and effort spent on diligence, or parting the curtains, and not necessarily
accepting everything at face value, is time well spent. Imperfect the market may be but there is a clear
correlation between risk and reward and the ability of the economy to leapfrog many traditional stages of
development means that it is already asserting itself as a significant player in the region and attracting
investment accordingly.