Vietnam's real estate sector continues to reap benefits of growing middle class and rapid urbanisation

After a four-year-long freeze, the Vietnamese real estate market is now entering its recovery phase. The market had reached its peak in 2009 but started to drop off the following year and had entered a cooling period until 2014. The cycle that began before the downturn was marked by a large stream of supply, particularly apartments, which had flooded the market in a relatively short period of time. As the market became increasingly frothy, the government started to clamp down on bank lending, and the sector subsequently lost steam.

The real estate market is now at the early stage of its recovery, which is being helped along by improving economic conditions and lower lending rates; but what makes the market unique in the region is that it is now in its countercyclical phase: unlike markets in Indonesia or the Philippines, which are coming off their peaks, or Singapore which is undergoing cooling measures, Real estate in Vietnam is now on an ascendant path. Indeed, the real estate sector expanded 4% in 2016 and contributed 0.21 percentage points to overall growth, the fastest pace seen since 2012, according to the General Statistics Office (GSO).

Outside Investors

Vietnam is also attracting a huge amount of interest from foreign investors, especially from around the region such as Thai retail groups looking to expand, as they can recognise the potential of a freshly emerging market. Indeed, Vietnam drew $1.52bn in foreign direct investment (FDI) for real estate in 2016, across 59 property projects, according to JLL, an international real estate consultancy firm.

On the merger and acquisition front, activities have been relatively quiet, apart from the retail sector, but there is a significant amount of interest from foreign investors looking to break into the market. Difficulties include the inability to find good opportunities and high-quality stock in the market, as well as the lack of clean, clear development sites that are shovel-ready. One big move has been the acquisition by Singapore’s CapitaLand of a prime site in District 1 of Ho Chi Minh City for $51.9m. This will be a high-end boutique development and is expected be a test for the market. Nevertheless, most deals have been dominated by local groups as they generally have better access to sites owing to greater insight in the marketplace. However, recent government policies have been aimed at encouraging more overseas investment.

A Fresh Start

Significant changes were made to the Real Estate Law in 2015, which was amended to allow foreigners to lease and own a maximum of 30% of an apartment building or up to 250 villas or town houses. This change effectively provides a registered 50-year leasehold title on any type of property and gives foreigners the right to now sublease, mortgage, trade and inherit. In addition, overseas Vietnamese, or Viet kieu, who hold another passport but can demonstrate they are returning, will be treated as locals, and are now also able to own a freehold title. Previously, Viet kieu and foreigners could only buy one apartment in Vietnam each. “The government has been extremely proactive in continually improving the Land Law and the Real Estate Law and that will continue,” Neil MacGregor, managing director of Savills, a real estate consultancy, told OBG. “The strata title has become clearer, but there needs to be further improvements in this regard. We understand that the government is in the very initial stages of looking at a property tax and are currently considering introducing an effective land registry.”

Returns

MacGregor also noted that there is a huge variation in potential returns for investors, as Vietnam remains an emerging market. Prime office yields are currently in the range of 7-8%, while residential yields for an individual on a buy-to-let basis in the mid- to high-end market focused towards foreign tenants, are between 5% and 8%. However, as there is a steady flow of supply coming on-stream these yields are likely to come down.

Residential On A Roll

Growth in the residential market has been spurred by rapid urbanisation and a growing middle class. Changing family demographics is also a factor in growth projections. As elsewhere in Asia, the younger generation is now starting to seek greater independence from the traditional multi-generational family homes.

By 2025 it is estimated that nearly half of the total population will live in cities, which will precipitate a need for an additional 5.1m housing units, according to VinaCapital. Indeed, World Bank figures show that urban growth in Vietnam is the highest in South-east Asia at 2.6% in 2015-20. Vietnam also boasts one of the fastest-growing economies in Asia. According to JLL, some 34,000 apartments were sold in Ho Chi Minh City in 2016, which is a city record. The stock was split fairly evenly between affordable and mid-end units. In the fourth quarter of 2016 supply totalled 8874  units, with mid-end apartments accounting for nearly 70% of total supply. Between 2017 and 2018 an additional 80,0000 units are expected to hit the market.

Demand Patterns

While there are no policies ordaining so-called flexible demand, in which housing supply is released only when and where the demand dictates, discernible patterns have emerged in an otherwise free-wheeling market. New developments have, for example, tended to sprout up around infrastructure projects, which have had a strong impact on new launches as well as choices made by homebuyers and developers.

The planned metro lines in Ho Chi Minh City, which are currently under construction, are expected to generate a hike in land prices and a surge in real estate development in the suburban areas surrounding the stations. According to real estate advisors, the eastern part of Ho Chi Minh City has become popular with developers owing to its existing infrastructure and urban planning, and land prices have jumped on reports that several bridges will be built there, as well as flyovers and tunnels. However, as prices go up and new supply hits the market, there are fears of the past becoming prologue in the form of another property bubble, such as the one seen in 2008-10.

Supply, Demand & Imbalances

Pierre-Jean Malgouyres, general director of Archetype Group, Vietnam’s largest multidisciplinary construction consultancy, told OBG that there is a question about a bubble in real estate, noting that it could come in one-and-a-half to two years, as there is significant speculation going on. “A lot of rich people in Vietnam are buying apartments as there is not much else to do with the money. As a Vietnamese person you cannot invest abroad, so money either goes into the stock exchange or real estate.”

MacGregor of Savills, however, does not believe a bubble will form in the short term. “At the moment transaction volumes are keeping up with supply and we registered a quarterly absorption rate in Ho Chi Minh City of around 19% in the third quarter of 2016, which is still healthy,” MacGregor told OBG. “The true luxury end, particularly smaller niche projects, are going to continue to perform well in our view.” He also acknowledged that there will be parts of the market, especially the mid-end, where there could be oversupply in the medium term. He noted, however, that, “the bulk of the demand is at the affordable end of the market, and it is in this area where demand is generally exceeding supply.”

Vietnam is undoubtedly experiencing a shortage of supply of affordable houses, particularly in major urban areas. If left unchecked, this trend could cause deeper imbalances within the sector, however, steps are being taken to ease the problem.

Government Loans

In 2013, in a bid to address this problem, the government launched a VND30trn ($1.3bn) loan programme for affordable housing projects, helping low- to mid-income earners to purchase affordable houses with preferential interest rates. In the past high lending rates deterred local homebuyers and dampened a still underdeveloped mortgage market, with many Vietnamese continuing to pay cash for their homes.

As of November 2016 lending rates for short-term loans ranged from between 6.8% to 9%, while rates for medium- and long-term loans amounted to 9.3 to 11%, according to the central bank. However, only five years previous to this rates had reached as high as 17%. Le Viet Hai, chairman and general director of Hoa Binh Construction Company, told OBG that the revised rates will help ease the oversupply of luxury real estate projects and the shortage of affordable ones, resulting in more balanced supply and demand.

Second Homes

However, in the past the majority of developers have ignored the low-end segment owing to low margins. The profit margin for affordable housing is capped at 10%, with actual profits often lower. Thus, foreign developers have concentrated on more lucrative areas such as the burgeoning second-home market, which is still in its early stages compared to regional markets such as Thailand and Indonesia. But with the loosening of real estate ownership policies for foreigners and overseas Vietnamese, as well as a growing affluent class, better transport infrastructure and increasing tourist numbers, the country’s second-home market has been catching up fast.

Concomitantly to these factors, demand has been increasing in key coastal locations such as Da Nang, Nha Trang, Cam Ranh and Vung Tau and Phu Quoc, where supply is now flowing in.

Estate agents such as Savills are becoming very active in the holiday-home market, especially in Da Nang, which is booming and is primarily a tourism destination. The city dominates the central part of Vietnam and many holiday homes are being sold on the back of that expansion. The growth has become aided by direct flights from Hong Kong, Singapore, Taiwan, Kuala Lumpur, Seoul and Japan, which is further fuelling the tourism boom and opening it up to more business. The southern city of Nha Trang has also seen a boost in development. Savills reports that the land plot sector is enjoying the highest primary price in Nha Trang’s residential market at an average of $710 per sq metre, while the primary price of apartments and villas/town houses stands at $595 and $620 per sq metre, respectively.

Supply Needed

If the residential market is riven by worries of oversupply in some areas, the opposite can be said of the office market, which in Ho Chi Minh City has one of the highest occupancy rates of any city in the world across the entire office market, industry players say. This has been good news for landlords, who are being more aggressive in quoting rents and as a result tenants have no option but to stay until more space is available on the market. According to JLL, vacancy rates are at a historic low, with grade-A and grade-B offices, tracking at 3.9% in the third quarter of 2016 down from 8.2% in the same quarter of the previous year.

The demand for office space is strong and is increasing on the back of manufacturing growth and new entrants coming onto the market, as well as existing occupiers extending their current office space. The top-five industries coming into the country, according to government FDI statistics, are finance services, insurance, logistics, fast-moving consumer goods and IT, all of which will push up demand for office space and drive rental growth over the next few years. According to IMA Asia, both office take up and employment in business services have risen by about 10% per annum over the last 10 years. This should continue as GDP is growing every year at a rate of over 6%.

In addition, there is a migration of employment from agriculture to manufacturing and from manufacturing to services. IMA Asia notes that if the proportion of people working in services grows by 30-40%, the demand for offices should continue to rise by 8-10% annually. For prime grade-A office space rents are at $40-45 per sq metre/month, according to Savills. Average net rents for grade-B space as of the fourth quarter of 2016 were $25 per sq metre/month – up 2.3% year-on-year.

With the market eager for supply, there is some relief coming. The Mappletree Business Centre in District 7 is slated for completion at end-2016, and will have 28,700 sq metres. Other big projects coming on-stream include Deutches Haus at 26,400 sq metres (the first LEED platinum-designated building in Vietnam and which will come on line in the third quarter of 2017), and Etown Central with 70,000 sq meters over 27 storeys. Nevertheless, based on the current demand, rents are not expected to rise significantly in 2017. By contrast, in Hanoi there is currently an excess supply of grade-A and grade-B office space. Only one new grade-A office building was launched in the city business district in 2015, the TNR Tower, with 53,000 sq metres.

One new grade-B building came on-stream in the third quarter of 2016, adding around 20,000 sq metres of office space to the Hanoi market. Abundant supply is expected to last through the mid term, likely leading to rental decreases. Most of Hanoi’s building projects are situated on the peripheral of the city centre. There has also been a continuing trend of relocation to newer office buildings, which offer more affordable rents.

Growth In The Retail Market

On the retail side, there has been abundant supply and demand has risen. International name brands, such as H&M, Zara and Marks & Spencer’s, have also been establishing themselves in recent years. New supply for the third quarter of 2016 stood at 818,000 sq metres compared to 630,000 in the same quarter of 2015, according to JLL.

Retail news in Ho Chi Minh City in 2016 was dominated by the new AEON mall, with 59,000 sq metres, and phase 2 of the Saigon Centre, with 55,000 sq metres. Foot traffic in the first weekend at the AEON mall was some 45,000 people, underscoring the demand in the country for modern retail malls, the mall’s operators said. The mall is the third to be built by AEON in Ho Chi Minh City and offers high-end design and details that are more modern than the brand’s older facilities. “Since the last AEON was finished three years ago we have been studying how to best utilise local materials and we now feel we have reached the same standards we have in Japan,” Shinobu Yamanaka, president and general director of Obayashi Vietnam Corporation, the lead contractor on the mall’s development, told OBG.

Retail vacancy rates in Ho Chi Minh City stood at 9% across the board in the third quarter of 2016, down slightly from 9.5% in the same quarter the previous year, a JLL report shows. Prime high street retail space in the city is among the most expensive in South-east Asia, reaching $1594 per sq metre/ year, though this is still significantly less than rates in Singapore, which stand at $3567.

Despite the steep prices, new supply continues to come on-line, including the relaunching of the Union Square shopping mall with 38,000 sq metres, the Vietnam Central Park mall in 2017 with 59,000 sq metres, and the Leman C.T. Plaza in the same year with 12,000 sq metres. A report by Savills showed that the average gross rent increased 4% in the third quarter of 2016 quarter-on-quarter, mainly due to good performances of the reopened Saigon Centre and the newly launched AEON mall.

Shopping In Hanoi

Hanoi is also regarded as one of the key high-potential retail markets in East Asia and beyond. In CBRE’s “the Liveliness of Retail Markets in Asia-Pacific 2014” report, Hanoi was ranked third after Beijing and Shanghai as the city with the liveliest retail market in the region.

In the second quarter of 2016 total retail stock stood at about 1.2m sq metres, up 4% quarter-on-quarter and 22% year-on-year. The added stock was due to the entry of Thang Long Victory, Thang Long Garden and Victoria Van Phu, which together supplied about 48,000 sq metres.

Some other major retail players who have moved into Hanoi include South Korea’s Lotte Mart and Robinsons department stores under Thailand’s Central Group, as well as Japan’s AEON mall. According to a Savills survey conducted across 15 Hanoi shopping centres and department stores, the average area for fashion accounted for 49% of the total area, followed by food and beverage with 24%. 

Outlook

As a young, growing market Vietnam has been seeing a flurry of activity, with a bevy of new investments in mixed-use developments, luxury apartments, commercial outlets and offices. Meanwhile, regions such as Da Nang and Nha Trang have seen a surge in tourism, especially from China, which will encourage more hotels and resorts. After a cooling period, residential is also picking up, with significant demand coming from the affordable housing sector, especially in Ho Chi Minh City.

More office space is also needed in Ho Chi Minh City as there is still not sufficient stock to meet demand. According to the GSO, over the last decade occupied office space rose by 10% annually, tracking the increase in employment in the financial, insurance and business services of 11% per year. Thus for foreign contractors, there will be no shortage of work going forward. Furthermore, new regulations, which increase minimum legal capital requirements for enterprises operating in real estate from $266,000 to $889,000, will serve as a way to weed out weaker enterprises and help improve the quality of the local real estate industry.