Long game played in real estate
Vietnam's real estate market continues to be of major interest to foreign investors.
When discussing the most dynamic emerging markets globally, it’s hard to lose sight of Vietnam. Driving its strong economic growth is an expanding middle class with thickening wallets. Rapid urbanization supported by a young, growing and educated population all bode well for an economy with one of the world’s fastest growing GDP rates.
With robust growth momentum, the World Bank has projected that Vietnam’s GDP will expand by 6.8 per cent this year. Understandably, this has fueled the appetites of global investors looking to make their mark in the country’s burgeoning domestic real estate market.
Home to Asia’s best performing stock market in 2017 and the second-largest retail market in 2018, much of the appeal Vietnam currently holds sits, ironically, in its auspicious future. Since 2015, the bulk of big-ticket M&A transactions we’ve seen have been championed by those investing in property development sites, followed by hotels, apartments and offices. This is testament to the fact that those pouring money into Vietnam are in it for the long run.
Over the last three years, foreign investment in Vietnam’s real estate market has been increasing year-on-year. In particular, developers from Singapore, Japan and South Korea have favored development sites in downtown areas and within close proximity to metro stations. Local developers usually enter into joint venture agreements with foreign developers on the premise of optimizing decision-making in site sourcing and project management.
Running alongside the strong demand for commercial sites is a relative shortage of supply, which is especially prevalent in the market for prime retail and office spaces in Ho Chi Minh City and Hanoi. Grade A rents in Ho Chi Minh City have increased from about $35 per sq m per month in the second quarter of 2016 to $43 in the second quarter of 2018, which translates into a healthy 23 per cent growth.
Similar office rental growth has been observed in Hanoi over the past two years. In the office market, the increasing presence of international firms has resulted in developing areas absorbing the overflow of occupants. Progress in office construction, however, has been pleasing, and the second half of 2018 will bring a significant amount of Grade A office supply onto the market.
Another area generating solid demand is the residential sector, and this segment of the market stands to inject further momentum in the economy. To illustrate, the largest IPO this year was that of a luxury residential developer, in which Singapore’s sovereign wealth fund GIC recently acquired a stake. Investors from Singapore, Hong Kong and Taiwan have shown much enthusiasm in the serviced apartment and condominium markets, together representing 75 per cent of total buyers in the buy-to-let market.
As a whole, foreign buyers accounted for 50 per cent of all successful residential deals. What this tells us is that foreign investors are not merely entering Vietnam to set up operations, they are committed to keeping their money here. This could explain the 15 per cent rise in prime residential prices in Ho Chi Minh City over the past two years.
Thanks to government efforts to ease restrictions on foreign holdings in public companies, the future just got brighter. This allows the composition of the economic landscape to diversify and encourages foreign ownership of commercial assets, thereby creating additional demand for real estate and increasing the rate at which Vietnam outpaces its fellow “BB”-rated peers in economic growth.
Given the parallels we can draw between the Vietnamese and Chinese stories, you might begin to speculate how sustainable demand and overall economic activity are. A differentiating factor Vietnam boasts is the relatively equal dispersion of wealth compared to other developing nations. And, to understand why else investors would be inclined to stay in Vietnam, we need to think in reverse. With a government that has publicly expressed the need to improve productivity and lower transaction and logistics costs, businesses are better equipped in attracting investors not only to individual companies and projects but to the wider market.
As concerns about credit tightening and geopolitical uncertainties remain, it’s easy to see why there may be some speed bumps in the short term. But, escalating trade tensions between the US and China have prompted companies to shift production to Southeast Asia in a bid to circumvent levies. Vietnam, which is a major exporter of apparel and electronics, has benefitted from this shift of low-cost manufacturing away from China.
Further, as the 2015 real estate market recovery shows, the occasional market correction is good news in the long run. And, we only need to look at the largest transactions this year for major office, residential and retail sites, all backed by foreign capital, to gauge the fervor foreign investors have in Asia’s rising star.