Vietnam has a population approximately 94.6 million people as of 2016 census. It is a fast modernising nation with a 2017 nominal GDP of US$215.8 billion with projections by Goldman Sachs to double by 2025 to US$436 billion. That is a phenomenal growth rate to achieve that target in 7 years. Vietnam’s economy is driven primarily by agriculture and manufacturing. But we are starting to see growth coming in from the technology sector along with the construction sector due to drive to improve transport infrastructure in the country. The population is young with half of them below the age of 30, the income levels are rising across the board. In short, Vietnam is a country with a central government, a young, hardworking population with increasing income levels and increasing openness to foreign direct investment. Not unlike what China was 20 years ago. And therein lies the opportunity for savvy investors. I will focus on the Capital city of Hanoi in this piece.
The real estate industry is certainly fast growing in Hanoi. Many big developers such as Lotte, Capita Land, Gamuda Land and VinHomes have multiple ongoing projects in the Hanoi metropolitan area. The residential segment is growing quite significantly. To note is that of the 22,000 plus apartments completed in the last year to date, more than 21,000 have been sold. That is a staggering take up rate. However, there is a disparity of take ups depending on the project and the total amount of unsold inventory across Hanoi sits around 20% of completed and upcoming stock. However, taking into consideration of a population of 7.6 million people with only 130,000 plus completed new apartments in Hanoi suggests that there is little evidence of an oversupply. It is also a surprising take up rate given that the mortgage rates are at 10-12% with actual rental yields ranging between 5-7%, most Vietnamese folks buy their properties in cash outright.
However, official statistics state the average Hanoian earns about US$300 per month. Compare that with properties at an average per square metre rate of US$1000 per square metre for apartments outside the CBD to as high as US$4000 within the city centre. That brings the Price to Income Ratio to a staggering 30 or so. Which in economics terms signals massive overvaluation in the property market. Or does it?
It is important to take statistics with a pinch of salt. In many developing countries, there is a lack of transparency and availability of reliable data. In this case, the information on individual incomes is not reliable. Statistically, the average Vietnamese earns less than $US500 per month. But what we have found is that many Vietnamese operates side businesses in addition to their day jobs. And many jobs have some form of variable income which is not captured by data. We then found out that many Vietnamese in white collar middle management jobs earn approximately US$2500 - US$3000. This is the market which the savvy investor has to pay attention to.
It is important for foreign investors to understand the regulations pertaining to the purchase of residential property. Residential property regulations dictate the following with respect to foreigners:
Also, foreigners are subjected to a 50 years leasehold period on the property they have bought. I know what many of you are thinking right now: “What? 50 years only? Won’t my property valuations depreciate according to the period of the lease?” Not necessarily so. Here is the catch: If a foreigner sells the property back to a Vietnamese, the property reverts to a freehold asset. This means that the leasehold rule is there to ensure that foreigners are not allowed to hold onto the property in perpetuity and to make sure ownership reverts eventually back to a Vietnamese citizen. This is not a bad rule when it comes to protecting the land ownership rights of the locals. The question is whether there is enough local demand to absorb the supply.
Very surprisingly, the Hanoi residential market has shown to be very much fundamentally supported. I viewed various completed projects and all of them have shown to have a very high occupancy level. Times City in the Hai Ba Trung district is a very large development of 20+ blocks of 800 apartments each and the occupancy rate is surprisingly high. (See the above pictures with). Fully parked basement for motorcycles and cars lots is another measure of the occupancy rate of the development.
This was the same situation across a few other developments across some of the other residential estates. Importantly, these still had available quotas for foreigners to purchase. This is indicative that the majority of buyers are Vietnamese (including overseas).
However, those were just the affordable to mid-end segment of the residential property sector. What was not covered earlier was the higher end premium to the luxury sector of the residential market with property prices ranging from US$2500 onwards. What was disconcerting for me was that the number of new projects in this segment far outnumbers the mid-tier segments. the average income of Hanoian is still lower than the folks down in Ho Chi Minh City. Naturally, these are questions I have that are yet to be answered on how the properties in the luxury segment are being taken up so quickly.
Hanoi’s skyline is certainly becoming more impressive by the year. It is certainly indicative of a capital city that is fast undergoing transformation and evolution from developing country status. However, challenges still abound for foreign investors. It is doubly important for foreign investors to address the basic principles of Ownership Security, Manageability and Profitability before making the decision to invest into Vietnam.
Head, Research and Projects
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