November 4, 2016

In the first nine months of 2016, foreign direct investments (FDI) into Vietnam increased by 12 percent year on year to US$11 billion.

Just behind South Korea, Singapore is the second-largest investor into Vietnam, with companies from the Lion City accounting for US$1.85 billion or 16 percent of cross border investment. According to Regina Lim from JLL Capital Markets Singapore Advisory & Research team, the trend is not only set to continue but signals good news for the real estate industry.

“After the manufacturing and processing industries, the real estate sector in Vietnam is the second-biggest recipient of foreign investment and in the last two years, Singapore real estate companies have pumped close to US$1 billion in Vietnam,” she explains.

One of the fastest growing countries in Southeast Asia and with about 60 percent of its 90 million-strong population under 35 years old, Vietnam is coming into a demographic golden age.

While the economy is still immature, employment in the manufacturing and services sectors has increased substantially in the last two decades and is expected to continue to rise in the next ten years, boosting income growth.

“Annual disposable income per capita has risen steadily over the past decade at a compound annual growth rate (CAGR) of 11 per cent and we expect incomes and the purchasing power of the Vietnamese consumer to grow,” says Lim

What’s the impact for investors & developers?
Investment into Vietnam’s manufacturing sector has strengthened over the last five years as it has become a lower cost alternative to China with exports growing by an average of 16 percent annually from 2011 to 2016, compared to just 6 percent in China. With inflation declining, deposit and borrowing rates have fallen to 5 percent and 8.5 percent, respectively, this year, allowing for a more stable investment environment.

“As confidence in the Vietnamese economy has grown, interest in property investment has gradually been revived since 2013,” says Lim.

Furthermore, regulatory changes implemented in July last year have made it easier and safer for foreigners to own property, stimulating strong residential sales in 2015 and the first half of 2016, when developers sold 24,000 and 16,800 units, respectively, 250 percent higher than sales in 2011 to 2014.

JLL estimates that Singapore developers have invested S$1.2 billion in property projects in Ho Chi Minh City in the last two years, with the bulk of the investments opportunities focused on residential development.

Mapletree Investments increased its assets under management in Vietnam to over S$1 billion by investing over S$400 million in Kumho Asiana Plaza in July 2016 while CapitaLand has invested over S$400 million in Vietnam this year, including the recent acquisition of a residential development site in District 1 for US$51.9 million – the first by a Singapore developer.

“Vietnam’s residential supply is expected to grow by 74 percent over the next three years but we’re confident the market will be able to absorb the increase,” she says.

“The stock of apartments relative to Ho Chi Minh City’s population is low compared to other South-east Asian cities, even after the units that have been launched have been developed.”

Despite the strong sales volume, premium apartment prices have risen by just 9 percent in the last six quarters. This is in sharp contrast to between 2005 and 2007 when prices rose sharply by 106 percent as foreign capital flow into Vietnam in anticipation of a recovery in the economy and property market. Prices have corrected by 30 percent over the seven years between 2007 and 2014, and as a result, the premium apartment price of US$2,180 per square metre is still 24 percent below the 2007 peak.

Lim expects overall apartment prices to rise by 5-7 percent per annum in the next three years, supported by strong absorption and affordability levels with mid-tier and affordable apartment prices likely to rise by up to 10 percent per annum.

Is the growth sustainable?
‘Ho Chi Minh City apartments are still affordable compared to income levels,” says Lim.

“Based on the top quintile household monthly income of US$1,337, private apartments in the affordable range cost about 3.9 years of income. This is 30 percent lower than the average of 5.7 years among other South-east Asian cities.”

“The developers we have spoken to in Ho Chi Minh City indicated that they were making earnings before interest, taxes, depreciation and amortisation (Ebitda) margins of 25-30 percent on prime and mid-end residential projects,” says Lim.

Acquiring good land plots that have been cleared and have clean title deeds at a reasonable price continues to be challenging in Vietnam, so foreign developers that are new to the market should consider partnering with local groups or joint ventures.

“In June 2015, the government eliminated the 49 percent limit on foreign ownership in many listed companies, a step to spur investment inflows and providing a good opportunity for foreign developers to take on a majority stake in residential projects in partnership with local groups,” Ms Lim says.


Regina Lim

Head of Capital Markets Research, JLL Singapore

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