Everything You Need to Know About Real Estate in HCMC
We sat down with property experts Mauro Gasparotti and Rudolf Hever from Alternaty (Alternaty.com) for a deep exploration of Ho Chi Minh City’s real estate scene.
Do you think Vietnamese people as a whole have a different perception on land value?
Mauro: Yes. Valuation is probably the most important and sensitive subject for Vietnamese. I think the true definition of value, which is what a willing buyer and seller would pay for is not applicable. It’s more of what the people are asking for next door.
The other thing that affects the value is the process of the acquisition of land, the years of pain of getting the land from a certain status to a much more sellable status. From a valuation point of view, foreigners don’t consider this when they come in. You could spend years on relationships and a lot of money to get this land, so there is a mismatch to what a normal developed country would perceive as value and what the Vietnamese think of it. Vietnamese want to get paid for this process, and that’s why a lot of development comes at such a high prices, because this would make the project feasible.
The Vietnamese also put a future value into the asking price. They put what the value will be in 5-10 years time, they try to put the growth of the country as a factor. It’s a long exercise to understand value from both sides. For Vietnamese it’s what has been the history they needed to go through to get to this point where they can sell the land; for foreigners it’s what the price is that would make their project feasible on this land.
There’s no transparency. That’s why the big guys like Vincom who get the land easier can also move the process along faster than the single developer who has spent 10 years trying to get the approval and now he wants to get paid for this 10 years.
Photo by Pullman Saigon Centre
Is there in your experience any other country that is similar to Vietnam in the market’s disregard to value?
Mauro: Myanmar. We have been asked to open an office there. I clearly saw the dynamic of the market when I was there. Nobody can tell the real value of the land, everybody is relying on the future value it, as well as how easy it is to build on it, how clean it is - also a lot of corruption in the back. That’s when you see speculation, you see a bubble, you see overpriced land, and not many transactions. And now you see an oversupply in the hotel business; two years ago there was an undersupply. Vietnam is past this stage now and much better than before.
Cambodia is different. It’s easier to get the land process approval. You know exactly how much it will cost you, so Cambodia is an easier market to do business with, and they rely on foreign business as well.
Is the average land value in the primary streets in HCMC overvalued?
Mauro: Yes, but if you asked me this question five years ago I would have said yes as well, and now the value is 30% more, so I was wrong then. I could be wrong now. The reality is that if I run a cash flow model on any commercial property, and I pick US$20,000 per square metre of land, there’s no way I’ll recover from that.
However, because of this barrier of entry, it will always keep your commercial property high in terminal value. If you look at the hotel business for example they badly need 3 and 4 star international branding. But then you look at the land price and it’s not very feasible to pay US$20,000 per sq m if your room rate is US$70.
But you're more likely to sell your end product for a premium. So you pass this high price on this land to the high price on your building. The whole system works somehow on this high land value, high barrier of entry in District 1, and then high value on the completed building. So somehow, I am sure, there are certain projects that are actually feasible.
Then you go outside a bit of District 1 - District 3, near the airport - the land price drops a lot, but still pretty high, but it’s feasible. Noise is another story [laughs].
Photo by Tri Nguyen
Do you think this system is sustainable?
Rudolf: I look at it in a more optimistic way. It is what it is, but it is changing, the market is developing, there are more laws being passed encouraging foreign investment, and you can see this in the statistics of FDI [Foreign Direct Investment]. I think over time, in terms of the big picture, we are an emerging marketing. We are going the right way, although it’s a rollercoaster, but over the long term it’s getting more developed and transparent.
FDI is increasing? By how much?
Rudolf: I don’t know off hand but real estate is usually the second or third largest recipient after manufacturing. Real estate is one of the major benefactors of FDI.
How important is the real estate market for the Vietnamese economy?
Mauro: [Pause] I think it’s crucial, I think [the Vietnamese] look at it closely as an indication of how strong the economy is itself. They are very attached to the land as core value, and I think it’s a good way to move the money out of the stock market, which seems very risky at the moment.
A lot of the big guys I mentioned before will change the dynamic of the market, whether there is a huge bubble of oversupply I cannot answer now but the belief is that they are building because there is demand and they believe people will invest. I think this is sustainable at a level that the bank will need to come in with more support. The market is a long way from being developed but it’s good news that we’re talking about something that can always improve and get better.
If you see the whole District 2 it’s a beautiful example of a new satellite city. So there is a lot of good news out there, I wouldn’t be too worried. And being here for eight years I passed two big bubbles: 2008-2009, and then 2011-2012, so I am very realistic about the market, but I see a lot more educated buyers and developers now.
Photo by Huy Nguyen
Is local financing still too weak to support real estate development?
Mauro: I think yes, I think there are banks that rush into something when they are asked, and then they step out as quick as they rush in. There is really no long term strategy for the bank itself, and they only support a certain level of buyer, which is the mid- to high-end buyer that has easier access to the bank, while the people that really need it, it’s much more difficult for them.
We were doing a project in Cambodia one year ago, a satellite city with a townhouse. We were amazed to see the amount of support the low-income buyers got from the banks to buy these low-cost townhouses. There was a whole structure of payment set up according to the salary the people had and there was a lot of cooperation from the developers and banks coming together to help this structure. I don’t think Vietnam is there yet. I think it’s more based on the personal relationship between the buyer and his bank, than a sustainable, clear structure. As a foreigner living in Vietnam, or as a foreign company, it’s not an easy structure - so there’s a lot of improvement to be done at that level.
Rudolf: I think we all know that bank financing and debt financing is a big mystery to most people in Vietnam, and very few have access to it. But on the level that there is access, I don’t think there is a shortage, just simply looking at the amount of activity going on in HCMC and Phu Quoc. But as Mauro said, once we go down to the middle tier and lower tier enterprises, then it’s quite difficult. There are also sources of financing overseas. A few big players like Vincom and Novaland are using offshore bonds. Then you have other groups Singapore’s CapitalLand, who obviously get funding from Singapore from the head office. And then you have groups such as SonKim Land, who are mid tier developers who are locally based, but who are partnering with foreign investors who then bring cash either at the corporate or project level, which can be private equity or listed funds.
The government recently issued new regulation that facilitates the purchase of property for foreign residents. Can you tell me more about that?
Rudolf: I think there is growing interest from offshore to invest in Vietnam. But in reality the number of actual groups and projects that are viable and are able to handle a foreign partner are very small.
Photo by Tri Nguyen
Legally speaking is that easy for them to do?
Rudolf: In terms of individual buyers, there are less restrictions. There is interest, people are definitely curious about Vietnam. You see more articles on Bloomberg, Newswire, these big news outlets, are now running good stories about Vietnam. But it’s still not an easy decision making process to commit to buying. Over time it will get easier, and the laws have improved dramatically, but there are still grey areas in terms of exactly what you can and cannot do and the mechanics of a purchase and sell. But we’ve come such a long way, and there will be more interest. You will see more and more developers going overseas with a broker to sell property. You see a lot of properties in Thailand, Australia and U.S. sold offshore. Vietnam is now getting into that group. It’s still seen as an emerging, a more risky case, but I think it’s an incredibly huge market to get into.
Mauro: If you buy property here and rent it, it’s actually a decent yield compared to other countries. With some properties you get 7-9% return on your initial investment, which is pretty attractive for people. But the problem is how do I get my money out of the country. The foreign buyers are those who are familiar with the country. It’s not just overseas people who put the money in, there is usually a wife, girlfriend or whatever who is familiar with the country. Thailand has a proven track record of enter and exit. Foreigners are more keen and safe there. Vietnam has just opened to foreigners, so I think there will be a couple of rounds of track records to be proven to the market, and I think this will be seen over the next couple of years as some properties are developed, such as Estella Heights.
In terms of the number of projects, there is no match. I think there are more projects in Ko Samui than in the whole of Vietnam. So that’s just in terms of volume. I think Vietnam has a lot of room for what Phuket and Bali have a lot of - these villas, second home projects that are decently built. Usually [in Vietnam] it’s either a US$1 million beachfront property or the township project with no real design. Vietnam needs a mid-type of prical structure with a managemental top, not much branded management, just something nice enough to show that there is value here. This is missing in Vietnam.
Which real estate sector suffers the most in HCMC today?
Mauro: To me it’s malls. This sector is still not truly developed. The demand is not there on the Vietnamese side. The mixed tenants are not there. Usually there is the same type of tenants. You don’t see what you get in Thailand: where people can spend all day at a mall, where there is a large variety of shops and a large food court, with everything from low-priced items to the branded level. I don’t think malls in Vietnam are a sound market yet - land is too expensive for the amount of land retail needs. Considering the land price you need to go high-rise to make your money. I think the only mall that has proven to be nice is AEON Mall. I think that was a good shot. But it took a long time to be executed.
Malls are popping up everywhere. Is there an oversupply?
Mauro: I don’t think there is an oversupply, I think there is a lack of demand and even the right design. There is no mall where I want to spend more than two hours at, as opposed to in Thailand. In Vietnam the feeling of a mall is still just a box where you can buy something and get out. There is a lot of room for further development, even open malls where it’s outside and there’s bars and clubs and something where you make the whole place more than just a shopping location. I think retail, and more specifically the malls sector, is the most difficult to make work, but there is a lot of potential.
I think office passed its bad period. I think it’s doing well and will do well. Residential - that’s where there might be a problem. Residential is still being supported by sales. But that’s a market where you want to keep selling and moving. That’s the riskiest market at the moment. People don’t know if it can be a huge success or disaster in the next two years. Apartments for rent need to be much more developed, a nice rental structure, where developers actually help the tenants rent the space for a decent price, and decent management. The rental market is actually very small. There is a lot of room for improvement here.
Hotels - I think there is a big need for 3 and 4 star hotels, mixed-use hotels, limited service hotels. I think these have the most potential in the non 5 star area; 5 star hotels we have all the property we will need to have for the next three years, that’s it.
What is your opinion on Vincom’s Landmark 81 project?
Mauro: I saw the pictures as everybody else. I think there is a need for Landmark 81. Did you see Bitexco? Again, from a feasibility standpoint it’s not a good return on investment, but it does give somehow a stronger character to the whole city. So I think this is something we should give it credit for. Vincom is different, because they are able to get the money on everything surrounding the Landmark 81 development. That’s the strategy: they’re going to spend money on something that’s not making any money itself, but this value is then going to be passed to every surrounding development they are going to have. I like the area, I think there is a lot of potential. There are a lot of critics on Vincom’s design and choices, but there is respect for them in that they actually deliver.
For a land lease for foreign companies, you are given 50 years. What happens after 50 years?
Rudolf: There are a few different issues. First of all, let’s go down to the other side, which is a developer selling projects to individual investors. There’s new rules and regulations, so yes, a foreigner can buy, but as an individual buyer foreigners can lease only 50-70 years renewable for a freehold area, but the renewable part is the grey area. In terms of talking about a development project, a local or foreign joint venture company can build the project; it just depends on the actual land and area, if its leasehold or freehold. But even a foreign developer, or a joint venture partner with local participation, can buy and sell for freehold some projects. For example a typical case is SonKim Land for The Nassim project. SonKim Land is local, but they joint ventured this with Hongkong Land. It’s freehold for locals, but foreigners can only buy it with a 50 year lease. Same thing with Estella. It’s actually now a 100% foreign-developed project but they can still sell as freehold.
Mauro: It’s funny because as a foreigner you buy leasehold, but if you sell to locals it converts to freehold. This structure makes the whole system open to hope that you never really lose the value even if you are foreign investor. So within 50 years you have a likely chance to sell it.
Imagine the prime minister of Vietnam approaches you and asks you to give three actions to take in order to boost the real estate market?
Rudolf: One is continue along the transparency route. Transparency is a key and risk factor for foreign investors. It has improved over five years but it still has a ways to improve to encourage development.
Mauro: I still think education for the real estate players is important. So my suggestion would be start to really work with developers, architects, PMs, everybody around real estate to educate them what the future of Vietnam is set to be and get everybody on the same page. Once you get a developer who knows what they are doing the project get smoother and the structure is better for the long-term value for the country. Same with architects, get them to a more professional level.
Education goes from the normal public structure all the way to certificates the government requires for the real estate professionals. 70% of the brokers selling homes are random people that are requested to call other people to try and sell it. This to me is wrong because there is a lack of information, a lot of confusion.
More regulation, more help and support. Having people run real estate as a profession. I’m not sure what are the requirements now for an architect to be considered a professional. If you see them make a mistake, you would withdraw the license that they have. A lot of Vietnamese developers - and I won’t mention any names... if you go to Nha Trang, there are a lot of structures that are dangerous in the way they are structured. A lot of property management companies have no real regulations in the way the work needs to be performed, just financial regulation to what they can charge to the developer. Yes there is a certificate to be a broker, but it’s just an easy month course. All of this is missing from the country. The fact that the professionals here are not guided to maintain a certain level of professionalism.
The other suggestion would be for local authorities to work much more with developers. There is a lack of international flights to Phu Quoc, one of the reasons is that local authorities and developers are not sitting down to develop the destination in the right way. Hotels don’t have a small marketing fund to promote destinations. I think if this coordination between local authorities and private investors was there, it would benefit everybody. Danang was able to be seen as an international destination within three to four years of development, because a lot of international brand hotels came on board, and because local authorities were much more open to foreign investors and players. I’m still surprised we receive the Danang newsletter from local authorities every two months. This to me is a huge step ahead. They understand what foreigners need, they listen to them, work with them on promoting the destination. I think this will give a lot of value to Phu Quoc, Mui Ne, Ho Tram, Nha Trang, all the destination that need more coordination. They should sit down with investors and consultants and make a master plan not just from the land value point of view but a 20 year planning for the whole city.
Photo by Tri Nguyen
Do you think it’s a bit naive to think that the Vietnamese can change to work for the benefit of the group?
Mauro: It’s a big step forward. But Danang did it, and it’s a good example of how it can be done.
Would you recommend a foreign friend to buy now in Vietnam?
Mauro: I would recommend to buy. Not everything. To me the right land is not the prime land, it’s the right development, the right spot that can be developed well, if the design is right, if many other things are right. It’s not just about having the prime land, but the land that makes the most sense. For the residential, yes - we bought a unit at Estella. I will buy some Novaland property. There are some products that have opportunities, but not which many people look at because of land prices.
Rudolf: Both of us have been here eight years. I myself would have never thought of buying anything until six months ago because of the future and pricing, but everything now converged to make sense. This time around there seems to be more real demand, I think the years of 2012-2015, where we worked through all the excess and the foundations again, gave me confidence that we went through that period of consolidation and that now we have much more solid footing. And now the economy - I follow it quite closely and all the indicators are looking positive; FDI, interest rates, foreign trade, everything is looking quite solid. Last quarter we had a little bit of a down, but everything for last 2 years has been building solidly. All our regional peers are suffering. So Singapore, Hong Kong, Thailand, Malaysia - usually they’re always looking good and Vietnam is the black sheep. Now it’s actually the reverse.
Photo by David Sawyer
Many economical factors are looking very bleak on a global scale. Is the Vietnamese economy dependant on these factors?
Rudolf: Yes and no. But I always look at myself, why I am based in Asia and why I am based in Vietnam. Because globally it can be a good place to be. Putting all the factors together, in the next 5-10 years Asia, specifically Southeast Asia and Vietnam, is a good place in terms of balance.
So you don’t think we’re in a real estate bubble now?
Rudolf: Globally it’s been risky for the past five years. But if you keep saying there is a crisis every day, in five years you’re going to be right at some point. There are always cycles, but I think the gloom and doom scenario is possible but highly unlikely.
Mauro: I don’t see a bubble like I saw a few years ago. I don’t see that scary situation where you say, oh my god, if that bank or whoever stops doing this, everything will collapse. I’ve seen much more growth from private investors. There are probably two sectors where you may say there is a lot of supply coming but demand is uncertain: one is residential, which is what probably everybody is looking at. I receive a message every day that somebody is building a condo somewhere in HCMC, so that’s probably the part that is most scary. The second home market is the other. Some planned projects are fine. But a lot of not well-planned products we will see selling only 15-20% at launch, and that’s it. This is the scary situation where there is no buyer.