Upbeat about Vietnam's residential property market

IN the first nine months of 2016, foreign direct investments (FDI) disbursed into Vietnam increased by 12 per cent year on year to US$11 billion. Singapore is the second-largest investor after South Korea. Singapore companies accounted for US$1.85 billion or 16 per cent of disbursed FDI. Over the last four years, Singapore's investment into Vietnam has increased from US$1 billion in 2012.

After the manufacturing and processing industries, the real estate sector is the second-biggest recipient of foreign investments. In the last two years, Singapore real estate companies have invested close to US$1 billion in Vietnam.

Vietnam is one of the fastest growing countries in South-east Asia. In the first half of 2016, Vietnam's gross domestic product (GDP) grew by 5.5 per cent and is expected to grow 6-6.5 per cent in 2016 to 2020. The young and educated population is a key driver of this growth. The World Bank expects Vietnam's urban population to grow by 2.4 per cent per annum until 2025, the highest in South-east Asia.

Over the next two decades, Vietnam will be in a demographic golden age. About 60 per cent of its 90 million-strong population is under 35 years old. Twenty-five per cent of the population is aged between 10 and 24; the median age is around 30. According to the Brookings Institute, Vietnam has the fastest growing middle-class in South-east Asia - 18 per cent per annum over the period 2016 to 2020, accelerating from 15 per cent per annum in 2005 to 2015.

Vietnam's economy is still immature, with about 47 per cent of employed people still working in the agriculture, fishery and mining sectors, compared to 28 per cent in South-east Asia. Employment in the manufacturing and services sectors has increased substantially in the last two decades. Employment in the services sector in Vietnam has increased from 19 per cent of the workforce in 1996 to 32 per cent of the workforce in 2016. We expect this to continue to rise in the next 10 years, boosting income growth. As the country spends over 6 per cent of its GDP on education, the workforce is skilled. 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.

Why is FDI rising?

JLL believes that investment into Vietnam has been strong in the manufacturing sector as it became a lower cost alternative to China in the last five years. Vietnam's exports grew by 16 per cent annually on average from 2011 to 2016, compared to just 6 per cent for China. Furthermore, as exports grew and the trade deficit narrowed after 2011, the Vietnamese dong stabilised at US$21,000 for an extended period. Inflation declined from 9 per cent in 2012 to an estimated 1.4 per cent in 2016, allowing deposit and borrowing rates to fall to 5 per cent and 8.5 per cent, respectively, in 2016. These stable conditions make investments more palatable.

Developers are buying more land in the last two years as residential sales have doubled from 2014 levels.

As confidence in the Vietnam economy grew, interest in property investment was revived gradually from 2013. Furthermore, in November 2014, regulatory changes were made to allow foreigners to buy up to 30 per cent of any single condominium building or a maximum of 250 houses in any one administrative ward. This was implemented in July 2015. Foreigners will be able to own the property for 50 years and enjoy the same rights to lease, transfer or sell the property. Foreigners may extend their home ownership after 50 years, subject to approval.

These changes stimulated strong residential sales in 2015 and the first half of 2016, when developers sold 24,000 and 16,800 units, respectively, 250 per cent higher than sales in 2011 to 2014. In 2011 to 2014, premium and luxury apartments made up just 10 per cent of apartment sales, but in 2015 and the first half of 2016, they made up 27 per cent and 44 per cent of apartment sales, respectively.

We estimate 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 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 this year. Its first phase in the 4.4 hectare (ha) Saigon South Place project, a mall named SC Vivocity, was opened in September 2015. The site was bought for S$500 million in 2008.

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) which will be launched on Oct 21. It is also looking to buy more assets over the next 18 months.

While Vietnam's residential supply is expected to grow by 74 per cent over the next three years, JLL thinks the market will be able to absorb the increase. 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.

The government is seeking ways to encourage developers to undertake more affordable housing projects to meet the housing needs of the city. However, the supply of premium and luxury apartments seems to be high, especially after the supply in the pipeline is exhausted. JLL estimates that Ho Chi Minh City could have close to three prime apartments per 1,000 people, close to the average in Bangkok, Kuala Lumpur and Manila, but higher than Jakarta.

Despite the strong sales volume in 2015 and the first half of 2016, premium apartment prices have risen by just 9 per cent in the last six quarters. This is a sharp contrast to 2005 to 2007, when prices rose sharply by 106 per cent when strong foreign capital flowed into Vietnam in anticipation of a strong recovery in the economy and the property market. Prices have corrected by 30 per cent over seven years in 2007-2014. Thus, the premium apartment price of US$2,180 per square metre is still 24 per cent below the 2007 peak.

JLL expects overall apartment prices to rise by 5-7 per cent per annum in the next three years, supported by strong absorption and affordability levels. Mid-tier and affordable apartment prices could rise by up to 10 per cent per annum.

Is growth in Vietnam's residential market sustainable?

JLL believes that Ho Chi Minh City apartments are still affordable compared to income levels. 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 per cent lower than the average of 5.7 years among other South-east Asian cities. This is because prices in other South-east Asian cities rose in the last five years while prices in Vietnam fell.

Even if prices rose 30 per cent over the next three years, it is likely that the home price to income ratio would be stable. Incomes have been rising at around 11 per cent annually in the last few years. In the last five years, home prices in Ho Chi Minh City have declined amid income growth, taking the home price to income ratio from 7.6 years in 2010 to 3.9 years in 2015.

Developers JLL spoke to in Ho Chi Minh City indicated that they were making earnings before interest, taxes, depreciation and amortisation (Ebitda) margins of 25-30 per cent on prime and mid-end residential projects.

Foreign developers that are new to the market should consider partnering local groups or joint ventures. Acquiring good land plots that have been cleared and have clean title deeds at a reasonable price continues to be challenging in Vietnam, as with many other South-east Asian cities. In June 2015, the government eliminated the 49 per cent limit on foreign ownership in many listed companies, a step to spur investment inflows.

This provides an opportunity for foreign developers to take on a majority stake in residential projects in partnership with local groups.