Ho Chi Minh City - Emerging City Market or Bubble Risk?
December 11, 2017 - Ho Chi Minh
Since the introduction of a new law allowing foreigners to effectively own apartments under a 50-year lease, Ho Chi Minh City (HCMC) has seen an influx of overseas investors buying up apartments in new projects across the city. This, in combination with an already buoyant domestic market, has led to a tremendous construction boom. Concerned voices are starting to talk about a bubble forming. That begs the question: Where is the Ho Chi Minh City property market headed?
Vietnam’s economy is on track for another year of over 6.5 percent GDP growth. The manufacturing sector is seeing increasing investment into new factories, particularly from companies relocating from China where labour costs have risen to three times the average wage of Vietnam. Many multi-national corporations are locating or expanding their manufacturing plants in Vietnam. Among them are Samsung, Intel and Taiwanese mobile phone supplier Foxconn. With an estimated expat population of 80,000 foreign nationals across Vietnam and over half of those living and working in the Ho Chi Minh City Metropolitan Area, expats are the primary target market in the high-end and luxury leasing segment. Given that typical HCMC apartment rental rates range from USD500-4,000 per month, depending on size, location and quality of the accommodation, locals would rather choose to buy or rent at a lower price than paying these amounts.
Photo 1. Samsung and Intel Vietnam expanding their production
As of March 2017, South Korea has taken over Singapore to be Vietnam’s biggest foreign investor, with investment totaling USD3.74 billion. Samsung contributed USD2.5 billion with their expansion project of Samsung Display Vietnam in Bac Ninh Province.
Photo 2. DBW Garment Factory, Long An, Vietnam (Awarded First Platinum LEED & LOTUS)
DBW is one of the garment manufacturers that moved their operations from China to Vietnam, where wages can be half of those in China. The project, completed in 2016, is a 15,000 m2 factory and the only LEED Platinum-grad factory in Asia setting new benchmark in environmentally sustainable production.
The property boom is fueled by a rapid opening of the country’s economy by the government following the accession to the WTO in 2007 and a massive inflow of Foreign Direct Investment that led to huge growth across various sectors. But what is more important are the excellent demographics. A young, motivated workforce with a median age of 30.1 years, that is eager to benefit from the opportunities such a boom brings with it, is driving the economy forward. With over 95 million citizens and a population increase of around a million people each year, the outlook remains positive which, in turn, generates a steadily increasing demand for new housing. With an urbanization rate of close to three percent per annum , this demand will be predominantly in urban areas and across all segments. In addition, a fast-growing middle class and an expected doubling of affluent households between 2012 and 2020 will create more capital to be invested in the local property market.
This all sounds positive but, as always, the devil is in the details and we shall examine those further. But first, a close look into the region will help us understand why so many foreign investors are flocking to Vietnam now and what can be learned from historic property trends in other markets.
RISING PRICES, FALLING RENTS – THOSE ARE THE REGION’S PROPERTY TRENDS
“If you are living in one of the financial centers across the region, for instance, Hong Kong, Singapore, Shanghai or Tokyo, prices for high-end and luxurious apartments are touching the unaffordable. If you then consider investing into a buy-to-let apartment then these cities are, in fact, not an attractive choice.”, says Timo Schmidt, Head of Sales at Indochina Properties, the brokerage arm of foreign investment firm Indochina Capital that has been a long-term player in Vietnam’s property market.
Figure 1. Price Comparison of Newly-built Luxurious Housings in Asia
Hong Kong and Singapore are two excellent examples of overheated property markets. Due to their relative political stability, personal safety, importance as key trade and financial centers as well as high quality of life, these are much sought after as the first choice for a residence in Asia. This has led to a flurry of foreign investors from mainland China – primarily in Hong Kong – and, in addition, Malaysian and Indonesian buyers for Singapore in particular. Driven by foreign investors and local speculators alike, the local property markets heated up severely over the past decade and governments have put measures in place to keep prices from spiraling further out of control. Those included, for example, excessive stamp duties and restricted access to lending for more than one property amongst others. Figure 1 shows the price index for comparable luxury properties in several urban centres across Asia. The index is based on Tokyo prices (=100) and shows that Tier 1 cities such as Hong Kong (2.4 times), Taipei (1.7 times), Shanghai and Singapore (1.5 times) are vastly more expensive than homes in Tokyo while the chart also shows that prices for apartments for sale in Ho Chi Minh City are merely a fraction of the cost of purchasing a comparable apartment in Tokyo.
When rental prices in Tier 1 cities did not grow
proportionally with the purchasing prices for property, the rental yields began to slip. Nowadays, most of those key markets do not offer attractive returns from lettings of residential property anymore, ranging from meager 1.5-3% per annum.
Those investors have started looking at emerging market based on the promising developments of secondary Asian key cities such as Bangkok or Kuala Lumpur where investors have seen property values increase dramatically in line with economic and infrastructure development.
Let us look at one of those markets in more detail.
CASE STUDY: BANGKOK – PROPERTY BOOM DESPITE POLITICAL TURMOILS
Bangkok, still years ahead in terms of development compared to Ho Chi Minh City, is an interesting benchmark. Between 2006 and 2016, Thailand and Bangkok have seen a myriad of political problems starting from a military coup in 2006 followed by airport closures, public protests, shootings and bombings intermittent chaos ruled regularly across the city over the past decade. Whilst political instability is a major factor for investment and more importantly so for Foreign Direct Investment (FDI), it is even more astounding that average property prices increased by 60% between 2009-2016 .
Photo 3. Bangkok, Thailand (2016)
“If one examines the luxury segment only, it shows a clear trend. Whilst in 2007-8 there was still a pricing cap for luxury units of around USD4,400-6,500 per square metre with some exceptional – typically branded – residences fetching up to USD9,000 per square metre.”, Schmidt continues. “Having worked in Thailand’s property industry for over half a decade, it is quite easy to spot the trends of Bangkok luxury residences and draw conclusions on what we expect to happen in Ho Chi Minh City over the coming years.” Since then, the typical range for prime residences in the urban in-demand locations such as Phrom Phong, Langsuan or Sathorn-Silom has increased to a minimum price of USD9,000 per square metre. A record-setting transaction in 2015 fetched a square metre price of nearly USD14,000 .
That means, on average the prices in prime locations nearly doubled in the past eight years. High acquisition cost for land in these prime areas is certainly a factor, often accounting for up to 60% of total development cost, according to a CBRE report. However, the reputation of the developer, the quality of the building, the facilities and unit mix as well as the branding of the project are all important aspects to assess the value of a luxury residence and whether a target clientele will find such prices acceptable. The price escalation was certainly driven, in part, by the launch of various hospitality-led ultra-luxury residences offered by renowned brands such as Sukhothai, St. Regis, Ritz-Carlton and Four Seasons as internationally branded residences will typically command a premium on pricing.
Photo 4. St. Regis Bangkok
The scarcity of inner-city land for development combined with the quality assurances that a reputable developer and international consultants promise are key decision-making criteria of prime inner-city projects. Those factors will strictly determine price development in those in-demand locations.
NOW, WHAT ABOUT HO CHI MINH CITY?
As we have already learned, Ho Chi Minh City is a relatively young property market. The majority of existing buildings is at least five to ten years old and therefore cannot compete with new supply that modern buyers favour in terms of quality, design and amenities. Meanwhile, the demand for high quality real estate here is continuing to expand. At the same time, the changing consumer characteristics, such as the creation of single household due to children living independently or divorce, also drive demand for real estate. Whilst a majority of this demand will affect the affordable housing segment there are, by extension, stimulating effects on the mid- and high-end segment for those that upgrade from one tier to the next above.
Photo 4. Ho Chi Minh City, Vietnam
Arguably, one could conclude that in the affordable segment you will likely find a higher percentage of owner-occupiers than in the high-end or luxury segment given that the risk-reward profile of affordable homes may not attract investors on a grand scale.
From a foreign investor’s perspective, one would likely exclude mid-end and affordable homes from the considerations based on the above assumption. That means, our examination will focus on the high-end and luxury segment, the spectrum that has seen the highest amount of foreign purchasers.
Table 2: Market Snapshot, Condominium for sale, HCMC, Q1 2017
Now, examining the supply in the high-end segment, a recent CBRE report states that there will be a total supply of nearly 60,000 completed apartment units by end of 2018. According to the same CBRE research, their agency’s buyer profiles show that between 40-66% of purchasers are buy-to-let investors. If we now estimate conservatively that only 40% of all purchasers in the high-end segment are buy-to-let investors that would mean a total supply of apartments for rent in Ho Chi Minh City of around 24,000 units. Recent statistics from the Labour Department showed that approximately 48,000 foreigners were eligible to work in Ho Chi Minh City and the surrounding provinces, referred to as the metropolitan area of Ho Chi Minh City. Ho Chi Minh City itself recorded a number around 21,000. Considering a reasonable amount of local renters at the lower end of the spectrum between USD500-1,500, that shows a balanced supply-and-demand outlook for the years to come.
The big losers of this are the older buildings that are seeing increasing disadvantages in quality, design and location with more and more upscale residential communities to choose from. However, in districts where the high-end segment is seeing a vast supply, the rental prices might slip across the board and adjust to more reasonable levels which will also affect rental yields for unit owners.
If one compares this to the situation in the luxury segment, matters are much different. According to CBRE total supply of luxury apartments for sale in Ho Chi Minh City, a metropolis of over 10 million inhabitants, is just over 4,000 units, with only 700 units completed. This reflects actual market sentiment from those expats that have high budgets to spend on accommodation and scramble to find high quality housing. This is a serious consideration for overseas investors as one would typically purchase properties that are easier to rent out. If that same property is also showing great prospects for capital appreciation then the equation almost becomes a ‘no-brainer’.
Figure 3: Condominium for sale, Forecast Completion, HCMC
Over the past two years, we have witnessed that overseas buyers purchase mostly properties in CBD areas or close to public transport networks but, more importantly, they prefer to purchase in the luxury segment rather than mid- or high-end market. The reason they cite is usually the past experiences of purchasing an apartment in an emerging property market and having made great gains with it. These investors look at Ho Chi Minh City today and understand that prime property will not be available at fifty percent of the cost in even Bangkok or a fraction of any other developed cities in Asia for much longer.
The Ho Chi Minh City property market remains active, albeit visibly slower than two years earlier but developers are reacting by slowing down launches as well. That will help to further consolidate the competitive mid- and high-end segments. For the remainder of 2017, more luxury projects will be launched that will match the expectations of foreign buyers and attract a higher percentage of overseas investors. Square meter prices in the CBD areas are rapidly increasing from an average of USD4,500 last year closer to USD6,000 and above for 2017 and 2018. Therefore, yield expectations in the luxury segment may also have to be adjusted as higher purchasing cost may not necessarily translate into rising rental rates. However, this will be offset by the exponentially growing property values of CBD apartments as land in city center locations is becoming increasingly difficult to acquire.
INDOCHINA PROPERTIES is the premier real estate brokerage for luxury homes and investment properties in Vietnam. With years of experience in sales of high-end real estate all over Vietnam, we provide you with crucial insights and market knowledge to make your real estate investment in Vietnam a smooth process.
If you are interested in Vietnam real estate investment, please contact Indochina Properties consultants at firstname.lastname@example.org or hotline +84 901 535 550.
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