Story :             Pattamaporn Kittipanachol
...................................................................

A visit late in 2007 to northern Vietnam reveals a country with promising property market prospects that is tempered by weighty challenges.

The growth of foreign direct investments (FDI) in Vietnam over the past two years has escalated exponentially with its entry into the World Trade Organization (WTO) on January 11, 2007.  Recent changes in expatriate landholding laws regarding ownership and extension of property leaseholds to 70 years, along with loosened of capital and property purchase controls in the face of longstanding urban property shortages, resulted in a resurgent real estate boom

.

Macroeconomic Overview
“Vietnam Investment Policy Review” by United Nations Conference on Trade and Development (UNCTAD) revealed that in 2006, foreign-invested enterprises produced 13% of Gross Domestic Product (GDP), almost 40% of industrial output and 60% of exports. The Government Statistics Office (GSO) announced that Vietnam’s 8.48% GDP growth in 2007 was only surpassed in Asia by China, and is targeted to expand 9% this year.

Since 2000, Vietnam’s impressive 6 - 8% annual economic growth rates witnessed annual inflation jump from -0.6% to 8.3% by 2007. Removing petrol subsidies after joining the WTO contributed to prices of food and essentials rising 15%, while construction material like steel and cement prices reached record highs. In December 2007, the government announced annual inflation of 12.7% and the trade deficit doubling from 2006 levels to US$12.4 billion.

Three-fifths the size of Thailand, at 331,688 sq km, Vietnam’s pristine forested mountains covering 40% of the country parallels its world leading agricultural and commodities exports harvested from land and sea. Vietnam’s young (averaging 26 years old) highly literate and motivated workforce with high consumption patterns attracts investors.

Causes of the Property Boom
Over the past two years, financial markets have grown led by a frothy stock market, creating new pockets of wealth. The bulk of stock profits, along with cash remittances from overseas Vietnamese, have been channeled into purchasing limited prime real estate in major cities for both speculative and non-speculative investments. Moreover, the “Law of Residence,” lifting prohibitions against domestic migrants purchasing property in major cities like Hanoi and Ho Chi Minh City widened the pool of eligible local buyers, further boosting property prices.

Compared to Thailand’s 65 million population, Vietnam’s 84 million people are densely packed on only 20% of the land. United Nations Population Fund (UNFPA) 2007 analysis, “Unleashing the Potential of Urban Growth” indicated that 27% of the population live in urban areas and will increase to 45% (~46 million people) by 2020 primarily through internal migration. Over the same period, tourists are estimated to jump from 4 million to 23 million.

In 2007, Nguyen Manh Ha, head of the Ministry of Construction’s Housing Management Department disclosed that by 2020, Vietnam’s urban land use is expected to quadruple to 460,000 hectares in tandem with estimated housing demand growth of 35 million square metres per year and predicts that US$8 – 10 billion annually from total FDI between 2006 – 2010 will be diverted into real estate.

Presently, many older urban buildings are structurally unsound and need to be rebuilt yet relocation is impossible without new structures to absorb displaced population. Uneven sewage and water supply quality contributes to districts with decent systems being priced at a premium.

To correct the demand-supply imbalance, the government has released new regulations inviting foreign property developers to escalate urban development whilst attempting to curb speculation through higher capital gains taxes on property and stocks.

Decree 84 ‘Progressive Land Reform’ (May 2007)

This is a fundamental property policy reform that is the first real step in igniting the development of this sector.
·Expatriates and foreign developers permitted long-term leasehold of land for 70 years (up from 50 years) with free and indefinite renewable agreements, puts them virtually on par with the Vietnamese. Thailand’s leasehold for foreign investors is 30 years with maybe one or two 30-year extensions.
·Delineate cases where the Government will clear land to expedite land transfer to investors/developers and increase the stock of land in the market.
·Foreign developers can bid for land at government auctions.
·Foreign investors CANNOT:
- borrow money in Vietnam to purchase leasehold (100% cash purchases only)
- bequeath leasehold
- borrow against asset (use leasehold as collateral)
- sublet because purchases are for solely for owner occupation/use
·All foreign entities are entitled to all real estate transactions only after residing in Vietnam for 3 months.

Although there are fears of new harsh laws which nipped the budding property market several years ago, it is hoped that the authorities will be more measured.

Measures to Curb Speculation
Concerns by the authorities on the sustainability of the high growth rates in the years ahead have resulted in high capitals gains taxes. 
·Transfer tax - 2%
·VAT - 10% (payable on property purchase)
·Corporate Income Tax - 28%
Taxes effective from January 2009
·Capital Gains Tax - Since most transactions are cash based, authorities may not be able to capture the actual gains.
            - 28% of corporate profit
            - 25% of individual’s profits.
·Personal Income Tax – sellers residing outside Vietnam are levied an additional 25% personal tax on generated income
Stock market speculators will be levied a 20% tax on investment earnings.

Property developers are prohibited from raising capital by pre-selling projects until the foundation is completed. The law, issued in 2006, was only recently strictly enforced and has pushed up the cost of investments.

Reuters, CB Richard Ellis (Vietnam), both Nov 2007, Thanh Nien Daily, December 2007

To capture Vietnam’s economy and growth potential, the World Economic Forum’s comprehensive competitive index is revealing.

The WEF ranked the top problems in doing business in Vietnam as: corruption, inadequate supply of infrastructure, inadequately educated workforce [tertiary education], inefficient government bureaucracy, access to financing, poor work ethics in national labour force, policy instability, tax regulations and tax rates.

Infrastructure
At first glance, 210,000 km road system, 2,600 km of single-track railroad lines, three international and 16 domestic airports, and 11 major sea ports seems adequate but they all need considerable upgrading to support tourism, economic and industrial development. Few multi-lane highways link cities and towns and strictly enforced low speed limits can be crippling. Hanoi to picturesque Ha Long Bay 180 km away is a three-hour drive predominantly along a two-lane road despite passing through the famous coal-exporting town of Quang Ninh.

Poor infrastructure has artificially propped up property prices. In Hanoi, which is at sea-level, more than 100,000 people endure annual high floods by living outside 14-foot dykes because property within protected walls is three times higher.

Fortunately, authorities have announced plans for three monorail lines and six subway routes linking Ho Chi Minh City to neighbouring towns and provinces. Hanoi is preparing for a subway route through the capital’s main districts and a network from Noi Bai international airport to neighbouring Ha Tay province. Both cities’ systems are expected to be completed by 2020. This move should help establish satellite towns to redistribute the population more evenly and provide a blue print for property developers.

Ho Chi Minh City ranked top for investments and development prospects
PricewaterhouseCoopers LLP and the Urban Land Institute’s second annual survey “Emerging Trends in Real Estate(R) Asia Pacific 2008” polling more than 190 top professionals in 20 cities rated Ho Chi Minh City their top choice in the “strong development markets” category in terms of hotel, office and retail sectors, industrial or distribution sectors and apartment rentals, besting regional contenders like Mumbai, Bangalore, Shanghai, Guangzhou and New Delhi.

Almost every category is hitting its peak occupancy capacity. For example, prime office rates in Ho Chi Minh City for instance showed 0 - 1% vacancy rates over consecutive quarters, while hotel occupancies vary between 70 -80% throughout the year. With the flurry of new buildings and infrastructure, construction companies are also secondary beneficiaries. Although authorities revealed plans to re-zone the city by 2020, it is seemingly at odds with the volume of construction projects in the city centre.

2020 Ho Chi Minh City Development Plan
·Current city centre Districts 1 and 3 will be designated a historical, administrative and cultural centre
·Commercial hubs will be relocated to Districts 5, 10, and Binh Thanh. Besides other centers in the city’s gateway, South Saigon and Districts 9, 12 and Binh Chanh will be urbanized
·New economic and residential zones will be outlying districts of Thu Duc, Nha Be, Binh Chanh, Can Gio, Hoc Mon, and Cu Chi

Source: Thanh Nien Daily, 27 December, 2007

Ho Chi Minh City’s renowned population density and role as the country’s commercial centre is matched by the proliferation of skyscrapers. Districts 1 and 3, two main commercial areas, already have 150 buildings built or currently under construction. In November 2007, Marc Townsend, Managing Director of CB Richard Ellis (Vietnam), predicts the supply of “international quality” office space more than doubling from 320,000 sqm to 800,000 sqm over the next three to five years. The government has promised the city US$10 billion to manage traffic and infrastructural development over the next five years.

Presently, twenty “golden land lots,” many of these housing slums, are slated for clearing and conversion into high density mixed use as commercial, retail and luxury residential buildings, up to 65 stories high. Prices are steep. A recent bid in District 1 for a 1.3 hectare plot by a four-partner consortium ended at VND10.5 trillion (US$654.4 million).

Hanoi’s neighbours benefit from property boom
With Hanoi’s property limits being breached, surrounding provinces have experienced growth in their residential property markets. Ha Tay, Bac Ninh and Vinh Phuc provinces are increasingly favoured by the wealthy for its fresh air and spacious villas, or by those escaping Hanoi’s high property prices. All three provinces are within 30 km from the capital. Ha Tay’s residential zones, for instance, are priced attractively at VND16 – 22 million per sqm for land including infrastructure. Vinh Phuc has 33 residential estates and tourist accommodation zones have planned covering more than 2,000 hectares. Nonetheless, developers are advised to build much needed schools, hospitals and shopping areas to attract a sizable population.

Revised Official Hanoi and Ho Chi Minh City Real Estate Prices
(Prices per sqm, as of 1 January, 2008)

Land prices are revised annually to assess land taxes, land transaction fees and determine compensation for residents living in areas to be cleared. Both cities revealed similar price increases, ranging from 10 - 50%. Exchange rate used, US$1 = VND 16,000.

Hanoi
·Residential downtown – rose to VND67.5 million (US$4,200) from VND45 million (US$2,800)
·Residential countryside – VND120,000 - 2.25 million (US$8 - 141)
·Non-agricultural land – VND987,000 - 30 million (US$60 – 1,900)
·Farmland – maximum of VND252,000 (US$16)

Ho Chi Minh City
·Downtown values rocketed to VND67.5 million (US$4,200), up from VND43 million (US$2,700)
·Suburbs increased 10%, while city non-prime areas are 20 - 30% higher
·Non-farming, manufacturing land – cap of VND47.8 million (US$3,000)
·Farmland - maximum VND158,000 (US$10)

Market prices have risen ahead of government price hikes. VietnamNet Bridge reports that “land in the centre of Hanoi, including the areas of Hang Bong, Hang Ngang and Hang Dao streets is trading at
VND120-150mil/sqm ($7,500-9,375).”

Sources: VietnamNet Bridge and Thanh Nien Daily, December 2007

New law permitting Foreigners to purchase houses
Six categories for foreigners qualified to purchase houses (not condominiums) on a trial basis for a few years in Hanoi and Ho Chi Minh City for 70 years:

Criteria for Foreigners to Purchase Houses

Basic requirements:
·Lived in Vietnam for at least one year
·Buy for own or family’s residence only
·Sell the house one year after receiving the ownership certificate
·Foreigners can only own one house – can only receive monetary value of gifted or inherited houses
·If title not renewed after 70 years – house has to be gifted or sold

Six Categories: 
 1. Foreigners with direct investments in Vietnam 
 2. People who have contributed to Vietnam and are honored by ministries or higher-ranked agencies
 3. Cultural and scientific experts
 4. Spouses of Vietnamese citizens living in Vietnam
 5. Honorary citizens
 6. Foreign-invested enterprises not operating in the property sector – can buy one or two houses for their employees

Source: Thanh Nien Daily, December, 2007

Authorities plan to rollout this plan nationwide if the trial period is smooth. This may be a short-term boon for a country hoping to attract foreign investments. In August 2007, the authorities estimated that of approximately 81,000 registered expatriates living in Vietnam, only 20,000 are eligible buyers. Nonetheless, it is unclear how the relatively lower-income local population will fare against considerably wealthier foreign home-buyers in the long run. 

Rick Mayo-Smith, a founder of Indochina Capital, predicted in the Thanh Nien Daily that more than 15,000 high-end housing units will enter the market annually for the next five years. Therefore, residential estate developers, more so than for tourism or commercial developers may want to examine the needs of a wider swath of the population, rather than just targeting high-end customers.

Mercer Human Resource Consulting Cost-of-Living Survey Rankings

Year                Bangkok                Ho Chi Minh City  Hanoi
2005                125                  56                    50
2006                127                  37                    32
2007                95                    60                    56

Note: Over 140 countries surveyed annually.

“The exchange rate fluctuation, particularly the weakening US dollar and strengthening Euro [and Thai baht] we observed in 2007 has resulted in a number of European cities moving significantly up the ranking this year. That’s the main reason why Vietnam cities have moved down in the ranking.” – Jennifer Su, Mercer (Switzerland) SA

Currently, Vietnam’s average per capita income currently lags behind Thailand, but the gap will narrow spurred by demand for higher wages against rising inflation. With Vietnam’s historically high cost of living above its peers is a factor worth careful consideration for those who plan to retire in Vietnam.

Potential Areas of Investment
There is plenty of untapped wealth for long-term, cash-rich foreign investors. Besides urban property developments, the 3,260 km long coastline has immense potential to be prime beach resorts and maritime hubs for landlocked Laos and Southern China, while mountainous regions populated by minority groups await development for cultural and eco-tourism purposes.

Among foreign developers making incursions into Vietnam, the biggest regional players are Korean, Japanese, Taiwanese and Singaporean developers that target industrial, commercial, and residential markets at all income levels. Domestic developers have strengthened so that they are beginning to target the lucrative high-end segment.

Thai Developers in Vietnam
Thai developers have begun to trickle into Vietnam. Amata Industrial Estates, one of Thailand’s biggest industrial estate developers, operates the 1,353 hectare Amata City Bien Hoa Vietnam, of which 700 hectares have been developed over the past 12 years. PrinVentures, a Prinsiri and Univentures joint venture, will partner Amata in a THB 1 billion residential project. Unlike Thailand where industrial estates are freehold for foreign companies, foreign investors in Vietnam do not own the land, though this may change in the future.

Vietnamese authorities opened up bids to domestic and foreign developers to boost property development in Ho Chi Minh City’s central business district provided a perfect opening for Preuksa Real Estate Plc, Thailand’s second largest property developer. Preuksa announced its bids for land to build much needed moderately priced housing units after studying the market for two years and estimated that Vietnam’s annual residential demand is 8 million units.

As hotels have enjoyed unprecedented high occupancy rates in major cities, Minor International has already begun to develop Anantara Hoi An and announced plans to develop three other resorts in Vietnam. This strategy makes the most of its corporate strengths and to be a first mover in the new locations.

Although many local and overseas investors may be lured by profit margins of being a first mover in a rapidly developing country, new investors should await for legal and tax regulations targeting foreign investors to be more clear cut and carefully study the market before forging ahead.