Understanding the real estate market in ho chi minh vietnam from 1996 may 2007

HCMC UNIVERSITY • OF FOREIGN DEPARTMENT LANGUAGES AND INFORMATION OF INTERNATIONAL TECHNOLOGY BUSINESS ADMINISTRATION -,' o' • GRADUATION PAPER TOPIC: UNDERSTANDING THE REAL ESTATE MARKET IN HO CHI MINH CITY - VIETNAM FROM 1996 - MAY 2007 I I Student's name: Nguyen Thai Hoang Anh Class: KD0304 Advisor: Dr Tran Duyen Dinh "l , JULY 2007 ACKNOWLEDGMENTS "You are only as great as the shoulders you stand on,,1 I have been blessed to have stood on some pretty great shoulders • following groups and individuals I would like to acknowledge to the development the contributions of the of my paper • Dr Tran Duyen Dinh, my advisor at Huflit He has instructed helpful at answering me to write this paper fi'om the beginning to the end He is very all of my questions also helping me narrow my research Further, he spent much his valuable time correcting me to have the correct format of a paper He gave me a lot of help Without him, it may not be finished Mr Le Quang Buu, the Senior Manager ofRescarch and Consultancy Department of Jones Lang LaSalle Vietnam I also want to give a big thank to him for his great support and advice for this paper Moreover, I highly appreciate all of my colleagucs at Jones Lang LaSalle for their supports and ideas I would like to take opportunity years in Huflit University Economics to thank all of the professors All of you help me to build the fundamental who taught me for four knowledge of as well as business experience Certainly, I wish to acknowledge my parents who support and encourage Without them, you may not read this paper Finally, [ am very grateful everyone me a lot who helps I me directly and indirectly to complete this paper Thank you all my friends for giving me a great time at University Lilly Glass 11 Ho chi Minh City - Vietnam July 7,2007 ADVISOR'S Title: COMMENT UNDERSTANDING THE REAL ESTATE MARKET IN HO CHI MINH CITY - VIETNAM (1996 - MAY 2007) • Author: NGUYEN THAI HOANG ANH Advisor: Dr TRAN DUYEN DJNH Practicality The real estate market in Ho Chi Minh city is on the way to develop However, there have been many obstacles that must be overcome As a result, it makes sense for the paper "Understanding the Real Estate Market in Ho Chi Minh City - Vietnam from 2006 - May 2007." Content The paper consists of chapters The first chapter gives an overview of the real estate market with analyses on demand and supply The second chapter describes the real estate market in Ho Chi Minh city with many interesting data The last chapter tries to estimate the perspectives of this market, and suggests two groups of measures of legal framework and fund mobilization for the market development The measures seem to be practical Presentation The paper is presented brightly and attractively with many tables and graphs that are sourced well Footnotes and references are ma.de in an accepted way General Assessment The subject of real estate market in Ho Chi Minh city has been a hot and controversial issue concerned by many experts and investors for years The paper - that tries to graph its characteristics and suggests some major measures for its development - deserves a praiseworthiness on the author's effort at the BA level Suggested Grade: Excellence Advisor, • • Dr TRAN DUYEN DJNH ABSTRACT I • Nowadays, there is abundance of investments for any investors to grasp Stock investment is hot to invest in their portfolio Bond is a safe place to pour their money However, there is one type of investment that does not fall into these kinds of categories, that is, investing in real estate market Real estate investment is extremely risky but the riskier it is, the higher profit it gains On top of that, you need big capital to invest into property In this limit of this research, I will focus on Ho Chi Minh City real estate market as Ho Chi Minh City is the economic, political and social hub of the whole country In some recent years, Ho Chi Minh City real estate was frozen by lack of capital and in fact because there is no interaction between demand and supply curve However, 2007 is the promising year for the real estate market because of two main important factors First, warmer market with more money from foreign organizational and individual investors is activated by Land Law effective from Jul 06 and Property Trading Law from Jan 07 which clarify the rules and regulations and restrictions As a result, real estate market opens up many new opportunities for overseas investors to profit from property in Vietnam and particularly in Ho Chi Minh City The second factor is that new money flow from stock market into property For these two reasons, real estate market is a very attracting field in 2007 III CONTENTS Acknowledgement Advisor's • 11 assessment Abstract iii Content IV - V Tables vi Figures VII INTRODUCTION CHAPTER I: AN OVERVIEW I OF THE REAL ESTATE MARKET Space Market A Definition B Demand C Supply is "Kinked" D Relationships between Supply, Demand and Rent II Asset Market A Definition B The Pricing of Real Estate Assets C Three Major Determinants I The Opportunity of Cap Rates Cost of Capital 10 Growth Expectations in the Property's Future Cash Flows 10 IV Risk Perceptions and Preferences among Investors CHAPTER 2: HO CHI MINH CITY REAL ESTATE MARKET I Office Sector 13 II Condo for Sale 21 III Serviced Apartment 36 IV Retail Sector 42 CHAPTER 3: PERSPECTIVES OF HO CHI MINH CITY REAL ESTATE MA RKET I II Perspectives A Office Sector 57 B Condo for Sale 57 C Serviced Apartment 58 D Retail Sector 60 Measures for Development A Legal Framework 62 B Fund Mobilization 65 CONCLUSION 70 REFERENCES 72 v TABLES Page Name Table 2.1: Office Rentals in Key Cities in ASEAN Region 14 Table 2.2: Grade A and Grade B Office Buildings - Current Supply 14 Table 2.3: Five Grade A Office Buildings in HCMC 15 Table 2.4: Future Supply in HCMC's CBO - Premium Office Buildings 17 Table 2.5: Grade Band C Office Buildings in CBO 17-18 Table 2.6: Completion of Condo for Sale in 2007 26 Table 2.7: Future Supply of Condo for Sale 27 Table 2.8: Five Most Expansive Condos for Sale in CBO 28 Table 2.9: Supply of Condo for Sale in District 31 For The Period 2004-2009 Table 2.10: Indications of Payment Ten11Son Some Grade A Projects 35 Table 2.11: Total Units for the Rent in HCMC 36 In The First Quarter Of2007 Table 2.12: Grade A Serviced Apartments 38 Table 2.13: The 2006 Global Retail Development Index 43 Table 2.14: Current Prime Shopping Centers 51 Table3.1: 2007 New Supply 59 VI FIGURES Page Name Figure 1.1: Demand Curve Figure 1.2: Supply Curve Figure 1.3: Rent Determination Figure 1.4: Relationships of Supply, Demand and Price In the Asset Market Figure 2.1: Rent Rate of Grade A Office Building for Period 1996 - 2007 20 Figure 2.2: Gold Fluctuations 22 Figure 2.3: The Increase in City Dwellers' Income For the Period 2000 - 2005 24 Figure 2.4: Apartment 33 Figure 2.5: Selling Price Change Supply by District of Typical High- End Condo Projects in District I Figure 2.6: Serviced Apartment Occupancy 35 Rates and Rent From 1999 - 2006 41 Figure 2.7: Windows of Opportunity Analysis Figure 2.8: Future Supply of Shopping Centers in HCMC Figure 2.9: Growth in Prime Retail Rates in HCMC From 2006 - 2007 Figure 3.1: Monthly Declared Household Figure 3.2: FDI by Year 48 52 55 Income 61 67 vii INTRODUCTION Do you want to be rich but not have to work hard? If yes, buying land or houses to invest because Real estate is believed to be very promising in Vietnam in 2007 after Vietnam's official entry into World Trade Organization According to Asia Property, after Vietnam became a WTO's official member, Vietnam's Real Estate market is picking up stream It can be explained that currently Vietnam is a WTO's member so it has to obey the International rules and this helps to wipe out many investors' doubts about the country's legal system According to Do Thi Loan, general secretary of the Ho Chi Minh City Real Estate Association, her association alone had received more than 20 delegations this year from such countries and territories as South Korea, the US, Australia, China, Singapore, Hong Kong and Taiwan More importantly, it can be said that the Real estate market in Vietnam has recovered from its long slump As we can see, the number of real estate transactions in the third quarter of 2006 increased 25% over the same period last year I Also many real estate development projects that have been suspended for some years during the "frozen real estate market" have recovered on the new foreign investor confidence "In addition, the real estate market in other Asian countries has become saturated, which cannot bring high profit to the investors Meanwhile, Vietnam has emerged as a profitable market with high population and high demand for accommodation.,,2 Thus, many local and foreign investors are keen on this market because they can see the big potential This paper is made to help make a good decision on investing in real estate market It will give anyone who is interested in Ho Asia Property www.overseaspropertymall.com Tuoi Tre newspaper, 26 Nov 2006 Chi Minh's real estate market not only some fundamental knowledge about real estate market but also the situation of Ho Chi Minh City's real estate market in some past few years to the first quarter of2007 After reading it, investors may get some insight when making a decision in investing in real estate market in Ho Chi Minh City; especially it may serve as a guideline for any foreign investors who care about doing business in Vietnam, and particularly in Ho Chi Minh's real estate market As a limit of research, this paper focuses on the real estate market in Ho Chi Minh City in past few years up to now, and four main subsections that are analyzed include office sector, condo for sale market, serviced apartment and retail market The proceed to this research includes two main steps, that is, collecting data of some existing projects, future supply and demand, and related information and the second step is to analyze this information and forecast the future trend The content of this paper consists of three main parts First, there is the overview of the real estate market This part explains what elements create and influence the real estate market, and how they relate to each other Based on this theoretical foundation, Ho Chi Minh City real estate market is analyzed from 1996 to May 2007 1996 is the first year that some Grade A projects began to present and operate in Ho Chi Minh City Finally, there are some forecasts for the real estate market in Ho Chi Minh and some suggestions to improve the legal systems and mobilize fund for this market Recently the market for condo for sale is warming up as the quality and value of condo buildings are increasing, and young people have a tendency to live in a condo more than in the past About the price of the condo, in the first quarter of2007, it can be said that the demand for housing is over its supply It leads to the price to increase very strongly However, the price is forecasted to stay still because it already reached a high level C Serviced Apartment With the strong economic growth rate of Ho Chi Minh City, many expatriates will find opportunities to invest here The market for serviced apartment will be profitable in a short time It is anticipated that the rent will increase a little and stay still due to a big amount offuture supply Mainly future supply of the serviced apartments complex or mixed used projects that consist of commercial and serviced apartments come from center, condo for sale, office Here is new supply which will come to stream in 2007 58 Table 3.1: 2007 New Supply Shorwood RQsidQncQ May 2007 ?ost9ur StrEet, District 3, minutes 27,531 228 21 32 2-3 bdrs to CBD Studio, I , and bdrs ThQ lancastQf Compl.t.d 30 3,300 35- 38 Greon Hill lot 25, Quang Trung Soft-Nor Park, Di,trict 12, 40 minut., to CBD Compl.t.d 100 11,300 11 - 15 1.4 bdrs Saigon Queen Yilla Nguyon Yon Huang, An Phu, Diotrict 2, 15 minut., to CBD June 2007 11 1,160 10-12 4.5 bdrs l Thanh Ton Str•• t, Diotrict 1, CBD Source:CBRE "In general, the serviced apartment markets in both cities are performing very well," said Mr Brett Ashton, Deputy General Director of Chesterton Petty Vietnam "Occupancies expatriates are near 100 per cent and rents are rising Demand is coming from new entering Vietnam as well as some Vietnamese that with so many developers people now renting." He added deciding to change to apartments for sale, few new serviced apartments will be coming on to the market in the next few years Chesterton predicts that serviced apartment rents in Ho Chi Minh City will remain stable till 2008 and thereafter will decrease as more apartment developments company expects to see occupancy Petty are completed Overall the levels remain at around the 90 per cent mark Investors have judged that the serviced apartment market in Vietnam is still in its infancy 59 compared with other regional cities, and so has great potential "The serviced apartment market in Vietnam is at a very early stage of development with total stock of units being very small compared with cities such as Manila, Jakarta and Bangkok, and as a result rental levels are much higher than the other cities due to the limited supply but high demand," said Mr Dinning "We expect this trend to continue for a number of years to come, making the development regional cities." of serviced apartments more profitable than in other 10 D Retail Sector The retail market in Ho Chi Minh City remains profitable in a short to medium term because average Vietnamese's income has been rising From the figure below, we can see that the average income of Vietnamese of the elements that giant international is about US$350 to US$500 This is one retailers need to know before coming to Vietnam to make sure the income high enough to ensure the purchasing power and profitable business 10 http://www.vneconomy.com.vnlvet/?param=info&name=Cover%20Slory&id= 18669 60 Figure 3.1: Monthly Declared Household Income SEC Scale A = US$ 1,001 + B = US$ 1,000 - 501 2003 14 2001 12 1999 DSECAB SEC CD Source: Jones Lang LaSalle Vietnam • SEC EF N=2000 urban Moreover, purchasing power depends on gender, income and age In other words, young populations and higher income prove that Vietnam and Ho Chi Minh City in particular are a potential market for consumption 61 . It is anticipated that long term prospects are the increasing demand for luxurious products as well as increasing tourist related retailing II MEASURES FOR DEVELOPMENT A Legal Framework Situation The Land Law 2005, the new housing law ( July I, 2006) and Law on Real Estate Business ( January I, 2007) well as the restriction came into effect that clarified the rules and regulations applying to foreign individuals Ventures between foreign companies and Vietnamese and foreign organizations was decollectivized by the State Private for the first time in 1988 when agricultural and land use rights were granted to households granted right to use land for a specific purpose The 1992 constitution land rights to individuals, or Joint companies All land in Vietnam belongs to people and is administered land use rights (LURs) were established as including rights over commercial land A LUR is a Stategranted stronger and personal property LURs may be granted for up to 50 years, depending on the specific use of the land Individual holders of LURs can sell them ifthey move to a new location, change jobs, or are unable to work In the 1993 Land Law, the National Assembly broadened LURs to include rights to exchange, transfer, rent, inherit, and mortgage land In 1998 several additional changes to the land law were enacted, primarily to distinguish between corporate leaseholders, who can use their land for domestic or foreign joint ventures, and individual leaseholders who are not permitted to enter joint ventures with foreign entities 62 Additional regulations amendments decentralized to the land law in 2001 and subsequent implementing authority for leasing land to businesses and permitted local officials to lease land to foreign organizations, individuals and overseas Vietnamese Still, foreign investors can currently only lease land from the Government parks These limitations may soon be lifted Government or in industrial Resolution Number issued in January 2003 proposed allowing domestic private companies with long-term land use rights to lease their land to foreign investors, provided that the lease is not longer than the rights held by the leaser The new Land Law passed by the National Assembly in November 2003 and in effect from July 2004 allows domestic private companies with long-term land use rights to lease their land to foreign investors Permission, however, is subject to approval of the authorities who grant the land use rights to the leaser, and the continued requirement that a lease cannot be longer than the rights held by the leaser Therefore, currently JV is most common form because foreigners just can rent land for a period of time (50 years) and it is hard to evaluate something unexpected To reduce risk, they form a partner with local investors who have land use right Also the land owner does not want to give up their land According to the Land Law, foreign organizations lease land from the State or through a contribution and individuals are allowed to of land use right by a local partner mentioned above for a period of 50 years, and for remote areas the lease can be up to 70 years They can invest in building houses, apa11ment buildings to lease or for sale or to improve land with infrastructure facilities to lease 63 Mr Luong Van Ly, Deputy Director of the HCMC Department Investment, made the following comments at a real estate seminar in HCMC on I June 2004: The new Land Law represents "tremendous commercial of Planning and value ofland" headway towards acknowledging Thanks to this new adjustment, foreign investment the in real estate projects helps give the high growth rate of the city and solve partly the shortage of housing in the future Suggestions In short, Vietnamese government has passed several important regulations to help develop Vietnam real estate market properly in the context with the region and the world However, there are still some obstacles that must be mentioned According to the Land Law, the provincial or municipal Natural Resources and Environment the only authority entitled to deal with the applications investment projects of enterprises The "one door" mechanism services shall be for land allocating or leasing for and shall be authorized to evaluate investment projects is a remarkable advance; however, in practical it may be difficult It is advisable that in order to implement the law on land properly, the Ministry of Natural Resources and Environment should establish an executive committee of the law on land as same as the form of the executive committee of the law on enterprises which shall regularly acquire, research and issue timely solutions to obstacles during the course of implementation of the law on land In addition, Vietnam's "non -liquid", real estate market is described as a "non - transparent", thus, the developers still have to navigate bureaucracy, very difficult to obtain detailed master plans for development especially it is Therefore, to speed up 64 improvement and make the real estate market more transparent, provide investment and market information land registration, the government needs to to the public, for instance, information future planning ofland and demand and supply and transaction on records Also they need to create a legal corridor for real estate services such as real estate appraisal, land use planning and brokerages policies that prevent speculations to ensure the consistency the administrative More importantly, they should create and allow for asset pricing cleaning Finally, they need of enforcement and clarity of regulatory factors and improve efficiency B Fund Mobilization I Situation Real estate market is somewhat ways to mobilize fund for this market perceived as a capital market, and there are some such as attracting money from Stock market, foreign funds and money from other sources Below are some ideas how money goes into the real estate market a The Stock Market According to the survey of Sai Gon Tiep Thi Magazine on March 15 2007, 46.6% of readers will invest in the stock market, 21.9% invest in the real estate market, 10.7% business directly to earn money, 9.8% buy gold, 5.4% save money in the bank, 3.5% buy foreign currency and the remaining 2.3% invest in other sources Therefore, the ratio of people investing in the real estate market ranks the second behind the ratio of ones who invest in the stock market However, remember about the number of people, not the amount of capital capital that will be required to invest In different that it is just the comparison invested markets Also the amount IS different, of for instance, 65 investing in the stock market requires investing in other markets at least one or two hundreds of million VND, requires at least ten millions but to invest in the real estate market, 500 million VND is at least Thus, it can be seen that if the ratio is calculated depending on the number of people investing and the required capital, the ratio of capital invested in the real estate market will be highest Moreover, 2007 is considered to be the year of real estate market because of the following reasons Firstly, the money flows from the stock market to the property market The profit earned from the stock market is transferred to the real estate market Also to avoid risk and to diversify a part of the amount the investment invested in the stock market is transferred new opportunities from the property portfolio, of capital in the real estate market to catch up some good market according to some evaluation of some experts It is important to remember that the total of capital invested in the stock market is more than 400,000 billions VND Thus, if only one fourth of this amount is transferred the property market, it will be bigger with the increase of transactions in and prices Also, if the stock market index falls steadily, money will flow into the real estate market very much If it fluctuates up and down, the capital streams will be stronger b Foreign Direct Investment's Capital (FDI's Capital) There is a big increase of the capital of FDI in the real estate market Since Vietnam's economic growth is currently 8.2%(2006) and is expected to increase, also political stability helps make Vietnam attractive for investment Poor upgraded Vietnamese's Moreover, Standard & foreign currency from "-88 "increases to "88" (September 66 2006) and its local currency rating from "88" to "88+", which attract many international investors Secondly, a lot of investors nowadays not want to depend much on China, so they share part of their investments into other Asia countries Certainly, Vietnam is the substitute for China because its economic growth is rating the second in the world behind China; this event is called China plus one scenario As we see from the figure below, FOI goes up steadily year by year Figure 3.2: FOI by Year V!1lt $lJn _ _._J • Registered capita-I-l_ -. ! • Implemented copital i , - -. • 20- 2001 2003 2002 2004 2005 2006 Source: Vietnam Economic Times Source: Vietnam Economic Times Last but not least, Vietnam has been the I 50th member of the WTO in November 2006 As a result, Vietnam is expected to benefit from improved international its membership in the World Trade Organization status with just as Shanghai's real-estate market took off after China joined the WTO in 2001 "It basically puts Vietnam on the map for more foreign direct investment and more demand for its real estate," says Don Lam, 67 • managing partner of VinaCapital, million in investments a Ho Chi Minh City-based fund that has about $865 in Vietnam, some in real estate 11 c Other Sources • The big amount of capital from Vietnamese overseas will be poured into the real estate market; the money of people who earned from labor export will flow into this market In addition, the demand for investing in the construction of factory, infrastructure, hotels, condo for sale new urban area, department increases very strongly when Vietnam's stores, supermarkets, economy is increasing steadily All stimulate the real estate market very hot recently Suggestions a Real estate market develops when it has good channels of fund mobilization Thus, the Government should create a stable legal corridor; provide good marketing • strategies for real estate projects and improve the infrastructure • to attract funds from Vietnamese overseas, foreign individuals and organizations b Securitization of real estates should be done to create more funds for real estate market, that is, a real estate project's developer can raise funds by issuing certificates of real estate and its value is equal to the value of the real estate The investors can profit from these certificates by the real estate appreciation on how much percents they own These certificates and how much they profit depends can be bought and sought to increase their liquidity In short, the real estate projects can be listed to raise funds like common stocks c Another channel to mobilize fund are the mortgages and loans for households • to buy apartments II More and more financial support is expected to offer to borrowers and Don Lam,managing partner of VinaCapital, Rea/Estate Journal, March I,2007 68 1""'" - • mortgagers - ~ Once lending policies get more favorable and more and more people can afford to buy houses, which increases the capital for the real estate market To sum up, developing the real estate market in Ho Chi Minh City requires many more improvements in legal framework and the way to mobilize funds The former opens the door for the latter to come in • • • 69 CONCLUSION • The real estate market in Vietnam in general and in Ho Chi Minh City in particular is getting prom ising However, the market is still small in terms of investment value and existing products The country's transparency, infrastructural and underdeveloped improvements low administrative efficiency, legal system as well as its requirements low for significant are some constraints to foreign investment Most of local developers are still small and not have enough capital, which leads to some suspended projects Therefore, they should cooperate together to increase the capital or transfer the project to any other developers government • • who have the ability The should have a legal system for these local developers to go public the real estate projects on the security exchange to mobilize fund More importantly, the real estate market operates well only if we have the finance policy to support the real estate market Also, the intermediate of real estate market in Vietnam, that is, valuation, broker, and research, is still small and insufficient They need to be more professional to help make the market operate smoothly and better After all, it is necessary to have transparent and stable policies for real estate financing and to create a level playing field for domestic and foreign investors Despite these limitations, Vietnam especially Ho Chi Minh's attractiveness foreign investors remains due to its consistently • to high economic growth and political stability 70 • ~' In brief, Ho Chi Minh City real estate market is still in the early stage of development, so it appears to offer unlimited potential to investors • ) • j 71 REFERENCES t • David M.Geltner and Norman G.Miller Commercial Real Estate Analysis and Investment South Western Publishing, 2001 Andrew Brown and Buu Le Destination Vietnam - The Final Frontier? Jones Lang LaSalle Copyright, 2006 Bat Dong San Magazine NoAO, 41, 2007 www.atkearny.com www.tuoitre.com.vn www.mof.gov.vn/Default.aspx?tabid=612&ItemID=33181 www.horea.org.vn www.atimes.com/atimes/Southeast Asia/GL21 Ae03.html t • -' 72