Archive for the ‘Vietnam’ Category

Is Vietnam’s Residential Market Near The Bottom Yet?

Friday, April 19th, 2013

For the overall market, not really! For certain segments, maybe!

Being in the real estate advisory business, especially in research, we have been asked about market bottoming many times. After all, it is the real estate and construction industries that have put a drag on Vietnam’s economy in the past two years, as noted several times in our publications. While the entire real estate market has experienced cyclical slowdowns across the board, it is the residential market, particularly high-rise apartments that the underlying question usually refers to.

Attempting to answer this question for the entire high-rise apartment market can be a brave act, not only because of the complexities that come with its different market segments behaving differently, but also because of the possible market reaction that any affirmative answer may bring. Nonetheless, let me offer my humble view: While the overall market may not be nearing the bottom, certain segments may be within two or three quarters away from bottoming out.

A look at our 1Q13 data yields several key findings:

First, HCMC will likely see prices bottoming out sooner than Hanoi. While prices in HCMC continued their prevailing downtrend but have seen declines slowing in most cases, Hanoi residential prices have only started experiencing significant declines recently. In almost all segments of the Hanoi market, quarterly declines in 1Q13 were still faster than the average quarterly decline seen in the past one year, indicating significant downside trajectory remains in place. Although cash rich buyers – a trademark of the Hanoi market – may occasionally stir the market in the short-term, we do not think it will lead to a sustainable recovery in Hanoi yet.

Second, affordable housing in HCMC may see prices bottoming out in 2013. Except for some projects where downside trajectory remains large, many projects in the Affordable segment and the low-tier Mid-end segment either have limited unsold inventory or are nearing completion. Prices in this segment have dropped to levels that are only marginally higher than construction costs. Assuming a sustainable price-to-income affordability ratio of 30, the intrinsic value of an affordable apartment in Vietnam would also be around current price levels. Considering these, we think affordable housing developers will likely have limited room, of about 2-4% in total, to lower prices for the next two to three quarters before a recovery takes place.

Third, High-end apartments will likely see a continued underlying downtrend, although most of the downside trajectory is in the secondary market. This is because many major high-tier Mid-end projects will continue launching new phases of sales and compete fiercely with High-end apartments, especially those in the secondary market. While we do not see credible signs of primary prices of High-end apartments bottoming, certain projects may outperform the market significantly enough to provide buffer to primary price levels. In fact, if High-end apartment prices in the primary market continued to perform as have been seen recently, those prices may bottom sooner than expected.

About the author
Trung Thai, CFA is Manager of Research in Vietnam and is based in Ho Chi Minh City.

Posted in Affordability, Residential Research, Vietnam | No Comments »

The Investment Case of HCMC Retail

Monday, January 28th, 2013

Amidst macroeconomic challenges in Vietnam, retail remained one of the country’s better performing sectors in 2012, as noted in our recent publication. So I took a look at how retail in Vietnam compares with that in Indonesia – a current hotspot, from both country- and city-level perspectives. The findings are summarised in the tables below.

Note: Click here for the full list of sources, methodology and explanations.

Over the short-term, Vietnam understandably carries higher country-specific risks than Indonesia at present, due to the macroeconomic environment. However, these two countries have fairly comparable demographics, such as population and age profile, as well as income growth prospects, as shown in Table 1. For retail property investors, perhaps an interesting indicator is the projected rise of the middle class – the main target market for prime retail centres. With these demographic prospects, long-term opportunities for retail investment properties apparently exist in Vietnam, as they do in Indonesia.

Favourable demographics have also paved the way for strong retail volume growth forecasts for both countries. Moreover, both have seen their retail sectors develop more quickly than the overall economy in recent years, signalling short-term opportunities for retail market participants (see Table 1 – Time Pressure).

Both countries still have relatively low levels of retail “market saturation”, suggesting modern retail sales areas and the penetration of international retailers remain modest. This can also be seen at the city level. As shown in Table 2, both Ho Chi Minh City (HCMC) and Jakarta have relatively low amounts of prime retail property stock considering their population and economic sizes, compared with the rest of Southeast Asia.

Nevertheless, prime retail property supply in the HCMC CBD has increased 35.0% annually on average over the past three years, from a low base. Meanwhile, the arrival of international retailers, via ownership and franchising, has also been noticeable, partly reflecting increased market saturation.

Prime retail rents in HCMC are considered high in Southeast Asia, behind only those in Singapore and Kuala Lumpur. This is quite an anomaly since the market remains immature and rents have seen corrections over the last one year. Anecdotally, many international F&B and retail outlets in HCMC are located in street-level shophouses rather than in prime shopping malls where foot traffic and visibility should be higher. Are these indications of a short-term lack of prime retail space?

If it does, there is room for short-, medium- and long-term investment strategies in the HCMC retail property market. Whether investors rely on market timing to capture excess returns arising from market anomalies or a buy-and-hold strategy to ride on the city’s long-term retail prospects, or both, our local team always works closely with regional Real Estate Intelligence Service (REIS) colleagues to deliver research solutions tailored to investors’ needs.

After all, it is important to note that HCMC still ranked second behind Jakarta among Southeast Asia’s best cities in terms of retail property “buy” recommendations in the 2013 Emerging Trends in Asia Pacific, after having ranked first in the region in all previous editions.

About the author
Trung Thai, CFA is the Manager of Research in Vietnam and is based in Ho Chi Minh City.

Posted in Economic Research, Investment Research, Investment Strategies, Retail Research, Vietnam | No Comments »

Is Inflation Back In Vietnam?

Monday, October 8th, 2012

Unlike its peers in the Asia Pacific region, Vietnam usually releases economic data before the close of the reporting period. CPI readings are among the earliest data to be released. The latest batch of data from the General Statistics Office indicates that inflation in Vietnam accelerated to 2.2% m-o-m in September, the fastest pace that had been seen in 16 months, at a time when everybody thought price rises of 2% a month were a thing of the past.

Figure 2 shows that, barring seasonal increases in educational costs near the start of the academic year and government-administered increases in medicine/health care costs, neither of which seems to constitute any persisting trend, increases in housing/construction costs and transportation costs were still major drivers behind the rise of inflation during August and September. These unanticipated and significant trends, together with base effects generally becoming less favourable, have raised concerns about the possibility of renewed inflationary pressure amidst a loosening monetary environment.

Is inflation back?
Perhaps the best way to look at this is to examine whether recent trends in the CPI, particularly in regards to housing/construction and transportation costs, have been the result of cost-push or demand-pull inflation. We think it has been mainly the case of the former. In fact, administered fuel prices jumping 11.6% from end-June to end-September, following increases in global oil prices, seems to be a more convincing cause of higher inflation than the moderate increase in demand for rental apartments and construction activity mentioned in the media recently.

In short, we do not think inflation risks have returned to alarming levels as yet. Broadly speaking, external and domestic demand conditions are still relatively weak, as demonstrated by slowing prices of raw materials and declining import prices. As such, this will likely limit any inflationary pressures for the rest of the year.

Implications for real estate
While we have not noted any significant broad-based effect of inflation on the average management fees or service charges quoted by owners of existing properties, volatile inflation may be bad news for numerous commercial and residential projects currently under construction. Although rising prices have ceased to be a major threat to real estate developers over the past two quarters, the current economic uncertainties indicate that inflation may still be volatile over the short-term and must be closely watched.

Most baseline economic forecasts would point to a rise, but not a jump, in inflation in 4Q12.

PS: You may also want to read our latest 3Q12 Vietnam Economic Brief for other economic highlights and their implications for real estate in Vietnam.

About the author
Trung Thai is the Manager of Research in Vietnam and is based in Ho Chi Minh City.

Posted in Economic Research, Vietnam | No Comments »

Vietnam Real Estate Market Transparency: What’s The Buzz?

Tuesday, July 10th, 2012

Vietnam’s real estate market has long been perceived as non-transparent, even by the local people. Recently, the country saw an encouraging improvement in its ranking in the 2012 edition of the Global Real Estate Transparency Index and became the third top improver in the Asia Pacific region, behind Indonesia and the Philippines. While other peers in the region have also made great improvements in their transparency scores, in line with the global trend of being “back on track”, the improvement in Vietnam deserves attention.

The country is now positioned right next to the “Semi-Transparent” tier. A movement up into the “Semi-Transparent” tier in the next two years, which is likely, given the current pace of market developments, would afford the country the power to rebrand itself for foreign investors. If we see that happening in our next edition in 2014, one may find it noteworthy to see a country transform from “Opaque” to “Semi-Transparent” in less than ten years.

There are several reasons behind Vietnam’s improvement. First, market fundamentals data has become significantly more available, thanks to greater market penetration by real estate professional services firms. For example, Jones Lang LaSalle researchers constantly work towards increasing the company’s coverage of various real estate sectors by collecting and maintaining market-aggregated data series and databases of individual properties and transactions, which can be used by institutional investors to quantify market opportunities and risks.

Second, the increased penetration of both foreign investors and multinational corporate occupiers has led to a more competitive real estate marketplace. In particular, this has led to improved bidding and negotiating processes for real estate transactions, greater access to professional property valuation and better professional standards for project and facility management services for corporate occupiers.

Third, government efforts to improve the corporate governance of listed vehicles have led to moderate improvements in market transparency. A decent number of real estate firms are publicly listed in Vietnam, as is the case in many other markets. Since these firms are widely followed by the investing public, they usually have a major influence on investor confidence in the overall real estate market. Thus, a robust framework of corporate governance provides institutional investors with increased confidence in gaining control over the performance of their investments, either through direct real estate or real estate securities. The findings in the 2012 Index, which noted a moderate improvement in Vietnam’s corporate governance, are relatively in line with the results published previously in the Vietnam Scorecard Project – 2011 Report by the International Finance Corporation – a member of the World Bank Group.

Still, there is much to be done in Vietnam to improve market transparency, as most improvements witnessed over the last two years have been reactive in nature. Since the country is now on the borderline between “Low Transparency” and “Semi-Transparent”, market developments must be closely watched, and our research team at Jones Lang LaSalle Vietnam is doing exactly that.

About the author
Trung Thai is the Manager of Research in Vietnam and is based in Ho Chi Minh City.

Posted in Investment Research, Transparency Research, Vietnam | No Comments »

The Case Of Risk-Adjusted Returns In HCMC Landed Housing

Monday, April 16th, 2012

When Indochina Capital introduced their newest villa project in Ho Chi Minh City (HCMC) in late 2011 amidst a property market downturn, I began to think the landed housing sector in the city might appear on the radar of institutional investors. Over the past few months, I have found out that investors are indeed viewing this sector favourably due to its limited supply pipeline and niche target market.

Apparently, it is not just landed housing that is on investors’ radar. In fact, it is not just real estate, as numerous opportunities may arise in times of economic downturns when valuations become attractive. This has probably been the case in the equity market, for example. As a matter of fact, M&A deals in Vietnam in 1Q12 totalled USD 1.5 billion, the eighth highest in Asia Pacific ex-Japan, according to Thomson Reuters.

So how has real estate (and landed housing in particular) performed compared with equities? This question prompted me to take a quick look at comparing risk adjusted returns among these types of investments.

I started with proprietary Jones Lang LaSalle quarterly data on average prime condominium and villa prices, together with quarter-end closing price levels of the VN-Index – Vietnam’s benchmark stock index comprising companies listed on the Ho Chi Minh City Stock Exchange. The time period chosen starts from 4Q06 (when Vietnam’s accession into the WTO was approved) to 1Q12. This set of raw data is then used to calculate time-series data of annual returns that could have hypothetically been realised at quarterly intervals. “Returns” in this context refers purely to capital gains in local currency terms and ignores dividends and rental income.

Figure 1 below shows that the VN-Index during the stock market’s heyday yielded the highest rate of annual return, but also yielded the lowest return seen in the time period studied. On average, returns on villas were the highest at over 20.0% per annum.

Figure 2 below further shows that annual returns in the villa sector have the lowest standard deviation – a measure of risk. Combined with the previous findings, the villa sector is found to have the highest Sharpe ratio – a measure of risk-adjusted performance.

While there are lots of caveats to this mini study (e.g. returns only incorporate capital gains, transaction costs are not accounted for, the Sharpe ratio in its simplified form assumes a constant risk free rate, etc), I am hopeful this is a good starting point to further examine this topic. We may also extend this to include returns on commercial real estate when capital value data in this sector become more readily available.

For now, we know that Indochina Capital did their homework.

About the author
Trung Thai is the Manager of Research in Vietnam and is based in Ho Chi Minh City.

Posted in Finance, Investment Research, Residential Research, Vietnam | No Comments »

Are There Storm Clouds On The Horizon?

Thursday, March 15th, 2012

At a first glance, taking a look at the recent Asia Pacific GDP growth statistics you could be forgiven for thinking that there are storm clouds on the horizon. Across the board, since September last year all the major countries in AP have had their GDP forecasts revised downwards.

Looking at China, the market pundits are certainly flapping! The “engine of world growth,” announced just last week that they are lowering their growth target for 2012 – 7.5% versus the usual 8%! Also, the import numbers released certainly took commentators by surprise. China imports outstripped exports by a not unsubstantial US$31.5bn, the biggest trade deficit since 1998, not insignificant in an export led economy like China.

Should the alarm bells be ringing and should AP real estate investors be concerned?! Let’s ignore headline grabbing sound bites and cut to facts. The bottom line is AP aggregate GDP growth is actually set to increase over 2012. Regional growth in 2012 will improve on the back of increased growth rates in Japan and China. In China we expect to see fiscal and monetary policy stimulating the economy, whilst in Japan rebuilding activities post last years earthquake will help to improve the economic outlook.

For investors, the rest of 2012 is likely to bring good opportunities to acquire assets. The Japanese market in particular is certain to present interesting options. At the height of the GFC downturn, we initially expected to see a number of distressed Japanese assets getting pushed onto the market, but that just didn’t happen, banks were more lenient than expected and rolled over loan covenants to accommodate their borrowers. However, now that we’re seeing conditions improving, we do expect to see these banks starting to put more pressure on their borrowers to push these out to the market and these assets will present excellent opportunities for the cashed up international investors.

Asia Pacific is interesting for international investors because it offers a good balance of opportunities. For Core investors, transparent mature markets such as Australia and Singapore are available to tap into, whilst Hong Kong still remains attractive, all be it that year to date it’s been a very locally driven investment market. On the flipside, more interesting opportunistic high yielding plays are there for the taking in the fast growing but opaque markets of Indonesia and Vietnam.

To sum up, are there storm clouds on the horizon? Well, if you’re sitting in Asia Pacific, I suggest you pull up a deck chair and enjoy the weather. For those investors in a strong position, the opportunities and growth in 2012 will very much be there for the taking. If international real estate investors are to deliver the types of returns their unit holders are looking for, with snail pace economic growth in EMEA and a sluggish America, investors will need to look to Asia Pacific real estate to deliver their numbers and now’s a pretty good time to be doing so.

About the author
Roddy Allan is a Director, Asia Pacific Research for Jones Lang LaSalle, based in Hong Kong.

Posted in Asia Pacific, China, Economic Research, Hong Kong, Indonesia, Investment Research, Japan, Singapore, Vietnam | No Comments »

HCMC Offices: When Market Trends Aren’t Everything

Thursday, January 19th, 2012

With the current vacancy rate at 28.0% and the supply forecast to increase by as much as 33.0% in 2012, there is little wonder that many investors would declare Ho Chi Minh City (HCMC) Grade A office space as oversupplied. Indeed, HCMC dropped one spot to number four in terms of office property ‘Buy’ recommendations in the latest Emerging Trends in Real Estate Asia Pacific 2012 survey.

Nevertheless, the recent acquisition of Saigon Tower by Osaka-based developer Daibiru Corporation seems to be a heavyweight rebuttal to claims that this sector is no longer on foreign investors’ radar. So, what lies ahead? From a researcher’s perspective, and as researchers we are supposed to be unbiased, I would argue that while the overall outlook for this sector is one of uninspiring expectations, it is not to the extent to which investors can afford to ignore.

My key proposition is that market trends aren’t everything. And I believe this is even more true for an emerging market like Vietnam. By nature, studying market trends involves arriving at statistics intended to describe the overall market. While this is a must-have starting point, the use of market statistics alone may significantly oversimplify idiosyncratic characteristics in emerging markets, and consequently mislead investment strategies. There is already substantial academic literature suggesting that emerging market investment returns cannot be completely characterised by regular statistical measures. In technical terms, there is significant skewness and kurtosis. In simple terms, there are too many outliers in emerging markets. And outliers can be either good or bad.

Take the overall market vacancy rate of 28.0% for example. That seems very high indeed! However, three-quarters of the Grade A office properties we monitor in HCMC have healthy vacancy rates near or below 10.0%. The remaining quarter contains the majority of vacant space in the market. This is an example of how bad outliers can make market statistics misleading if they are used alone.

Having previously followed the Singapore office market, I have been surprised to encounter many cases in both HCMC and Hanoi where several office properties consistently enjoy strong rental performance while those of comparable grades struggle with rental declines. One may argue that in Vietnam a lack of information and immature market dynamics may result in certain tenants not being able to follow market norms. But I believe there are also other fundamental factors such as property management quality and developer profile that make certain properties outperform the rest. This is an example of good outliers being overshadowed by negative market trends.

Whilst overall market trends do impact on the investment prospects of every single office property, there will be certain individual properties that can buck the trend. In this light, I believe attractive risk-adjusted returns in HCMC offices are still available, albeit on a selective basis. We at Jones Lang LaSalle Research are committed to providing investors a fair, accurate and complete picture of both the trends and the outliers in the market.

About the author
Trung Thai is the Manager of Research in Vietnam and is based in Ho Chi Minh City.

Posted in Economic Research, Investment Research, Office Research, Vietnam | No Comments »