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.