» » FDI in Real Estate: A waiting game

VNRE - Unlike 2008 and 2009, when numerous foreign investors flocked to Vietnam and poured tens of billions of dollars into real estate projects, this year they are cautiously sizing up the market from a distance.

As at the end of 2010 foreign investors had committed to develop only 21 new real estate projects in Vietnam, capitalized at US$6.84 billion, compared to 39 projects in 2009, and just two of these - South Hoi An in Quang Nam province and Skybridge Dragon Sea in Ba Ria Vung Tau province have total capital of around $4.9 billion.

The modest number of newly registered projects this year reflects foreign investors’ caginess regarding investments in Vietnam.

Although Vietnam is one of only a few countries that continued to grow strongly despite the global economic downturn, the property market has been dampened by other factors, such as the constant high trade deficit against GDP, inflation- ary pressures leading to high interest rates, and an unstable exchange rate. The cyclical property market has also been sluggish compared to previous years.

“Vietnam’s economy has come under pressure from a depreciating Vietnam dong, rising inflation and interest rates, coupled with high land compensation,” said Mr. Chen Lian Pang, Chief Executive Officer of CapitaLand in Southeast Asia. “These have dampened the market.”

Mr. Alex Loh, Chief Representative in Vietnam of Malaysia’s leading property developer SP Setia, said the market was going through an “unexciting” phase in the property cycle “with sentiment being flattish to slightly on the down side. In general, both the macro and micro envi- ronments are not particularly conducive to committing to real estate investments.” The recent dong devaluation and tightened monetary policies in the real estate market have also resulted in real estate investors thinking twice before proceeding.

According to research from CB Richard Ellis Vietnam (CBRE), there are three main areas where the dong devaluation will affect developers: sourcing of materials and labor for projects, the sale price of the final product, and the raising of capital. The dong devaluation also increases the cost of all imports, including the cost of imported labor such as architects and engineers.

Ms. Low Sin Leng, Executive Chair at Singapore’s Sembcorp and Co-Chair of the Vietnam Singapore Industrial Park and Township Development Joint Stock Company (VSIP), said the devaluation was a major concern for investors in Vietnam. “It will also affect profits when investors exchange into foreign currencies to send back to their parent companies,” she added. VSIP is now investing in three industrial park and township projects in Binh Duong, Bac Ninh and Haiphong.

Besides the economic challenges, foreign investors are also facing another obstacle when entering Vietnam.

Mr. Loh said that finding sites to develop a project in Vietnam is a major challenge for new investors for a combination of reasons, ranging from the status of site clearance and compensa- tion to the nature of land ownership and the pricing structure for land. Most ideal locations in major cities like Hanoi, Ho Chi Minh City and Danang are occupied by local private companies or State-owned enterprises, who are familiar with the local culture and requirements and the business environment.

So what is the greatest concern of real estate developers at present? Analysts say it is the gloominess of the market while supply is still rising. Many foreign real estate investors, who announced plans to invest in Vietnam one or two years ago, are now stalling.

Malaysia’s Berjaya Corporation, for example, secured licenses to develop a $3 billion international university and township project and a $930 financial tower in Ho Chi Minh City in 2008, but construction has yet to begin on either project.

Mr. Nguyen Hoai Nam, Chairman of Berjaya in Vietnam, said it was not in financial trouble, but the projects’ con- struction plans are based on the recovery of the local property market. Construc- tion of the financial tower project could start in July this year, while the interna- tional university and township project is now undergoing site clearance.

For VSIP, Ms. Low said it would focus on developing the industrial parks first while waiting for further positive signs from the market before deciding on when to build the township segment.

According to CBRE, 40,621 apartments will be introduced into the Ho Chi Minh City market this year and about 16,000 in Hanoi, double 2008’s figure. Meanwhile, the Government is tightening credit for the property market in its fight against the rampant inflation rate.

“Buyers have adopted a wait and see approach, hoping to see prices and interest rates come down,” said Mr. Marc Townsend, Managing Director of CBRE.

Remaining loyal

It’s not all bad news, however. Long-term investors in Vietnam are continuing to expand their investments. CapitaLand has announced plans to double its total investment capital in Vietnam to $2.5 billion from $1.2 billion, raising its current assets from 1 per cent of the group’s total to 10 per cent

within five years by focusing on building affordable housing, serviced apartments and shopping malls.

Mr. Chen Lian Pang, Chief Executive of Southeast Asia at CapitaLand, said the group remained confident of the outlook in Vietnam, underpinned by the country’s strong economic growth and pro-growth regulatory environment, rapid urban- ization and its huge, young population. SP Setia this year also strengthened its presence in Vietnam by launching a 10-hectare project called Eco Xuan in southern Binh Duong province.

All of these investors have been in Vietnam for a relatively long time. While CapitaLand and Keppel Land have been here for about 15 years, SP Setia entered the market in 2007 after signing a joint venture with the local firm Becamex IDC Corporation to develop the EcoLakes township in Binh Duong province, about
60 kilometers north of Ho Chi Minh City.

According to Mr. Peter Dinning from Colliers International Vietnam, for those investors already in Vietnam it is easier to expand their business as they have firsthand knowledge of the market place and know what is happening. “They are able to make quicker decisions and have teams in place already to fast-track additional investments,” he explained. “Developers from overseas without a presence here find it difficult to understand the market and are still cautious, and are slower as a result to react to changes that may result in projects being more profitable than before.”

A new investment method is to join hands with Vietnamese partners. In October 2010, while CapitaLand joined forces with domestic firm Nova Land, Keppel Land entered into joint venture agreements with local developers Tien Phuoc Company and Hung Phu Real Estate Corporation to develop two prime sites in Ho Chi Minh City. “Foreign investors joining hands with local partners is the best way for them to jump into Vietnam,” Mr. Loh believes.

Source: Vietnam Financial Review

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