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Can it last?

Released at: 23:23, 05/12/2014

Can it last?

Although considered a new trend among many property investors, investing in the mid-end townhouse segment is not without its drawbacks.

by Nguyen Quynh

The first 50 townhouses at the Mega Ruby project of the Khang Dien House Trading and Investment JSC have been finished and 110 are to be completed shortly. The company has already sold 160 townhouses at its Mega Residence project. Costing from VND2.2 billion ($105,000), each townhouse at Mega Ruby is suitable for stable middle-income earners. 

A new trend

Nam Long is also a property developer in the townhouse segment, with its Ehome 4 project. According to Mr. Le Minh Khanh, Director of its PR and Sales and Marketing Department, 218 townhouses in the Ehome 4 project were sold as soon as they were launched. Each townhouse, costing from VND867 million ($40,641) and of 40-70 sq m, attracted interest among people on middle incomes.

Mega Ruby, Mega Residence and Ehome4 are the latest projects by Khang Dien and Nam Long that are part of a strategy to move from the luxury segment to the mid-end segment. After the success of Mega Residence, Khang Dien decided to invest in townhouses costing from VND2.2 billion ($105,000) to VND2.5 billion ($158,000) instead of its main product line in the luxury segment, which cost from VND4 billion ($200,000) to VND20 billion ($936,000). Khang Dien also changed its profit goal for 2014, from VND40 billion ($1.872 million) to VND100 billion ($4.6 million).

According to Mr. Khanh, Nam Long has launched other product lines to meet the changing demand of customers. A few years ago, when demand in the luxury segment was at its peak, many customers wanted to buy houses not only for living but also as investments, so Nam Long introduced high-end townhouses in the Kim Long, Ngan Long, Nam Khang projects. “In the last five years, however, due to demand among stable middle-income increasing rapidly, Nam Long decided to invest in the Ehome product line, which cost around VND1 billion ($46,816) with areas of 75 to 90 sq m,” he said.

It is clear that townhouse projects for the mid-end segment have become a trend in Ho Chi Minh City. According to the latest report from Savills, the villa and townhouse market performed well due to significant increases in supply. Approximately 72 per cent of the total transaction volume in the segment was in newly-launched projects. Total villa and townhouse transactions increased significantly, by 223 per cent year-on-year, while the absorption rate fell 13 per cent quarter-on-quarter, due mainly to the strong growth in stock. The townhouse segment is predicted to be an attractive segment with a positive outlook, according to the report. Future supply will be approximately 52,890 dwellings in 135 projects over the next eight years. In addition, approximately 1,000 dwellings in ten projects are expected to enter the market over the next two quarters. Ms. Nguyen Hoai An, Senior Manager at CBRE, agreed that the mid-end townhouse segment, which is directly competing with the apartment segment, has become a trend in the property market.

Long-term strategy or temporary trend?

Khang Dien and Nam Long have clearly been successful with their strategies. According to real estate expert Mr. Nguyen Nguyen Thai, the townhouse model may be popular in the property market because it targets Vietnamese customs, in that most people prefer owning a house over living in an apartment. “But we need to wait to see the full business results of Khang Dien to determine whether the strategy is the right one,” he added.

Despite receiving positive feedback from customers, Khang Dien and Nam Long’s townhouse strategies have created some concern among property analysts. The question is whether townhouses in the mid-end segment are a long-term strategy or just a short-term trend. Some believe that townhouse projects are only a temporary strategy adopted by some companies to create liquidity.

When asked about the issue, Mr. Nguyen Van Duc, Deputy Director of the Dat Lanh Real Estate Co., said the townhouse strategy of Khang Dien and Nam Long is just one way to diversify property segments. “Although targeted at demand among Vietnamese, townhouse projects are not a long-term strategy,” he said. “With many villa and townhouse projects in Hanoi being deserted, property companies who intend to invest in townhouses in Ho Chi Minh City need to be careful.” 

Moreover, land resources are a major problem because more land is needed for a townhouse project than for an apartment project. Mr. Le Chi Hieu, General Director of Thu Duc House, said that property companies planning to invest in townhouses or villas must have large land funds with low site clearance and compensation costs. “But the number of companies with such a land fund is limited,” he was quoted as saying. When asked about the problem, Mr. Khanh said that Nam Long, with its 570-hectare land fund, was able to develop townhouses for the next ten years. It is also seeking new land resources, to ensure their strategy is sustainable.

The question, though, is what solutions Nam Long can adopt ten or more years from now when the land fund is exhausted, especially in the context of greater competition between property developers.

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