Fluctuations in the exchange rate leave stakeholders in Vietnam's real estate market with a number of matters to ponder.
The decision of the State Bank of Vietnam to increase the exchange rate band from +/-2 per cent to +/- 3 per cent to deal with the devaluation of the Chinese Yuan at the end of August is viewed by experts as the right step to take.It will, however, have an impact on the country’s real estate market, as rising exchange rates will see real estate companies eventually faced with higher costs and declining profitability in the future unless they push up house prices.
The move also creates opportunities in real estate, though, because it will remain a safe investment channel compared to securities and gold given the devaluation of the Chinese Yuan triggered panic in stock markets.
Many real estate companies are concerned given that the majority of construction materials are imported and will now cost more.
According to Ms. Vo Thi Diu Hien, Deputy General Director of the Saigon Thuong Tin Real Estate JSC (Sacomreal), real estate companies should consider opening sales as soon as possible to take advantage of cash flows from the financial market, welcome investment flows from potential foreign investors, and introduce preferential rates to customers and companies.
“Companies should balance the structure of the materials used in construction by increasing the use of domestic materials to cut costs and be more competitive,” she advised.
One real estate investor developing a series of projects in South Saigon, meanwhile, said that the price fluctuations in raw materials will have less of an impact on the business plan of his company because it signed purchase contracts to buy construction materials well before beginning construction, as is the case with all investors. So any project that started earlier will not be subject to higher prices. “Material prices will only rise in the future, for new material orders,” he said. “Old orders will not be affected by changes to the exchange rate.”
In a report on the impact of exchange rate adjustments on Vietnam’s real estate market, CBRE said that the market will not be overly affected by the exchange rate volatility. Domestic developers account for the bulk of supply in Vietnam’s residential real estate market while foreign developers account for less than 10 per cent.
Foreign investors and developers usually have profit targets calculated in USD, so they may bear a heavy burden from sales made in VND even though the risk of exchange rate fluctuations would have been carefully considered when they developed financial plans for their projects.
Housing prices over recent years have been more affected by supply and demand factors than exchange rates. “Projects that have completed their construction will be less affected by exchange rate volatility as the cost of imported raw materials for these projects were paid for in the past,” the report states. “Future projects, however, with imported construction materials, will be under pressure from price increases.”
Agreeing, Mr. Le Hoang Chau, Chairman of the Ho Chi Minh City Real Estate Association (HOREA), said that in the short term housing prices will not increase because of many reasons, the most important of which is that the devaluation of the Yuan will make the price of exported raw materials from China cheaper and this is the source of most materials used in Vietnam. But in the long term, housing prices will rise.
While projects using materials from China will not be overly affected by the exchange rate fluctuations, high-end projects using imported material from elsewhere will suffer. According to Mr. Le Chi Hieu, Chairman of the Board at the Thu Duc Housing Development Corporation, real estate investors should carefully consider cutting unnecessary expenses to offset higher input costs.
“Because purchasing power in luxury real estate remains weak, investors must carefully consider any price rises,” he said. “To reduce costs, companies need to save on management and design costs, creating a reasonable price that the market can bear.”
While movements in the exchange rate have sparked concern about house prices increasing they also make real estate a more attractive investment channel than gold or securities. Ms. Duong Thuy Dung, Head of the CBRE Research and Consulting Department, said that local investors’ demand for investing in real estate should increase in the time to come as property becomes seen as a popular investment channel compared to gold, securities, and bank savings, in the context of volatile gold prices, stock market fluctuations, and low interest rates. Mr. Chau also believes that real estate will benefit from being viewed as a safe investment channel.
And stock continues to be in good supply. Sacomreal announced in late September that it will launch 238 villas at the Jamona Home Resort in Ho Chi Minh City’s Thu Duc district at prices starting from VND1.9 billion ($85,500). In the apartment segment, the company will also launch 200 luxury apartments at the Jamona Apartment project in District 7 sooner than expected. The Phat Dat Real Estate Development Corporation, meanwhile, opened 528 apartments and 75 villas at its Everich 3 project for sale at the end of August. The investor of the Phu My Hung urban area also introduced 554 apartments in the Happy Residence project recently.
Investors opening sales at the moment can benefit from two separate factors: they may attract cash being withdrawn from the stock market for property investments, and can take advantage of foreigners being allowed to purchase housing under the amended Law on Housing, which took effect on July 1. Exchange rate moves will also be favorable to these foreign homebuyers.
Ms. Dung said that this is a good opportunity for foreign investors to participate in Vietnam’s market, following the exchange rate adjustment. “Foreign investors may be less affected by the devaluation of the VND in terms of their investment decisions,” she said. “Before the devaluation Vietnam’s property market was already seen as an attractive investment channel due to its higher profitability and lower purchasing price compared with neighboring countries.”