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Grass is greener

Released at: 08:35, 18/06/2017

Grass is greener

Photo: Viet Tuan

It’s not without its difficulties, but increasing numbers of local property developers have set their sights on overseas investments.

by Hong Nhung

Vietnamese developer the BIM Group, together with InterContinental Hotels Group, one of the world’s leading hotel operators, held an opening ceremony on April 27 for their first five-star hotel, Crowne Plaza Vientiane, in the Lao capital of Vientiane. The five-star project marks the completion of the first stage of the BIM Group’s major investment project in the country. This is not a new trend and not the first time Vietnamese developers have invested in Laos or overseas real estate markets. A number of local developers, including the Hoang Anh Gia Lai (HAGL) Group, the Muong Thanh Group, and Thu Duc House have already set foot in real estate markets of potential around the world.

Offshore investments

During Vietnam’s global integration, while foreign investors have aggressively attempted to penetrate into the country’s fertile real estate market there has also been a wave of local developers reaching into international property markets over the last few years to curb risks and secure assets. According to a survey conducted by the Vietnam Chamber of Commerce and Industry (VCCI) in cooperation with the United States Agency for International Development (USAID) on future prospective locations for investors, many Vietnamese enterprises hope to expand their investments into key markets such as Laos, the US, Singapore, Myanmar, and Cambodia. 

Laos has become the leading destination for investments from Vietnamese enterprises. Figures from the Ministry of Industry and Trade (MoIT) last year show that Vietnam is ranked second among countries investing in the country, with capital totaling about $5.5 billion. Disbursement stands at $1.7 billion, primarily in real estate, agriculture, energy, and minerals. 
Crown Plaza Vientiane is among the first internationally-branded upscale hotels in Laos and part of Royal Square, a high-class hotel-office-shopping mall complex. “This project represents the BIM Group’s first investment in Laos and highlights the progress made in the development of the strategic economic relationship between Vietnam and Laos,” Mr. Doan Quoc Huy, Vice Chairman of BIM, told VET. “Laos is the group’s first key market for offshore investments.”

The Muong Thanh Group, Vietnam’s largest private hotel operator, opened the five-star Muong Thanh Luxury Vientiane hotel in July last year, its first hotel overseas and with investment of around $40 million. The 37-story hotel, with 331 rooms of international five-star standard, can house 700 guests and is the tallest building in Vientiane. Its opening marks a new stage in Muong Thanh’s ambition to become the largest hotel chain developer in Indochina, the opening ceremony heard.

Meanwhile, the HAGL Group, a Vietnamese pioneer in penetrating into international real estate markets, launched its five-star Melia Yangon hotel in Myanmar at the same time last year, which belongs to the Myanmar Center complex and has total investment capital of up to $440 million. The HAGL complex is the largest 100 per cent foreign-owned project in Myanmar to date, consisting of two phases with completion expected next year. According to an announcement from the Group, occupancy at the shopping center in the first stage is 95 per cent and office space 60 per cent. 

While the company has been finding ways to withdraw from the local property sector, it has sought development opportunities overseas. In 2015, it opened an international airport in the Lao province of Attapeu, with investment of nearly $40 million, and has also been building the Nongkhang International Airport in Houaphan province, with investment capital of around $80 million.

While not orienting its expansion strategy to neighboring countries like other major groups, Vingroup officially began a plan early last year to step out of the local market by purchasing an area of than 1,000 sq m in the CBD of Sydney in Australia, according to The Australian newspaper. The land has been valued at more than $16 million and will be used to build a hotel complex. Vingroup was not available for comment when contacted by VET.

Showing potential

Recent movements by local developers to diversify their investment portfolios have seen Laos and other nearby markets take on greater appeal. Laos and Myanmar are evaluated by industry insiders as possessing rapid growth, rich cultures, and favorable geographic locations, which are all major factors in attracting investors following the saturation in the property sectors of developed countries. There has been significant exploration conducted to seek investment channels in the Southeast Asia region in addition to local real estate projects.

Laos’ real estate market is growing quickly and has attracted the attention of investors from China and other ASEAN countries, the latest report from Savills on Vientiane’s property market noted. The apartment segment lacks supply, with total apartment stock in the fourth quarter of 2016 standing at approximately 1,000 units. Asking prices range from $1,000 - $4,000 per sq m, and pricing overall in Vientiane is lower than in other regional cities, such as Yangon, Ho Chi Minh City, and Hanoi. Active projects have absorption exceeding 50 per cent. 

In the office segment, Vientiane’s stock is smaller than that of other cities in Southeast Asia, at only 0.6 per cent of Bangkok’s, 1 per cent of Jakarta’s, 3 per cent of Hanoi and Ho Chi Minh City’s, 17 per cent of Yangon’s, and 28 per cent of Phnom Penh’s. Office demand from Asian tenants is expected to rise in step with increasing foreign direct investment (FDI) to Laos. In addition, according to the World Travel and Tourism Council (WTTC), Laos is ranked seventh out of 184 countries in the growth of travel and tourism’s contribution to GDP, at 6.6 per cent in 2016, while Vietnam was ranked 40th.

Savills’ report on Myanmar’s hotel segment shows that total supply of three- to five-star hotels in Yangon reached approximately 3,000 rooms, which was equal to 5 per cent of the hotel stock in Hong Kong, 7 per cent of Phuket’s, 26 per cent of Ho Chi Minh City’s, and 40 per cent of Hanoi’s. Average tariffs in the four- and five-star hotel segment is around $210 per night. Most hotels in Yangon have seen occupancy of 90-100 per cent, on both weekdays and weekends, due to a shortage of rooms.

The trend among Vietnamese developers to look overseas has two possible scenarios, according to Mr. Adam Fitzpatrick, Director of Capital Markets & Investment Services at Colliers International Vietnam. Land in key markets in Vietnam is now incredibly expensive and this makes successful projects in the country a very challenging prospect. “One aspect of developers looking overseas will be for them to take advantage of markets where land is still competitively priced and offers better returns than their projects in Vietnam might,” he told VET. “The other aspect will be developers trying to expand into more mature markets and develop to a higher standard, but that will be more challenging and I would expect it to be relatively rare.” 

Challenges to face

HAGL’s Myanmar Center project was estimated to bring billions of dollars to the group, but HAGL has been facing certain challenges after Myanmar introduced new tax regulations on real estate transactions in April last year. Transactions valued at under $22,000 incur a 15 per cent tax rate, from $22,000 to $73,000 20 per cent, and more than $73,000 30 per cent. The new rates are five times higher than in 2015 and much higher than the 2 per cent rate imposed in Vietnam, and has put pressure on the operations of property developers in Myanmar.

Additionally, the ability to transfer projects is affected by a very high tax rate of 40 per cent. As a result, HAGL ended a deal to sell 50 per cent of its ownership in the Myanmar Center to Singapore’s real estate and investment group Rowsley in 2015 because of the high tax rate. In addition, “demand for apartments and offices has been increasing in Myanmar, but it seems that supply is now rising faster than demand, which leads to the possibility of increasing competitiveness among real estate developers in the market,” VPBank Securities noted in a report.
Stepping into the US in 2009, Thu Duc House, in cooperation with two US partners, established the Thu Duc House Property Venture LLC, in which the Vietnamese developer holds 50 per cent. “The company in the US has operated quite effectively over the past few years, but business results have been unsatisfactory,” Mr. Le Chi Hieu, CEO of Thu Duc House, told VET. Moreover, “new policies from the US Government are becoming unfavorable for foreign investors, so the company decided to divest from the market.” After its withdrawal, the company revealed a plan to expand its land reserve in Vietnam by merger and acquisition (M&A) activities this year.

As Mr. Bui Kien Thanh, an economic expert, said, overseas property markets have always been attractive and hold great potential but are also extremely challenging, with laws on taxation in some countries being especially harsh. Nevertheless, this does not mean that Vietnamese developers should not reach out over borders, as opportunities will come to those with strong resources, cautious investment strategies and, more importantly, a deep understanding of their target markets.  

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