The government must do its utmost to prevent a real estate bubble accompanying the strong recovery of the market.
On a January afternoon some 2,000 people, including representatives from financial institutions, investment funds, and real estate enterprises, together with individual investors and potential homebuyers, attended a workshop organized by the FLC Group to seek investment opportunities.
Looking at models of projects displayed at the workshop, Mr. Phan Tat Thang, an individual speculator from Cau Giay district, decided to subscribe to purchase three apartments in Nam Tu Liem district's FLC Complex Pham Hung. The developer recorded hundreds of other subscriptions to buy one or more of its 4,000 apartments, villas, and townhouses in Hanoi, which are to be launched on the market this year. "Real estate is recovering and housing prices will rise soon," Mr. Thang said. "Small or medium-sized apartments in favorable locations will soon earn profit for buyers."
The optimism of Mr. Thang and the other participants at the crowded workshop is just one of a few promising signs that the property market, which has been slowly recovering since 2014, will truly bounce back in 2015. It may well be a fruitful year for the market, as it is set to benefit from a number of newly-issued regulations.
The revised Law on Housing, falling interest rates, and reinforced market confidence all support the property market. The residential market is forecast to remain positive in 2015. Sales momentum is expected to stay strong, retaining its current pace in both Hanoi and Ho Chi Minh City, according to Mr. Marc Townsend, Managing Director of CBRE Vietnam.
It is expected that new launches will continue their strong run in both cities, especially in locations with improving infrastructure, like Districts 2 and 9 and Thu Duc and Binh Thanh districts in Ho Chi Minh City, and districts in the west and southeast of Hanoi. Luxury and high-end products will be sought after, especially in Hanoi, as the stock for these segments is diminishing gradually.
Looking back on 2014, the residential market saw a sharp increase in the number of new launches in both Hanoi and Ho Chi Minh City. CBRE's figures show there were a total 14,807 new units launched in Ho Chi Minh City, 3.2 times higher than in 2013, while in Hanoi a total 16,253 new units were released, or 2.06 times higher. There was an increasing trend in new launches from the first quarter to the fourth quarter, evidencing improved market confidence among both developers and buyers towards the end of the year.
While the high-end segment was the spotlight in Ho Chi Minh City, with over 50 per cent of the sales volume being in the segment, the mid-end segment was the key performer in Hanoi. Typical examples include Vinhomes Central Park, Masteri Thao Dien, Scenic Valley and Rivergate in Ho Chi Minh City, and Times City, Green Stars, and Hoa Binh Green City in Hanoi. It is estimated that approximately 26,000 units were sold in both cities, a 50 per cent increase compared with 2013.
Property prices have become much more affordable over the last five years, with smaller-sized units triggering demand from both owner-occupiers and investors. According to figures from the Ministry of Construction, inventory was estimated at VND74 billion ($3.44 million) as at December 15, 2014, a fall of 21.8 per cent compared with the same day of 2013 and 42.52 per cent against early 2013.
Residential absorption will be interesting to watch, according to Mr. Troy Griffiths, Deputy Managing Director of Savills Vietnam. Detached housing will have a good opportunity for capital gain and its yet to have the full focus of developers. "With small stock volumes and solid real demand, this could be an opportunity for the detached housing business over the near term," he said.
Regarding the office market, rents in established and mature office buildings are expected to be stable or even slightly increase in Ho Chi Minh City. "Newly completed buildings, however, will need to offer competitive rental rates to attract occupiers," said Mr. Townsend. For Hanoi, office space in the west will continue to be under pressure due to oversupply. Occupancy rates are expected to increase thanks to economic recovery, with optimistic GDP and FDI forecasts.
Meanwhile, the retail market will continue to see a mix of positive and negative news in the two cities. In Ho Chi Minh City, limited availability of space in core areas continue to support average CBD rents, while average non-CBD rents are expected to recover with increasing occupancy. The closure of under-performing retail centers is expected in both cities.
Expansion and new entrants are anticipated to drive the retail market in 2015 thanks to changes in regulations allowing foreign retailers to establish 100 per cent foreign-owned entities in Vietnam, which is within the framework of Vietnam's commitments to the WTO. However, the Economic Needs Test (ENT) will remain a barrier to foreign retailers. Restarted projects and the construction of future supply will speed up following economic recovery.
Towards sustainable development
Having researched the real estate market in 2014 and its future prospects, Dr. Tran Kim Chung, Deputy Director of the Central Institute for Economic Management, said that the market may develop steadily from the second quarter of this year onwards because of increased availability of funds, especially overseas remittances. "A new cycle may appear," he said. "The degree of development will depend on many factors, however. Opportunities are plentiful but there are also many challenges."
The market is expected to grow in 2015 but could be negatively affected by strong speculation. The amended Law on Housing is expected to increase demand from foreigners and overseas Vietnamese. Overseas Vietnamese have the right to buy, own or transfer houses and land use rights in Vietnam, creating a potential new source of demand for luxury or high-end projects. The active involvement of both owner-occupiers and investors, including speculators, will translate into increasing sales volumes. "The government should focus on monitoring secondary investors, especially in the high-end segment, because speculation by them could be a decisive factor in prompting a market collapse," one insider said.
With the market's recovery, the risk level in real estate has decreased. Along with disbursement from the banks, borrowing is easier for both buyers and investors. "This may lead to a real estate bubble if the government doesn't exert sufficient control," Dr. Chung said.
The last property bubble reached its climax in early 2008 after prices jumped off the charts in large cities, fueled by high economic growth, a dire shortage of housing, and weak government management, all of which gave rise to speculation. The government should do its utmost to prevent a new real estate bubble from appearing.
Strong reform and government initiatives in recent times are expected to assist the market's development in a sustainable manner. Among others, under the amended Law on Real Estate Business, effective from July 1 this year, conditions specify that real estate companies must have minimum legal capital of VND20 billion ($937,800). Developers must also be guaranteed by credit institutions to sell or rent houses that are formed in the future. The new regulations target to limit the ability of market participants who have weak financials, thereby helping to stabilize supply.
Residential prices have fallen consistently and are at levels where purchasers feel comfortable entering the market. According to Mr. Jonathan Tizzard, National Head of Research & Valuation at Cushman & Wakefield Vietnam, this is because many developers have learned what type of product to build and how to build them as efficiently as possible. Commercial property, whether retail or office, continues to struggle in certain areas and it is only the very best locations or developers that are performing strongly. "Many developers and speculators were severely burned during the bursting of the last real estate bubble and will have learned from their mistakes," he added.
Vietnam's real estate market is certainly evolving and maturing and there is no doubt that 2015 could mark a more general recovery. "The focus will continue to be on a sustainable recovery that avoids the mistakes of the recent past," Mr. Tizzard added.