Mergers & acquisitions are breathing new life into Vietnam's stagnant real estate market.
After lying idle for two years, Sky Park Residence, a multi-purpose complex with residential, commercial, and office units for lease on Hanoi’s Ton That Thuyet Street, changed owners earlier this year, from Licogi 16 to the Thanh Hoa Construction Company. Initially planned to be completed late this year, the project was postponed last year due to Licogi 16’s financial difficulties. Insiders told VET that Thanh Hoa Construction intends to maintain the existing layout of the project, building on elements Licogi managed to finish. Sky Park Residence will cover an area of almost 7,000 sq m and feature two buildings: the first of 25 storeys with office space for lease and the other of 35 storeys with residential units for sale. The two buildings will share a common three-storey underground parking lot and the first five-storeys, which will be a commercial centre with retail space for lease. Thanh Hoa Construction, a new name in the Hanoi property market who has until now has only worked on projects in its native Thanh Hoa province in Vietnam’s north, plans to invest VND1,650 billion ($77.8 million) to complete the project.
Sky Park Residence is not the only project to stir a degree of interest in Hanoi’s property market in recent times. The ION Complex, at the coveted location of 36 Pham Hung Street, was acquired from the Hai Phat Company by the FLC Group in June, while the four-star hotel Mercure Hanoi at 9 Cat Linh was another of Thanh Hoa Construction’s purchases. According to Mr Nguyen Hong Son, Head of Feasibility Studies and Valuation at Savills Vietnam, the positive signals in the economy in general and the real estate market in particular make this an ideal time for real estate mergers and acquisitions. After a long period of market slowdown and with many developers looking to hand over projects they are unable to complete, the price of many large projects has fallen to more reasonable and attractive levels.
Combined with lower interest rates, which have made loans more affordable, developers with strong financial resources can now more easily purchase projects that used to be significantly more expensive. Furthermore, as Mr Pham Xuan Can, Chairman of the Board at Sohovietnam, the facilitator and consultant behind many mergers, told VET, the increasingly favourable signals in pricing, finance, and cash flow are giving buyers more confidence in choosing to purchase residential units.
According to Mr Marc Townsend, Managing Director of CBRE Vietnam, the number of residential unit sales transactions in the second quarter of this year, both in Hanoi and in Ho Chi Minh City, has increased steadily, from approximately 1,600 in the first quarter to over 2,400 in the second. Real demand, especially in Hanoi, outstrips supply in the sector. With 3.1 million people currently working in Hanoi and about 10 per cent needing housing, the demand of these 300,000 far exceeds the 10,000 or even fewer apartments now available. Along with relatively stable office rental rates and the entrance of many new retail brands such as Robins, Starbucks, and Lotte Mart into both Hanoi and Ho Chi Minh City, developers are finding it increasingly profitable to invest in multi-purpose complexes such as FLC Complex and Sky Park Residence.
Reasons for the rise in M&As come not only from the external environment but also from the internal conditions of both the previous and new developers. According to Mr Can, sellers such as the Hai Phat Company and Licogi 16 were developing many projects at the same time and therefore had to sell off their valuable projects in order to raise the necessary capital to finish others. Buyers and new developers, such as the FLC Group and Thanh Hoa Construction, have capital at hand and with banks more eager to lend and interest rates so low, borrowing more money if needed would present no problem at all. Increased liquidity and strong financial resources make it possible for developers to purchase and continue projects. Mr Can also notes that it is easier for new developers to continue these projects as they do not have to deal with any time-consuming paperwork or complications in land clearance and compensation, which have already been addressed.
With favourable conditions and adequate finances, the new owners are virtually guaranteed of success. One of only a few challenges would be that they must connect with existing partners and buyers to renew any dwindling interest in the projects and restore faith. Competition from similar complexes nearby also need be taken into consideration. One source told VET that the FLC Group is planning to pitch the starting price for residential units at FLC Complex 36 Pham Hung at VND23 million (nearly $1,100) per sq m; considerably lower than that at the nearby Indochina Plaza Hanoi (VND48 million ($2,264) per sq m) and the Eurowindow Multicomplex (VND33 million ($1,556) per sq m). Such differences in price will no doubt attract many potential buyers, especially young families looking to buy their first home, but at the same time may also raise questions about construction quality.
Similarly, Sky Park Residence will face competition from Keangnam Hanoi Landmark Tower in terms of price and special offerings, and it is important that it differentiates itself from this strong competitor in order to succeed.
Ms Nguyen Huong Giang, Senior Research Manager at Savills Vietnam, observes that the developing infrastructure in the western part of Hanoi (Cau Giay, Nam Tu Liem districts and elsewhere) and the relocation of government offices to these areas from the CBD will result in a vibrant local market in both office and residential. Competition will be strong, with the completion of Lotte Centre Hanoi on Lieu Giai Street and its 278 office units, but this will also drive down rental prices, which is an advantage for buyers and will further increase interest. And with Vietnam’s upcoming participation in the ASEAN Economic Community in 2015, demand for upscale office and residential units from foreign buyers will only grow. Recent research by Savills Vietnam shows that residential and office prices in both Hanoi and Ho Chi Minh City are among the lowest in the region, compared to Kuala Lumpur, Manila, Beijing, Hong Kong, and Singapore. So if an international corporation is looking to open new offices in the region, Vietnam’s lower prices will be a major advantage, according to Mr Troy Griffiths, Deputy Managing Director of Savills Vietnam.
Experts are of the opinion that the M&A trend is one of many good signs for the market. “This is a process of selection and elimination,” said Mr Can. “Companies without adequate financial resources or experience and capacity will have to leave the market, handing their projects over to other developers with the ability to complete them.” These new developers, with their strong resources and experience, will be able to ensure that the project is finished on time and does not have financial issues. In terms of social effects, the projects will also be more carefully completed and create many opportunities during completion, in construction, materials, and design, and will make use of existing resources such as machinery. All of these factors will to contribute to greater liquidity in the market as a whole.