Vietnam's property market boils over
HANOI - Is Vietnam's explosive economic growth inflating a property bubble? Some Vietnam-based analysts think so judging by the number of new developments mushrooming across the country.
The 1997-98 financial crisis that hit other countries in the region such as Thailand, Indonesia and Malaysia had only a marginal impact on Vietnam, which had then only recently emerged from decades of economic isolation. Now, however, Vietnamese property developers are rapidly building new commercial and residential developments that some analysts contend have glutted the market. And there is no end in sight of new building projects.
With the transition from a centrally planned to a market economy and a recent record of strong economic growth, up and coming
Vietnamese increasingly demand better quality housing and business facilities. Vietnam continues to go from strength to strength, averaging annual growth of 6-7%. That demand had in recent years pushed up land and house prices in Hanoi and Ho Chi Minh City and provided developers commercial incentive to build.
More recently, however, property speculation has pushed prices up and beyond the reach of most Vietnamese. Judging by property and land turnover rates, many Vietnamese have invested in property rather than depositing their money in low-interest bank deposits or even in the lightly regulated new stock exchange. Local property experts estimate that only 5% of the population has the wealth required to buy property at current inflated prices.
For instance, a square meter of street-front land in Hanoi and Ho Chi Minh City's downtown now fetches about US$5,000, while a square meter of apartment space can run between $300 and $1,000 or more - prices far beyond the reach of average national incomes, which now hover between $1,500 and $2,000 per year.
Many investors, on the other hand, leveraged into those extremely high prices on borrowed money and are still sitting on their property hoping that Vietnam's accession to the World Trade Organization (WTO) will generate deep-pocketed foreign interest in the market. But even by international standards Vietnamese property prices are sky-high and arguably are leading to major distortions in the broad economy.
One measure: a recent survey by Mercer, a US human-resource consultancy, found Hanoi ranked 29th out of 144 global cities ranked on cost of living, directly following Berlin and ahead of other major cities such as Taipei, Guangzhou, Chicago and San Francisco. A property bubble would also have a major impact on the banking sector: about 18% of total bank loans are now tied up in property-related investments. And with the property market grinding down, banks have recently stopped lending money for new property investments.
Rapid reforms
Vietnam-based property experts contend that rapid market reforms are partially to blame. A new land law passed in 2004 established private land-use rights, legislation designed to phase out communist policies that made the people and state custodian of all lands. The law aimed specifically to level the competitive playing field, ensuring that all enterprises, whether foreign-invested, state-owned or private, would have equal opportunity to lease or be allocated state lands at market, rather than government determined prices.
Historically, about 70-80% of all land transactions took place without a paper trail, meaning that authorities were unable to tax or manage the sector effectively. The new law aims to change that by standardizing land transactions, providing legal disincentives for unofficial property transactions and prohibiting companies from dividing land and selling it in smaller lots.
Property analysts blame the ban on parceling plots as one reason for over-speculation in land and large-scale developments. It also has pushed many smaller-scale developers, who lacked bank financing and the ability to acquire large tracts of land, but arguably were more in tune with local buyer preferences and real spending power, out of the market.
There are tell-tale signs that large-scale property developers have overshot the market. And the new legal requirements for property transactions have created major confusion in the market and hence led to fewer transactions.
Land and house transactions have come to a near standstill over the past year, according to industry experts. At the end of 2005, property transactions were 70% lower than before the new land law took effect. Now, officials and developers worry about a possible collapse of the real-estate market due to inactivity and development.
"Land prices being higher than their actual value, combined with the psychological effect and changes in real-estate law, were the main reasons for the decrease in land and house transactions," said Le Dinh Thang, head of the Real Estate Trading Faculty at Hanoi National Economic University.
Persistent rumors about possible new taxes on property ownership have recently deterred speculators from buying into the overbuilt market, he said.
Dang Hung Vo, deputy minister of the Ministry of Natural Resources and Environment, recently said: "Reducing land prices to levels affordable for most of the population would help reignite the market. We cannot let land prices stay so high, because it is at the expense of most people and economic development."
That's easier said than done, however. Now that market reforms have been introduced, if the government were to intervene directly in the property market it would send a worrying signal to foreign investors. Instead, the government would be well advised to create policies that curb speculation and allow for asset pricing clearing by allowing the market to bankrupt those developers that made poor commercial decisions.
Pham Sy Liem, deputy president of the Vietnam Construction Association, suggested: "When buyers are not interested to buy property, it is necessary to lower the price. Those holding property should realize that in order to sell, they'll have to accept less than they anticipate and salvage what they can of a bad investment."
Foreigners to the rescue ?
The government is acutely aware of the important role the real-estate sector can play in maintaining economic growth and is now encouraging foreign interests to join with Vietnamese companies to bolster the sector.
While Vietnamese banks are bearish on the market, some foreign fund managers are bullish. VinaCapital, which is listed on the London Stock Exchange, recently increased the size of its Vietnam Opportunity Fund to $171 million, and its $205 million Vinaland Fund was Vietnam's best-performing fund last year. Both funds provide financing for construction in Vietnam's apartment, office, hotel and trade-center sectors in Hanoi, Ho Chi Minh City and some provinces in the central region.
VinaCapital's property investments focus on foreign companies that aim to set up operations in Vietnam after the country accedes to the WTO this year and the foreign tourism sector. Still, memories of the 1997 regional financial crisis linger. Recent revelations about large-scale government corruption in certain infrastructure projects have spooked foreign investors, financial analysts say.
The government is rushing to allay those concerns. For instance, the Construction Ministry recently sponsored the formation of the Vietnam Real Estate Association (VREA) to provide guidance to the market and maintain contact points with potential foreign investors.
Both the VREA and the government have recently tried to send positive signals to foreigners. The VREA carefully studied the Chinese approach to property-market development, and although it replicated some of China's reform initiatives, the body finally concluded that the ideal real-estate brokerage model for Vietnam should be the United States, not China.
Moreover, many delegates to the current session of the National Assembly have focused on clarifying definitions of the real-estate business, transactions and types of real estate. Delegates also demanded that transactions among the population, including state agencies, army and police units, should be clearly legislated to ensure transparency.
Last month, the National Assembly passed the Real Estate Trading Law, which aimed to provide regulations on property development and transactions. The new law eases the way for foreigners and overseas Vietnamese to enter the real-estate market, allowing them to provide a wide range of services relating to real estate, including brokerage, pricing, buying and selling, consultancy, auctions, advertisements and management.
The law includes for the first time the concept of a "real-estate exchange", where all real-estate transactions are required to take place. Individuals and organizations may establish their own real-estate exchanges, the establishment and operation of which are subject to statutory requirements. And while foreign investors are still barred from buying an existing structure, investment in building houses or making improvements is allowed.
Some Vietnam-based property analysts believe the new law sufficiently tightens the legal framework enough to avoid the market chaos witnessed in recent years.
"It is essential to have a real-estate law in order to address problems in the real-estate market, such as illicit transactions, speculation and stagnancy, to make the market healthier," said Chu Van Chung, head of the legal department at the Construction Ministry. "The law will make it legal and more convenient for individuals and organizations to conduct real-estate transactions."
However, whether those legal tweaks are enough incentive for foreign investors to bail out Vietnam's broad property sector at current inflated prices still seems doubtful.
By Karl D John - Asia Times - July 27, 2006
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