Opportunities amidst crisis
02-AUG-2008 Intellasia | Property-report
Aug 2, 2008 - 7:00:00 AM
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Vietnam was a bright star in Asia until early this year. However, news in recent months had caused concerns among investors.
Vietnam was a bright star in Asia until early this year. It attained one of the highest economic growths in South East Asia with GDP growth of 8.5% in 2007 and was on the radar screens of many foreign investors.
However, news in recent months on the widening trade deficit, high inflation, depreciating currency and weak stock market had caused concerns among investors. The deteriorating situation had prompted the government to lower its initial 2008 GDP growth target from 8.5% to 7-7.5% in May 2008. US rating companies Standard and Poor's and Fitch Ratings have downgraded their macroeconomic outlook for Vietnam from stable to negative.
This paper analyses the current economic situation in Vietnam and discusses the implications for the property market in Vietnam.
Rising inflation
High domestic demand, large inflow of investment funds, excessive liquidity, coupled with high food and energy prices had created inflationary pressure. Between March and July 2008, Vietnam's YOY inflation soared relentlessly. March 2008 saw inflation rate at 19.4% year-on-year (YOY), climbing up to 25.2% in May and 27% in July.
To bring prices under control, the government and the central bank had cut down on public expenditure, raised interest rates three times this year to 14% and increased the reserve requirement for banks. However, these measures require time to work through the system and the raising of retail petrol prices by more than 30% in late July is likely to accelerate inflation. According to recent official forecast, Vietnam´s consumer prices are expected to rise 25% this year.
Widening trade deficit
With soaring prices of imports and high expenditure, import growth for the first five months in 2008 alone escalated by 70% yoy. Trade deficit for the first seven months of 2008 grew to US$15 billion, exceeding the total deficit for the whole of 2007 by US$1.4bn.
Nevertheless, counterbalance measures such as foreign direct investment (FDI) inflows, official development assistance (ODA), and private remittances from Viet Kieu (overseas Vietnamese) can help mitigate the problem. The government has also suspended various public projects to lower public expenditure. These have helped to a certain extent as the monthly trade deficits have started to decrease. The June trade deficit of US$1.3 billion is down from US$2.85 billion in May, while the official estimated trade deficit for July is US$700 million. However, the government is still expected to face a wider trade deficit of US$18.8bn by end of the year.
Depreciating currency
There are rising concerns that the high inflation and widening trade deficit may result in a financial crisis and a hefty devaluation of the currency as experienced by Thailand in 1997. The closely managed dong has already dropped 5% this year, its greatest decline since 1998. The weaker currency would help to reduce the trade deficit as demand for imports would decline while exports become cheaper. However, the risk is that higher import costs would aggravate inflation.
Persistent trade deficit would drain the foreign reserves and lack of confidence would continue to cause Vietnamese to take flight from dong and buy foreign currencies, gold and other assets. Likewise, foreigners would likely choose appropriate hedging or sell their assets.
Anaemic stock market
Adding to the current woes is the stock market which had in June 2008 fallen 67% from the peak in March 2007 and seen volume down by 95% from a year ago. The stock market had enjoyed a phenomenal boom in 2006 and 2007 but plunged as the government started to carry out more prudent requirements on bank loans to securities companies and stock traders. The capitalisation of the HCM City and Hanoi stock exchanges fell from above 40% of GDP in March 2007 to about 17% of GDP in June 2008. Vietnam´s currency controls and the raising of interest rates are aggravating the stock markets.
Implications for real estate market
Residential
As the government implements more regulations on the credit markets, loans will be increasingly difficult to obtain. Real estate, often thought to be a good hedge against inflation especially when stock prices are declining, have instead seen prices cooling off since February with tightening credit conditions. At the same time, high inflation and lower stock prices have eroded wealth for the people.
As such, residential prices which saw a boom prior to the Lunar New Year have stabilised and in some instances have declined significantly compared to the peak before the Lunar New Year. It is very likely that Vietnam's residential market will go through a wait-and-see period. Prices are likely to decline further, making residential property less attractive as a hedging alternative in the medium term.
Office
Rents of Grades B and C office have been declining since end 2007. Tenants of Grades B and C offices are usually small-and medium-sized companies. Due to the economic uncertainties, many companies are consolidating and finding ways to reduce operating costs like rents. Quite a number of large corporations are also developing their own office buildings outside the central areas instead of renting to avoid long-term rental volatility.
Meanwhile, Grade A offices are still in great demand due to limited supply, thus driving up rentals. In 2007, Grade A office rental averaged around US$35 per sqm per month but has now almost doubled to US$65-70 per sq m per month. However, this situation is likely to stabilise in 2010 when 19 Grade A and B office buildings in HCM City are scheduled for completion, among which are Kumho Asiana Plaza and M&C Tower.
However, if the economic situation is not managed well and deteriorates, the office market could see downward pressure as companies reduce their office space requirement. A loss of confidence from local and foreign companies operating in Vietnam would lead to decreasing demand for even Grade A space, in addition to that for Grade B and C offices.
Industrial
Vietnam has been an attractive location for manufacturers of various products such as clothing, footwear and electronics in recent years. Previously, foreign companies had recognised Vietnam's advantage in low labour cost, political stability, sound policies, and good transportation network. By the end of August 2007, Vietnam had 150 industrial zones attracting foreign manufacturers mainly from Singapore, Taiwan, Korea, Japan and China.
The demand for industrial space may face a slowdown as workers demand higher wages. High inflation has eroded purchasing power, causing factory workers to go on strike in various companies to demand for higher pay as their salaries are below subsistence level. If high inflation persists and such strikes continue to take place, Vietnam's advantage as Asia's low-cost manufacture would be affected.
Retail
Vietnam's retail market is relatively immature with very few malls. The low competitiveness is therefore attractive for foreigners. There is also a growing population of young consumers and middle class who yearn for branded merchandise. In early 2008, Vietnam topped A.T. Kearney's annual list of most attractive emerging market retails destination, displacing India from its three-year run at top spot. A.T. Kearney's Global Retail Development Index ranks countries based on various factors such as economic and political risk, per capita income, market saturation and market attractiveness.
However, many young people have borrowed money or sold their houses to invest in the stock market. The ensuing high inflation and decline in stock index have eroded the wealth of many people, leaving many in debt. We are therefore cautiously optimistic about Vietnam's retail market in the short-term. The outlook depends on how efficient and how soon the government can lift the country out of the economic turmoil.
Real estate opportunities
There is a common saying that in every crisis, there are opportunities. The tightening of liquidity and falling prices in Vietnam are opportunities for foreign investors. Local developers are facing a severe credit crunch as banks tightened credit lines to the real estate market. Many projects are delayed, waiting for funds. Also, some developers are facing pressure from banks to repay debts, forcing them to sell properties at more realistic prices. Hence it is now easier to find investment opportunities, compared to last year.
The tourism industry is also an attractive area for investment. The greatest advantage for Vietnam's tourism industry comes from the rich cultural heritage, whereas long coastal geographical features have also blessed Vietnam with beautiful beaches and aquatic ecology. However, lacking expertise on tourism, Vietnam has not successfully and efficiently tapped into its natural advantage. As such, investors can help to develop a holistic tourism concept which incorporates all the historical, cultural and natural elements and draw more visitors to the country.
Meanwhile, manufacturing will continue to be a key driver in Vietnam's economy as Vietnam has comparative advantages over other countries in terms of low cost and educated workforce, good transportation networks and strategic geographical location. Thus, foreign manufacturers will still be attracted to Vietnam as a manufacturing base. To press on with Vietnam's dream of being a manufacturing hub, the government is likely to try their best to keep the manufacturing sector healthy and curb inflation to provide a ready workforce on low wages for the manufacturing sector.
Conclusion
Vietnam is an emerging economy competing in the global market. With its ascension to the World Trade Organisation, competitive manufacturing base and growing domestic market, it will continue to be attractive to foreign investors with a longer term view. Although the situation has deteriorated and the ride continues to look bumpy in the near term, its long-term fundamentals remain sound. With good management, Vietnam would be able to regain its stability and restore investors' confidence in the medium term. During this time of uncertainty, major players with necessary funding will benefit if they adopt a longer term view in investing in Vietnam's real estate market.
For more information, please contact:
Thailand/Vietnam
Heng Hua Thong
Executive director
Tel: +65 6393 2398
huathong_heng@dtz.com.sg
Research
Ong Choon Fah
Executive director &
Head Consulting & Research SEA
Business Group Leader Asia Pacific Research
Tel: +65 6393 2318
choonfah_ong@dtz.com.sg
Chua Chor Hoon
Senior director, Research
Tel: +65 6393 2341
chorhoon_chua@dtz.com.sg
www.dtz.com/sg.
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