Back in Nam
Take a stake in an offshore company and you can buy idyllic property in Vietnam. But how risky is this business, asks Alex Frew McMillan
Early in 2008, it looked like Vietnam would go through another version of the Asian economic crisis, all on its own. Inflation for the year hit 23 percent. Growth was falling. The currency, the dong, took a pounding. And Vietnam’s trade deficit blew out to US$17.5 billion.
Hardy investors who had bought second homes in Vietnam’s fledgling villa market took a hit. Overseas Vietnamese – known as the Viet Kieu – and local buyers, who have been known to get into fist fights while waiting in line to buy some of the few new condominium developments coming on the market, were surprised to find that property prices don’t always go up.
Prices plummeted, funding dried up from banks, and the lending rate shot up to 21 percent in the third quarter of last year. Purchasing property is a new idea in Vietnam – like China, it is a Communist country, and all land is in theory owned communally by the people – and the sudden downturn in the market alarmed buyers who had just got used to the concept.
“Vietnam really rode out a pretty tough period last year, with real-estate prices plummeting,” Peter Ryder, the CEO of the developer and investment manager Indochina Capital, says. “With the currency, Morgan Stanley was telling everyone it would depreciate by 40 percent.”
Property prices dropped 50 percent to 60 percent on the outskirts of the biggest city, Ho Chi Minh City, also known as Saigon. But the huge currency declines never came to pass. The dong dropped around 5 percent in 2008 instead, and is down around 2 percent so far this year. As a result, confidence is returning, and developers are starting to market projects again. But is it real confidence, or a confidence game?
The statistics favour long-term growth in the property market. And Ryder, who was born in Manhattan, in New York City, says Vietnam is far better off than his homeland.
“I think Vietnam is – if you are thinking medium-term – less risky than investing in the United States today,” Ryder says. “Institutions are still pretty shell-shocked over there. And let’s get some perspective. In Vietnam we currently have a functioning banking system that continues to lend money to people on a project basis.”
Ryder’s future does of course depend on him being right, and convincing others to buy into his vision. His company recently sold the last of the 40 privately owned villas at The Nam Hai, a resort on China Beach just outside Hoi An, near Danang, for US$2.5 million. There’s a new golf course designed by Scottish golfing legend Colin Montgomerie and another 60 hotel villas in the complex. Travel + Leisure named it Best Designed Resort for 2008.
Ryder has spent 22 years in Asia, working in Tokyo with Salomon Brothers before leaving that company in 1991. He now lives in Hanoi, with his Vietnamese wife and twin boys, and develops property across the country.
“To me, Hanoi is the last really magical Asian city,” he says. “It still has a lot of very traditional elements to it. It has an amazing collection of beaux arts and art deco architecture. It is quite an exotic place to be, and it is still very Asian, unlike Saigon,” which is Vietnam’s most Western-influenced city, its business hub, and its equivalent of international New York City.
Although some real-estate professionals have questioned the ownership structure for The Nam Hai, Ryder says it stands up. Since non-Vietnamese are not allowed to own land in Vietnam, the law firm Johnson Stokes & Master – which has now merged with Mayer Brown – has created an offshore company that owns The Nam Hai, which non-Vietnamese can buy into.
“It’s very similar to a New York co-op,” Ryder says. “You, as a foreigner, could purchase one of the villas through this structure, and you get a C-share for condo, or a V-share for a villa.”
Other observers say they are more comfortable taking out leases in Vietnam, and suggest offshore structures may be skirting the law. The concept has proven controversial in Thailand, where the government has targeted off-the-books partnerships that allow foreigners to buy land and hold it via silent Thai partners. But so far, Vietnam has not taken any action on offshore companies.
The rules of property ownership in Vietnam are just now being written. In June 2008, Resolution 19 outlined a pilot scheme for foreign organisations and individuals, allowing them to buy and own housing in Vietnam. The law allows non-Vietnamese buyers to purchase one residential apartment in Vietnam. The government then issued Decree No. 51 in June 2009, providing guidelines on how Resolution 19 should be implemented.
According to CB Richard Ellis, the way to interpret the laws is that resident foreign individuals and resident foreign entities can buy residential apartments, with certain restrictions, while non-resident foreigners aren’t allowed to buy or lease any type of property. Anyone who gets a three-month visa can be classified as a foreign resident, however, even if they aren’t really living in Vietnam – they just have to be present and legally staying in Vietnam when they buy the property. You can then get a 50-year lease.
The Vietnamese economy is forecast to grow at 3.5 percent this year, just over half the 6.0 percent rate expected for China, but still positive. Vietnam, China, India (the leader at 6.5 percent), Indonesia (2.8 percent) and the Philippines (1.4 percent) are the only Asian nations expected to see growth this year. Hong Kong, by comparison, will see an economic decline of 2.5 percent, while Singapore is expected to slump 6.5 percent.
The forecast is patchy this year, in other words. But things look much better in 2010. CB Richard Ellis forecasts ‘partly sunny’ economics for Vietnam, with growth of 4.9 percent. Only Japan and Taiwan are forecast to see economic declines next year.
Ryder notes that 70 percent of Vietnam’s population of 87 million is under 30, with a median age of 27.4 years old, according to the World Factbook. That’s a sad legacy of the war that decimated a generation of Vietnamese. But it does mean that, as the population gets older, demand for property is expected to shoot up. By comparison, the median age in China is 34.1, similar to the 36.7 in the United States. In Hong Kong, the median age is 42.3.
Since 2005, Indochina Capital has formed three real-estate funds to capitalise on those trends in Vietnam. Combined, the company has US$450 million under management. It owns the Evason Hideaway Con Dao, managed by the Six Senses hotel chain and due to open in a year, where 16 residential villas are for sale.
Ryder’s latest project is the Hyatt Regency Residences, which had a soft launch in Hong Kong in June, at the Grand Hyatt. The residences are part of the Hyatt Regency Danang Resort & Spa, again on China Beach. The project includes 174 condominiums, from 807-square-foot one-bedroom units to 2,583-square-foot waterfront penthouses. There are also 27 stand-alone villas. Again, foreign buyers take a stake in an offshore company that gives them ownership rights to their unit in Vietnam. The prices for the condos range from US$200,000 to US$895,000, while villas run from US$1.35 million to US$2.0 million.
According to CB Richard Ellis, the condos are more expensive than comparable properties in Langkawi and Penang, in Malaysia, but cheaper than similar apartments in Boracay, in the Philippines, and much cheaper than high-end apartments in Phuket, Thailand. The villas are priced lower than they’d be in either Bali or Phuket, but comparable to Boracay.
Ryder says around 40 percent of the Hyatt properties have already sold. Locals can get bank financing, but again, the rules as to whether you can get a mortgage or bank financing as a non-Vietnamese are yet to be tested. Most owners are paying cash for now.
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