Concern over further local currency depreciations in the coming months will erode foreign property developers’ confidence in this slumping market. Alex Loh, chief resident representative of Malaysia’s property developer SP Setia Group, weighs up the issue with VIR’s Ngoc Linh.
There is growing concern that a US dollar shortage in Vietnam in the next months could lead to a further devaluation of dong. In your view, how will a further devaluation of dong impact on foreign property sector investments?
A dong depreciation will have a negative impact on all foreign direct investments, regardless of which sector they represent. In property, as investments are typically big ticket, the quantum is large. Whether quarterly or year-end, translation losses from currency movements can be significant. Setia, largely an institutionally held stock, is constantly monitored by analysts and fund managers that pay attention to such currency related impacts on the profits and losses of a corporation.
But if developers choose to continue pricing in dollars or in dong tied to the exchange rate, they can successfully mitigate the risks of devaluation and pass that risk onto purchasers. So why are you concerned about a dong devaluation?
By law, developers are not allowed to price in dollars. The government is working very hard to ensure the economy is not dollarised and this is a good move. Its appears serious about this effort. Even my yoga studio has posted an announcement it will not receive fees in US dollars.
Foreign direct investment (FDI) in the property sector has been sharply declining this year as the proportion of new committed capital accounted for only 3 per cent of total commitments. Among the reasons for this decline, the dong devaluation is an important one. Do you think FDI in this sector will worsen with further local currency depreciation?
A commitment to a property investment is not driven by foreign exchange considerations alone. Real estate investments are generally long term in nature and forex movements is one factor considered. Nevertheless, as pointed out earlier, a dong depreciation can and will have significant monetary impacts. Hence, whilst developers take longer-term views we watch for and desire a stable to strengthening currency. We recognise the many macro economic ills the economy is suffering. We understand that as these ills are addressed, there is a need for some painful medication and amongst the pills prescribed would be one involving a weaker dong to perhaps help drive exports.
However, foreign developers do need to see that there are well thought through and resolute measures to right the wrongs of the economy. Lessons need to be drawn on how the economy became problematic. Many of us remain committed to Vietnam and are here alongside the government and will stomach a weakening dong if it is a necessary evil. However, we expect and await the reward of a stabilised and strengthened economy and this will translate to a firmer dong at some point in time. We hope this will be sooner than later.
For SP Setia, how will you deal with this issue with its two investment projects EcoLakes and Eco Xuan in Binh Duong province?
We are rather fortunate that in both EcoLakes and Eco Xuan our houses are sold on a bare finish basis. This means the component of imported materials to our overall cost is not high. In a finished and furnished house there is a need to import and the weakened dong will mean higher costs. Nevertheless at the operation level, there is more than just construction cost to contend with. For instance, given the weakened and projected to further weaken dong scenario plus the high interest rate regime, we are remitting in more funds from our head office instead of drawing on our already secured credit lines. At Eco Xuan, we have financed our already completed sales gallery with our own remitted funds. Drawing on a dollar denominated credit line would lead to a negative impact when the dong weakens and drawing on a dong denominated line would mean incurring exorbitantly high interest charges.
It seems that the situation will become worse for the real estate market. When do you think the market will recover?
The answer to this million dollar question is multi dimensional in nature. For a start we have to be mindful that property is a cyclical business. The real estate market is a barometer of sorts for the economy at large. An overall recovery of the economy will be signal to a market turn around in the property space. Nevertheless, to be more specific, recovery will differ for each sector of the real estate market.
Ngoc Linh (vir.com.vn)