Neil MacGregor, deputy managing director of Savills Vietnam, offers some unique views on the role of merger and acquisition (M&A) activities in Vietnam’s cash-starved property sector.
Do you think M&A is a good way for developers to mobilise investment capital given the shortage of capital flow the property sector is experiencing at present?
The Vietnamese real estate market is critically short of capital and developers are seeking new sources of finance. Whilst in the past many developers were reluctant to seek finance from the banks, projects are now leveraged at unprecedented levels. There are a number of options open to developers requiring capital to move their projects forward, none of which necessarily require financing from banks, if the right partner can be found. These include an outright sale of the project to a third party, seeking a joint venture partner, en bloc sales of residential units, or strata sales of retail and office space. Many Vietnamese developers continue to hold large land banks and are able to sell development land to third parties to raise capital to finance the construction of other projects.
During a time of tight finance and high interest rates the divestment of some assets to raise capital for other projects is a strategy that will certainly work for many investors, particularly those that have built up large property portfolios in recent years but lack the capital to carry out development themselves.
How do you evaluate recent M&A activities in Vietnam?
Until this year it was difficult to find property assets priced at a level that was attractive for investment. The current economic difficulties have resulted in a reality check for many, with a resultant fall in price expectations to more reasonable levels. This has led to a number of transactions that benefit both the buyer and seller, which we hope will continue to be the case as more transactions, are completed over the coming years.
In Vietnam real estate was one of the most active sectors in 2010 in terms of both transaction quantity and transaction value. In these transactions, Vietnamese investors and developers are more and more active as buyers, and not just foreign players with large capital capacity as previously. Although there are a number of challenges such as an immature legal framework, low market transparency, complicated licensing procedures and differences in price expectations; it is believed that the next few years will see a rising number of M&A deals. Whilst the lack of bank finance is troublesome for many in the real estate industry, it also creates an unprecedented period of opportunity for others, particularly those with cash.
Deal flows are likely to continue to be highest in the residential sector, where there are a number of active local and foreign players. Indeed we have seen a number of deals between local land owners and recognised foreign developers already this year and we expect this trend to continue.
Another area of highly anticipated deals is in the retail sector, as a growing number of international retail developers, and operators, seek to enter the Vietnamese market. The number of deals in this sector of the market will rise as local players recognise the benefits of partnering with foreign players who can offer many years of experience. A successful, branded retail development can also add significant value to larger mixed use projects and accelerate residential sales. It is not just local land owners and developers that are seeking exits from their real estate investments. There are also a growing number of the foreign managed real estate funds seeking buyers. These potential deals can be seen across the real estate sectors, but include hotels, resorts, office buildings, as well as development land within larger projects.
How does the volume of M&A activities in Vietnam compare to other neighbouring countries?
Despite a recent increase in transactions, M&A activities in Vietnam are still quite limited compared with other countries. When the above concerns I mentioned in my last answer are addressed, M&A activities will certainly increase.
What are the disadvantages or the risks buyers face when entering into an M&A in Vietnam?
Due to the above mentioned obstacles, parties to M&A activities in Vietnam need to address a much higher level of risk than may be the case in many other countries. These could be risks associated with timing such as delays in licencing paperwork, to the lack of market information and to changes in legal framework. Also, another risk is whether joint venture partners can cooperate effectively over the longer term. A comprehensive and detailed due diligence process, as well as carefully considered sale and purchase agreements, will help minimise those risks.