Property rising up again

Work in progress: property development has been rising steadily in Vietnam in recent years

We were granted our first licence at the beginning of 1996. Since those days we have witnessed incredible transformation in all aspects of life in Vietnam, but these changes are perhaps most visible in real estate.
When I first arrived there were almost no high-rise buildings in Hanoi, only a couple in Ho Chi Minh City and the first international standard buildings were just coming up of the ground.
But there was great excitement about the next Asian tiger, so much so that would be investors were simply rushing in, often without due care and attention, and that’s part of the reason why so many projects then failed to get off the ground or performed far under expectations.
We were one of six real estate consulting companies and all of the others had already established a business in Vietnam, mostly focusing on Ho Chi Minh City. That’s why we chose Hanoi for our first office and opened Ho Chi Minh City two years later in 1997. We started modestly, combining our office and home while our competitors became weighed down with expensive overheads.
When euphoria turned to crisis we were dynamic and light of foot and were able not only to survive through the economic crisis but to benefit from it. Clients who had chosen not to take our advice came back and we were there to help and advise them on how to navigate the difficult times of the financial crisis. At the same time, we watched as our competitors closed up and left the country, the last one giving up in 2001. That left us alone for the next four years!
One of the major changes in the real estate industry has been the number of Vietnamese developers. Whereas back in 1995 almost all new developments were being undertaken by foreign-invested companies, nowadays the vast majority of ongoing new developments are only Vietnamese invested.
We have been advising our Vietnamese clients for many years that they don’t always need foreign investors and so we are delighted to see this trend.
However, we also think the trend for non-real estate companies to divert from their core businesses into real estate can be extremely dangerous particularly at a time when the perception is that one cannot fail.
If we are not careful we will see a repeat of the pattern that occurred in our early years here – suddenly everyone got on the bandwagon, there was massive oversupply all at once and the fallout was painful. It would be sad to see companies successful in their field get into financial problems due to an ill planned diversion into real estate.
An obvious change in the real estate market has been the extraordinary and well-publicised increase in the price of land. Back in 1995 few people really understood the “value” of land, particularly as a tradable commodity in which one could speculate. In fact a year or two earlier some investors who had bought at the beginning of the decade were finding it almost impossible to sell.
It is ironic that at that time rents for small local buildings that we wouldn’t even dare show our clients today were sky high and so investments yields must have been fantastic.
Over the past 10 years we have seen land prices increase tenfold and often more while rents have decreased by almost the same amount (especially for those local premises). Rental yields have of course plummeted. Ten years ago retail and entertainment was something developers did with the ground floor of buildings when they didn’t know what else to do. Hanoi was pitch dark at night and restaurants were quite difficult to find after 7 pm. Nowadays there are purpose-built retail developments with restaurants and leisure facilities.
Chesterton Petty Vietnam opened Vietnam’s first shopping centre at Diamond Plaza in 2000 and it remains the top retail destination, consistently achieving some of the highest rents in Ho Chi Minh City. Since that time a number of others have opened and we seem to have gone well past the days of all visitors simply coming to try out the escalators – now customers have money to spend.
Over the past few years we have seen the sudden increase of condominium developments – apartments for sale rather than for leasing to foreigners.
It all seemed to start from nowhere but the catalyst was surely the rapid increase in land prices. House buyers could no longer afford their own land and house and so had to look at an apartment instead.
The concept of apartment living has grown in popularity since then and most of the construction cranes you see today are the sites of new condominium buildings.
In our decade in Vietnam we have witnessed an entire property cycle and this may give some guidance as to what could happen in the next 10 years. Property markets tend to be cyclical because of the unavoidable delay in producing supply to fulfil demand.
In 1995 rents were very high ($60 per square metre and above) and space was very limited. Everyone started building furiously with little attention to all the others doing the same thing. Oversupply resulted, the Asian crisis compounded the problem, occupancy levels and rents fell and the cycle goes to the bottom of the trough. Development stops and so occupancy levels rise pulling rents up with them.
We are now at or approaching the top of the cycle again with very high occupancy levels and rents unlikely to go much higher, although an additional 10 per cent to 15 per cent rise is possible in some buildings over the next 18 months.
The next construction boom is already bubbling, and we are likely to see many thousands of square metres of offices and apartments coming to the market in two or three years time. Rents will fall again, development will stop and so on.
We have seen a lot and learnt even more over the last 10 years. We have witnessed a decade of development both around us, growing from two ambitious young men in 1995 to a staff of 150, including some of the most experienced real estate professionals in the country. We think we are a good example of the success of Vietnam-EU relations. Here’s to the next 10 years.