Tourism property in 2017: Carrying out commitments of profit

14:00 | 25/02/2018
In the context of impressive economic growth and Vietnam’s successful hosting of the APEC meetings and events, 2017 recorded good progress in the Vietnamese tourism industry. Nguyen Trong Thuc, manager of Research & Consulting Services at CBRE Vietnam, provides an insight into the Vietnamese tourism property market during the past year and its prospects in 2018.
tourism property in 2017 carrying out commitments of profit
Nguyen Trong Thuc

The number of international tourists arriving to Vietnam in the first 11 months of 2017 reached 11.6 million, up 27.8 per cent over the same period of 2016, while tourism revenue is estimated to increase by 25.2 per cent.

The average room rate in luxury hotels and resorts in coastal cities slightly increased in 2017, but the occupancy level saw little change due to increases in both supply and demand, except for Danang which had a very nice fourth quarter thanks the APEC Economic Leaders’ Week.

The second home market in 2017 continued to attract many investors, with many high-profile projects opening for sale.

Among the three major markets of tourism property of Danang, Nha Trang, and Phu Quoc, Danang has been particularly busy in 2017 with the opening of new phases of CocoBay condotels or the launch of Pan Pacific villas.

In Phu Quoc, the market grew more vibrant than in 2016 with new projects managed by international brands, such as InterContinental, Best Western Premier, Novotel, Movenpick, and Wyndham.

Many developers have expanded into new markets, such as Halong in the north, Quy Nhon in Central Vietnam, and Ho Tram in the south.

Commitment policies are they sustainable?

In the current competitive market, many developers have been offering sales incentives to attract buyers. A typical example would be buyers participating in rental programmes (optional or mandatory): after receiving their condotels or villas, they will have to sign the property back to the project developer to operate and receive 50-85 per cent of the profit.

In addition, buyers will have 15-20 days a year to use their condotels or villas. In the first 5-10 years, they will receive a minimum yield of 5-12 per cent of the condotel value or villa per year. Some developers even committed to buy back the property at 108 per cent of the original price after this period.

We think that it will certainly be difficult for developers to ensure that operating profit will be enough to pay the committed returns to the buyers—as guaranteed yields in some cases could reach 11-12 per cent—or to perform the commitment to buy back properties. As a result, developers often have to account for these commitments in the selling price, which is often higher than when there is no such commitment.

Some buyers must have thought about this, but the prospect of higher guaranteed yields from 5 to 10 years from reputable developers could give them a sense of safety. On the other hand, apart from being an investment, second home is also a lifestyle product, thus many people are willing to pour money into resort projects located in ideal positions.

Currently, as these promising commitments have only emerged in the last three years, it is still not possible to verify developers’ compliance. However, in 2017 there was a project in the central city of Nha Trang that had a guaranteed yield of 15 per cent per year and the developer quickly failed to pay, leading to disputes with buyers. The developer then asked to reduce the commitment to 8 per cent per annum, but the case has not yet been closed.

This lesson reminds buyers to carefully consider the project’s operational capability after the sale—usually buyers can be more secure if the condotel/villa is managed by a well-known operator similar to the hotel component within the same complex.

tourism property in 2017 carrying out commitments of profit
Source: The Vietnam Administration of Tourism

Investment opportunities in 2018

In recent years, visa application procedures to enter Vietnam have improved considerably. While at the end of 2015 Vietnam provided visa exemption for citizens of five European countries only, 2017 was the first year of issuing electronic visas for citizens from 40 countries (this has also increased by six more countries under a new resolution issued in December 2017).

Regarding infrastructure, more and more direct international flights are coming to major tourist destinations (such as Bangkok Airways with the Bangkok-Phu Quoc or Thomson Airways with the London-Phu Quoc route).

Van Don International Airport is expected to be put into operation in the first quarter of 2018, boosting tourism in the northern province of Quang Ninh. These developments all point towards a strong tourism industry in 2018.

In the coming time, it is expected that the coastal area extending from Danang to the ancient town Hoi An and Cam Ranh will bring a bright supply of second homes, as there are still vacant land funds available. In addition, if the Law on Special Administrative-Economic Zones is passed (expected in mid-2018), Van Don, North Van Phong, and Phu Quoc will attract more investors to develop tourism projects.

tourism property in 2017 carrying out commitments of profit
Much rides on developers’ ability to perform their profitability commitments

Hazy foreign resort ownership regulations

The fact is that foreigners have rarely considered buying resort property because of concerns over legal issues. Condotels, which feature both residential and commercial land, have not been issued a legal framework yet. In addition, the Prohibited Projects List the list of residential projects where foreign investors and individuals are not entitled to buy houses and therefore cannot be granted a pink book—is still in effect, while in many places these areas are not clearly defined. Therefore, many developers are not interested in marketing products to foreigners.

Potential oversupply?

Resort property boomed only in the 2015-2016 period along with the entire real estate market. For developers, properties for sale like condotels or second homes often help them recover capital faster than properties for rent like hotels and serviced apartments. Especially as Vietnam’s economic and tourism situation has been on the upswing in recent years, and people’s income is improving too, a growing number of investors are expressing interest in the vacation property sector. This helps to increase demand and makes the developer community more confident in developing their projects.

Most of the existing high-end projects which are located in beautiful coastal areas are targeting affluent buyers. Projects from big developers, such as Vingroup, Sun Group, Empire Group, and CEO Group, still have good absorption rates thanks to the prestige of these developers as well as strong sales teams.

However, even if the market has yet to be saturated, state management authorities should be more serious in licensing new projects, ensuring a reasonable construction density and developing infrastructure at the same time.

Solutions for 2018-2020

First of all, it is necessary to set up a legal basis for the type of vacation properties, clearly identifying the cases when the buyer will be issued a certificate of land use rights as well as ownership of the house and other assets attached to the land. This will increase the transparency of the market.

To ensure that commitments will be performed, state management authorities should require developers to assign bank guarantees. In case developers cannot fulfill their obligations, the bank will compensate for the loss, reducing risks for buyers. This way, developers will have to be more serious about their commitments, making them more realistic and only developers who have enough financial resources will dare to offer attractive commitments.

Tourism development and environmental and landscape protection must be tied together, keeping the “soul” of the destination and improving services at the same time, which are factors in attracting visitors to return.

By Nguyen Trong Thuc

Based on MasterCMS Ultimate Edition Ver 2.8 2018