Cross-border marriages in property-Optimisation towards higher efficiencies

15:07 | 23/08/2018

An increasing number of foreign and domestic investors come together in property projects, with one party arriving with the financial resources and expertise while the other brings a large land bank and competence to deal with local authorities. Michael Piro, director of Indochina Strategic, the advisory arm of Indochina Capital, gives Trang Nguyen a glimpse into how this trend emerged and why he thinks it is healthy for the local real estate market.

cross border marriages in property optimisation towards higher efficiencies

New foreign property developers/investors and even older ones have chosen to shake hands with reliable domestic partners rather than setting up their own greenfield projects. In your view, does this signal a shift from foreign direct investment (FDI) to foreign indirect investment (FII) and is it shaping up as a definitive trend in the Vietnamese real estate sector?

It is really how we define FII and FDI. To me, FII is a more passive form of investment where the foreign investor is not taking an active role in project development, like joint ventures where the two groups come together to execute a project despite the fact that they acquired the shares in the company through indirect investment. Maybe the Ministry of Planning and Investment (MPI) counts this as indirect investment. They are becoming a partner in the company, in its everyday operations. I really still see this as FDI.

I think FII is when I hand you money and I do not get involved. If I just buy 20 per cent of your company, I would tell you to keep running your company and I will see you at the end of the year and I hope to get some money. To me, that is more like FII, but as soon as you are on the ground and invest time and effort into the project-that is already FDI.

I think current developments in the market are the process of it actually becoming more efficient. At the beginning, we did most of our projects in Danang. We would go to the government and say, “Hi, we are Indochina. We want to build a hotel here.” And the government would say, “Okay, well there is that one, that one, and that one, which one do you want to pay for?” We picked one, then we did everything from the beginning to the end. That is truly FDI.

There are a few things happening at the same time right now. One is that most of the projects are controlled by local investors, so if you want to get a good project, you have to go through a local investor in most cases. Two, I truly think the market is becoming more efficient, which is very good because it is starting to realise that locals can do a much better job of getting the projects, getting the approvals, getting the land, and getting the licences, while foreign investors can bring expertise and money. This, I think, will lead to far more optimal operations in the market. It is not so much a trend as market evolution-growing and maturing and becoming more efficient.

And that is how we are looking at it now, too, when we acquire projects. I do not go directly to the government and start from the beginning in most cases anymore. Now I buy from local investors the land and the approvals in a neat, tidy package. I know they can do much better than me when it comes to working with MPI and the Ministry of Natural Resources and Environment (MoNRE).

What we are seeing now is a very healthy shift in the market, as long as foreign investors are picking the right local partners and vice versa. A conflict between partners, on the other hand, can make big news and then scare off other investors. However, I think in most cases what we see in the market are very happy marriages between foreign and local investors. You can see that this model is preferred by most of the big Singaporean investors like CapitaLand-to partner with local investors, do a joint venture, and let the local investors handle the land acquisition. In exchange, Singaporean investors bring in the money and the expertise, and everything works without a hitch. All in all, what is happening now is the natural evolution of the market, and it is very healthy.

cross border marriages in property optimisation towards higher efficiencies
Toong Trang Thi - the luxurious and tranquil co-working space invested by Indochina Capital

A partnership like that seems ideal, but are there any risks associated with this kind of cooperation between foreign and local investors?

Of course, there is partner risk. You have to take the risks that come with joint ventures. Even when I, a Canadian, do a joint venture with another Canadian person, it is still difficult at times. Any joint venture or partnership is difficult. But it gets even more difficult when you take two people from different cultures, different countries, with different expectations. It is often difficult to tell whether you have picked the right partner-you just have to stay cautious.

Typically, joint venture projects are more expensive because local investors did all the work to acquire the land, to get the projects ready. Of course they want to make a bit more money than when you just go buy the land by yourself. So it is typically more expensive and a bit more risky because of your partner-there might also be some struggle for control over the project. But at the end of the day, if you chose the proper partner, these risks can be overcome.

cross border marriages in property optimisation towards higher efficiencies
Success lies in picking the right people for every task
cross border marriages in property optimisation towards higher efficiencies
Indochina Plaza Hanoi in Cau Giay district, Hanoi

Several years ago, conservationists claimed that foreign developers who build their greenfield projects in Vietnam via FDI took advantage of domestic capital resources, including bank loans and homebuyers’ funds. Is this one of the reasons why FII should be encouraged?

I do not agree with that. When foreign investors come and borrow from a local bank, in return, the bank will make a lot of money. How is that taking advantage of the local banks, when you make them more money and bring them business?

On the issue of bad debts, it is true that a lot of assets are trapped at properties that could not be sold. On the other hand, I have a hunch that local developers have more non-performing loans (NPLs) than foreign developers. There are not that many cases of foreign developers going bankrupt in Vietnam. I certainly cannot think of that many.

I think we actually helped the market a lot, and we helped to mobilise capital—several years ago, interest rates were 21 per cent, which means our interest expenses were extremely high. The only people getting taken advantage of were the developers, I think. I do not think anyone else got taken advantage of. Nobody made any money on real estate projects in the last several years, except for the banks. Everyone was just working to pay the bank because interest rates were so high and prices were coming down. It was a very difficult time.

What must domestic developers keep in mind if they want to find the best and most reliable foreign partners for any merger and acquisition (M&A) transaction?

Well, I think one is transparency. Companies need to have good governance and corporate structure. Also, always remember the first thing: people. Making sure you have good people in your company and that operations are transparent. This will allow your company to be ambitious, to go far beyond local standards and shoot for international standards.

I think these are some of the key factors: companies need to really push their standards, to bring competitive levels of compliance, accounting, management, and organisation.

Do you think the Vietnamese authorities have quickly and properly reacted to allow, attract, and create a level playing field for FII via capital contributions, share purchases, and M&A in the real estate market?

I actually think the legal framework is pretty clear for FII. It is basically just buying shares in another company, and that is how we do most of our transactions now. The only thing I think is wrong right now is when you want to acquire shares in a company, you have to get pre-approval from the municipal and provincial departments of Planning and Investment (DPI). This takes a lot of time, because it involves not only DPI, but MoNRE, the Ministry of Public Security, and the police as well. All this before you can decide whether the transaction will actually take place. Thus, I believe there are still some areas to cut down on or accelerate procedures.

On the other hand, I would say the current regulations are accommodating. I believe procedures and requirements are far clearer now, it is easy to follow what steps need to be taken and there are no undue obstacles. However, there are maybe too many steps involved, still.

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