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|Viet Hung is quoting apartment prices in dong with reference to inflation index|
To date, many developers have quoted prices in US dollars to minimise losses stemming from increases in the prices of imported materials – a ploy that has benefited developers but sometimes caused pain for customers.
However, current regulations forbid commodity price quotation in foreign currency and since last September the State Bank has reminded the real estate industry that prices for the sale or lease of real estate must be quoted in dong. Some developers have been fined for quoting prices in US dollars.
As a result, developers have recently announced a shift in direction.
The An Khanh New City Development Joint Venture Company (An Khanh JVC) and Viet Hung Urban Investment Development Joint Stock Company have started quoting in dong for their apartments.
The An Khanh JVC general director Kwak Won Kap said the company had released the first lot of apartments in its Hanoi Splendora project with prices in Vietnamese dong.
Kap said that US dollar prices made things much more difficult for customers because their instalment of payment would have to be increased much when the price is equally transferred to Vietnamese dong.
Kap said that by quoting in Vietnamese dong, he wanted to share the risk with customers.
However, how to minimize the risks from quoting prices in dong is a question for developers as dong has been devalued four times over the last 16 months. In February, dong lost 9.3 per cent of its value against the US dollar and as a result, developers have to bear increased construction costs because they imported materials in US dollar, but quoted sale prices in dong.
According to CBRE research team, developers can avoid some effects of dong devaluation by using a natural hedge. By trying to transact as much of their business as possible in dong, sourcing local materials and using dong denominated labour contracts, the effects of dong devaluation are avoided. In reality, few companies can operate successfully without engaging the international marketplace.
CBRE said the three main areas where dong devaluation would affect developers were in the sourcing of materials and labour for their projects, the sale price of the final product and the raising of capital. Dong devaluation increased the cost for all imports, including the cost of imported labour such as architects and engineers. The pricing of the final product presented the most challenges.
In a bid to ensure returns for developers when it came to selling products in dong, Bui Tien Hung, deputy general director of Viet Hung Urban Investment and Development Company said that his company would use the consumer price index (CPI) announced by the General Statistics Office as a reference index for pricing the Palm Forest apartments it is building 14 kilometres southeast of Hanoi.
Accodingly, the apartment price is set at the time of signing purchase contract. However, the price quoted for the payment of each installment will be adjusted in line with CPI index.
Hung said making use of the CPI as a reference point for real estate product prices would minimise risks for both developers and customers.
The CPI takes into account prices for 11 different goods, including housing, construction materials, food and beverages, tobacco, clothing and transport.
“Referencing the CPI is reasonable because developers have to import materials, human resources and contractors from other regions of the country, even from abroad,” Hung said.
This view was echoed by former deputy minister of Natural Resources and Environment Dang Hung Vo, who favours using the CPI as a reference point for price adjustment over pricing in US dollars.
“In the context of increasing inflation, this method could reduce developers’ losses and those of customers when they buy properties,” Vo said.
Dang Van Quang, director of Navigat Consultant said that it made sense that developers relied on various indexes to price their products, given that property business involved high levels of risk.
But Quang was also keen to point out that no matter whether prices were quoted in gold or dollars or using some other index, the result was an estimate only.
“Therefore it is important to find out something which is acceptable for both developers and customers,” he said.
However Quang wasn’t a fan of the CPI as a reference for property prices. He said the index consisted of too many factors. And with construction materials being just one of those looked at in the CPI it could not truly represent property values.
Besides, customers could be exposed to more risk when price were calculated using the CPI, said Quang.
“The devaluation rate of dong is even lower the increase of inflation,” he said
With the CPI not yet an official marker for calculating real estate product values, two other indexes – the Construction Price Index and Real Estate Index - are also being considered.
The quarterly Construction Price Index is issued by the Ministry of Construction (MoC) to help investors and contractors determine total investments, cost estimates, and payments and to assist them in managing the construction expenditure.
The Construction Price Index tracks the ups and downs in construction costs by focusing on the construction material price index as well as labour and machine prices. In addition, MoC is also working on a Real Estate Index, which will act as a basis for developers and customers in terms of setting property prices.