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Vietnam’s luxury home market remains frozen
25/05/2015

Though the overall realty market in Vietnam may be showing some cracks, the market for oceanfront mansions and palatial condos shows no signs of thawing, dampening concerns of wildly escalating prices in the near future.  

Vietnam has been easing restrictions on foreign ownership of real estate as part of an effort to attract higher levels of investment and stimulate the realty market, which has been ailing ever since it froze four years ago.

Following years of easy credit and lax oversight, the market crashed in 2011 leaving the banking sector saddled with bad debt and unable to provide the credit domestic businesses throughout the nation need to grow and prosper.

Opening up the market and expanding the criteria for people to buy and own houses in the Southeast Asian nation has the aim of creating more favourable conditions to draw foreign investment and partially alleviate problems associated with the bad debt saga.

Under Vietnam’s constitution, all land belongs to the state. However, land-lease certificates, good for a maximum of 50 years, will be granted to qualifying foreigners when the new law becomes effective this July.

It is expected the government will issue a decree in May, also effective July 1, which will provide for an extension of foreign ownership for an additional 50 years in specific limited circumstances.

The changes related to foreign ownership in conjunction with the nation’s globalization and market oriented economic reforms have led one market analyst to predict a real estate revolution is underway as it relates to the luxury market.

At a recent real estate conference, Nguyen Nam Son, managing director of Vietnam Capital Partners enthusiastically assessed the prospects for higher property values in oceanfront property over the five year period 2015-2020.

Son postulated that the key drivers for the high end property values over the five year period would be the rising disposable incomes of Vietnamese families, growth in the tourism industry buoyed by elevated levels of foreign investment.

Over the past 10 years domestic tourists have migrated from staying in two-star to three-star hotels in line with a trend in the rise in disposable income and based on estimated future increases this would result in their staying in four-star hotels, Son postulated.

The increased hotel costs, he inferred, would provide the fuel for investors seeking higher rates of return and tourists seeking less expensive alternatives to channel more money into the luxury beachfront market and in turn cause property values to heat up.

This he argued creates a window of opportunity for investors today to make a killing in speculating in the luxury real estate market and earn higher than average market internal rates of return.

He also curiously went out on a limb and attempted to rationalize that somehow the number of hypothetical automobiles purchases over the next five years by Vietnamese citizens would translate into increased oceanfront property values.

His theory was something along the lines that the number of automobiles along with increased investment in roads and highway infrastructure would result in increased holiday travel.

This would in turn push up the demand for and value of beachfront property.

However, most of those in attendance at the conference were sceptical of Son’s suppositions and were not accepting them as a realistic or likely scenario for the market over the next five years.

“There’s just not that much enthusiasm or activity in the luxury market and I am very disturbed about the development of the real estate market in the coastal cities in particular and Vietnam in general,” an investor in Phan Thiet city shared.

The investor said last year the tourism industry experienced many difficulties as a result of the situation in the East China Sea compounded by currency exchange rate problems with the Russian rouble and the plummeting number of inbound tourists.

The tourism decline is a global issue and is not just isolated to Vietnam the investor stressed— adding that she recently attended a fair in Europe at which the forecasts for tourism in 2015 were also not bright.

She underscored the point that the tourism industry in Vietnam needs to achieve sustainability before we will see a seller’s market in high end property and though domestic tourism is thriving, international tourism is not.

Huynh Phuoc Nghia, a senior business consultant for GIBC in turn also expressed serious reservations and doubts about Son’s rather bold predictions for the market over the next five years.

It seems pretty certain that investors with business interests in Vietnam such as those from Singapore, China and Japan are likely to buy property and that overseas remittances funnelled into realty from Vietnamese living abroad will increase.

However, this hardly serves as a rational basis for believing it will create a bubble in the luxury real estate market.

Though disposable income levels, spending by tourists and other factors mentioned by Son may positively impact the real estate market as well, it is highly improbable they will have the significant impact Son suggests, Nghia said.

At a minimum Vietnam needs a decade to perfect infrastructure changes necessary to transform the tourism industry and for it to flourish and become sustainable.

For now, like most who attended the conference, Nghia believes that the high end oceanfront property market will remain frozen.

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