Vietnam’s rapidly emerging economy is a bedrock for growth in its major real estate markets, especially Ho Chi Minh City
Riding in on the world’s new wave of emerging and growth-leading economies, Vietnam and its major cities have become major magnets for foreign funds. This report from Tranio.com surveys the Vietnamese economy, its national real estate market and its most vibrant local market in Ho Chi Minh City.
The Vietnamese economy
Vietnam has undergone remarkable growth and development over the past 30 years. The launch of the Đổi Mới Policy in 1986 transformed the country from one of the world’s poorest to an emerging middle-income country. Favourable demographics, a burgeoning middle class and continued industrialisation and urbanisation have spurred strong economic growth, making Vietnam one of the fastest growing countries in Southeast Asia. Averaging a 6.2% GDP growth rate since 2000, according to Trading Economics, Vietnam comes close to rivaling China’s level of growth. In many ways similar to China, Vietnam is governed by a communist government that has gradually opened itself up to foreign investments.
The Vietnamese real estate market
In July 2015, the Housing Law and the Law on Real Estate Business, whereby foreign property investors could purchase and legally own residential property in Vietnam, came into effect. The types of property available to foreigners include apartments, villas and townhouses, as long as they are parts of development projects. Foreigners, like locals, can enjoy rights to lease, trade, inherit and collate their properties. Among the major taxes and fees associated with real estate investment in Vietnam are a registration tax (0.5%), a value-added tax (10%), an income tax on transfer of property (25% on capital gains or 2% of the transaction value) and notary fees of up to nearly USD 460. the income tax is based on rental income and consists of a personal income tax (5%) and a value-added tax (5%).
The laws are also expected to spur growth in the commercial and industrial sectors, as foreign companies and representative offices are now eligible to purchase new and existing properties, provided that the properties are purchased for business purposes. The regulatory changes helped to stimulate investor interest and drive the real estate market, making Vietnam one of the most attractive destinations in the region.
The Ho Chi Minh City market
Being the economic centre and the most populous city in Vietnam, Ho Chi Minh City (HCMC) has particularly benefitted from the massive expansion of the real estate market. HCMC is a new market and is currently at the start of an upward trend in the real estate industry lifecycle. In 2015, the Urban Land Institute and PwC ranked the city fifth in terms of favourable investment prospects in the Asia-Pacific region, after Tokyo, Sydney, Melbourne and Osaka.
HCMC is the second-most popular market in Asia for investment in residential apartments, according to the Urban Land Institute. The residential sector accounts for about 85% of the real estate market. Nevertheless, the residential property market has not been well-developed over the years, and the current supply is not sufficient to meet growing demand from the local population and foreigner investors. As such, the residential property market has been on an upward trend in recent years, with new property launches, good sales performance and increasing primary sale prices.
According to JLL, HCMC had about 80,000 apartment units in 2016, where affordable, mid-range and premium apartments constituted about 43%, 42% and 15% of the stock, respectively. The residential property market continues to expand to the south and the east. The east has become attractive due to infrastructure improvements, such as Metro Line 1, the HCMC-Long Thanh-Dau Giay Expressway, the Hanoi Highway extension and the approved Long Thanh airport project.
Thus far, foreign investors’ greatest interest lies in the premium apartment segment in District 1 (the city centre) and District 2, where many expats and wealthy Vietnamese reside, as well as in properties along Metro Line 1. In 2016, a total of 2,700 premium apartment units were opened to the market, which was the highest number recorded in the past 10 years. Some 98% of the newly launched apartments were located in District 1. Similar premium and luxury projects are being launched in districts adjacent to District 1. The premium and luxury condominium developments, as well as lower interest rates, have stimulated renewed interest in property investment in HCMC.
Expectations for the HCMC market
The premium and luxury apartment segment is expected to maintain its high absorption level above 50%, considering its small size compared to other segments. the segment is still attractive to foreigners and affluent locals, as prices for luxury projects in HCMC are still relatively low compared to other cities in Southeast Asia. This segment is expected to introduce more unique offerings in 2017 and beyond to attract high net worth investors. Thus, the stock of premium apartments priced above USD 2,000 per sq m is expected to double within the next three years.
At the same time, the number of affordable housing units worth less than USD 45,000 fails to meet demand in HCMC. According to the World Bank, with the current urbanisation trend in the country, the urban population is expected to reach around 50% by 2040, creating demand for approximately 374,000 additional units in cities every year. To address the issue, the Government is seeking ways to encourage developers to undertake more affordable housing projects. Some developers have expressed interest towards the affordable housing segment to meet less-tapped demand and resolve the shortage problem to some extent. In the next three years, the residential supply is expected to grow by 74%. Nevertheless, the market is expected to absorb the increase, as the stock of apartments is low relative to the city’s, population.
In addition, more apartments are likely to be built along Metro Line 1, which is scheduled to be completed by 2020. The construction of Metro Line 1 in HCMC commenced on 28 August 2012. Covering 19.6 kilometres, Metro Line 1 will consist of 14 stations and run across Districts 1, 2, 9, Binh Thanh and Thu Duc. When it begins operating in 2020, Metro Line 1 will enhance the accessibility of housing developments, making properties located along its route even more attractive.
Property prices in HCMC are still relatively low compared to those in other major Southeast Asian cities. According to the Japan Real Estate Institute, the prices of newly built premium residential projects in HCMC are still much cheaper than their counterparts in cities such as Jakarta, Kuala Lumpur and Bangkok. Investors can expect a gross rental yield of 6-8% and favourable capital gains in the medium and long term. The general affordability of premium and luxury residential projects that creates lower financial risks, coupled with favourable capital upsides, makes HCMC a competitive investment destination.
As an emerging market, Vietnam presents substantial growth potential. The country’s economic growth, a burgeoning middle class and urbanisation remain the important drivers for the expansion of the real estate market. Ho Chi Minh City is on track to becoming a major business centre and vibrant metropolis of Southeast Asia, and the demand for property in the city will remain strong.
Diana Ablyakimova, Tranio.com