Vulture funds circle Vietnam's property market

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Many residential projects in Hanoi have been halted due to slow sales

Vietnam's once-frenzied property market has ground to a halt, leaving local developers limping and international investors salivating at the chance of snapping up distressed deals.

With poorly-capitalized local developers struggling to complete projects, foreign funds say this is the opportunity they have been awaiting since the global financial crisis began.

"In the last 30 days, we've signed up two deals that I would put in the needy category," Peter Ryder, the CEO of Indochina Capital Corp, said in an interview at the end of November.

Property sales in Ho Chi Minh City have fallen by half this year while interest rates, which are hovering around 20 percent, have pushed buyers who need to borrow to the sidelines.

Only 5,470 properties changed hands in Ho Chi Minh in the first nine months of this year, according to brokerage CB Richard Ellis, down from 10,213 in the same period in 2010.

This has prompted Vietnam property investors, after years of waiting for the right time to buy, to say now is the time.

"It will be a better buying time than any time over the last four years," said David Blackhall, deputy managing director at Vietnam fund manager and property developer VinaCapital. "The market is going through a pretty challenging time."

The catalyst for the slowdown in home sales is rampant inflation, at 19.8 percent in November. Though interest rates look set to moderate next year, the damage has already been done to the property industry.

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"The next 12 months will be difficult in real estate," Blackhall said. "The liquidity has basically gone out of the market, so it has really slowed everything down."

Blackhall says land prices have fallen 12 percent over the last 12 months, while condominium prices in Ho Chi Minh and Hanoi have fallen 10-15 percent over the last year. He expects a similar decline again next year for apartments in those cities.

A broken model

Vietnamese developers have typically pumped money into land and the foundations of projects and funded construction through sales and, as a last resort, bank borrowings.

That model is falling apart now that sales have dropped off.

"If they're half built, they can't leave it half built, so they have to carry on," Dominic Scriven, CEO of Vietnam fund manager Dragon Capital, said. "The key is where their existing financing has come from and what pressure they're under to repay that."

Scriven is starting to see "pockets of distress" in the property industry as a result. His company has a property team of six, which is now in talks with several developers.

"They were looking for distress in 2008, but there was very little," Scriven said, and that evaporated when a stimulus package was swiftly introduced. "This time around, we are getting calls that lead to sensible conversations."

The company, which is raising a new fund to invest in Vietnam, Laos and Cambodia, also has a property fund with $90 million in assets. Around 40 percent of that is currently in cash, which it hopes to invest in three or four deals, Scriven said.

The two deals Ryder struck at IndoChina include Ho Chi Minh residential developments where the developer ran into financing problems. IndoChina, which declined to identify the properties, will now look to reposition, redesign and sell them under the Indochina name.

The lender approached IndoChina on the first deal, a $40 million development that it bought outright. "The bank had a gun to the head of the local developer," Ryder said adding that financiers continue to approach his company. "I would be very surprised if we don't do several more deals."

Hard to exit

The flip side is that international investors with property to sell are finding it hard to shift.

CapitaLand (CATL.SI), Southeast Asia's largest developer, is building 5,900 homes in Ho Chi Minh and Hanoi and is using the slowdown to target local developers and landowners.

"The current economic difficulties...present opportunities for us to explore good investment opportunities," the company said by email.

It has done two deals this year in lower-cost housing, buying majority stakes in joint-venture projects with Khang Dien House Trading and Investment KDH.HM and with Quoc Cuong Gia Lai QCG.HM.

Keppel Land (KLAN.SI) has 8 percent of its assets in Vietnam, with 22,000 homes in the works. It says it is taking a long-term view and is confident the market will recover.

Indochina, in which Japanese finance house Orix Corp (8591.T) owns a 25 percent stake, is currently working on sales at two projects. It has sold 90 percent of the apartments at the Hyatt Regency Danang. "We've covered our nut there, so there's absolutely no pressure there," Ryder said.

But the Indochina Plaza Hanoi is only 70 percent sold and the company is offering incentives such as a free parking space to tempt buyers. "We've definitely had to sweeten the pie, but not in a dramatic fashion," Ryder said. "We continue to sell two, three apartments per week."

VinaCapital has a large land bank in its VinaLand fund, which has a seven-year life that runs through 2013. But the land will take another four years to monetize, Blackhall said, so the company plans to ask investors to extend the life of the fund, giving it time to prepare the land for development or sell it when the market improves.

"You don't want to be selling everything off today because the market is not suited today," Blackhall said.

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