A large property project on the outskirts of Hanoi. Vietnam's unsold housing stocks will increase and this will have a negative effect on values, property consultant Knight Frank Vietnam fears.
The property market is not expected to recover in 2013, and there could be further decreases in prices and rents in big cities like Hanoi and Ho Chi Minh City, Stephen Wyatt, country managing director of UK-owned real estate consultant Knight Frank Vietnam, tells Vietweek.
Vietweek: The property market has plummeted in recent years. Authorities say it is because of the industry's lack of good business strategies, while enterprises say it is due to the high interest rates. Why do you think the market is in this situation?
Stephen Wyatt: There are many reasons why the property market has softened over the past few years. First and foremost, the property industry is cyclical, therefore, we will always see a rise and fall in values, prices will never increase for an indefinite period and Vietnam is no exception to this rule. Many other countries all over the world are currently going through the same issues, so Vietnam is not alone. When the market is very good, of course, everyone wants to join the party and make money, this is human nature.
Developers, banks, investors and speculators were all very eager to get involved in the booming property industry which led to an overinflated market, with oversupply in almost every sector, especially residential.
We are now faced with a frozen market due to lack of liquidity, banks are unwilling to lend due to a current high percentage of nonperforming loans and lack of confidence, buyers and investors believe that values will continue to decrease. So what we are currently experiencing in Vietnam is the bottom of the cycle and the question everyone wants to know is when the market will improve.
So when will the market improve? How do you assess investment in property compared to gold and stocks in 2013?
We do not expect to see a recovery in the property market in 2013 and it is possible that we will see further decreases in residential values and rental values in both cities. The stock market has had a difficult year in 2012, and this will more than likely continue in 2013. Gold continues to outperform both sectors and will probably be the safest bet for 2013.
A recent report said that there are some 70,000 apartments unsold in Hanoi and Ho Chi Minh City. What is your estimation? Is the oversupply likely to worsen in the coming time?
Our research suggests the number is broadly in line with this figure. Very few transactions are currently taking place in the market while development continues, albeit at a much slower pace. So our prediction for 2013 will be that the stockpile will increase and ultimately this will have a negative effect on values.
Is the market stagnant due to high prices? Many property firms have cut prices by 30-50 percent, but their products are still unmarketable. Why?
There is a very simple calculation to see if prices are affordable. Most banks have strict lending criteria and will lend money to an individual based on a multiple of say three or four times the individual's gross salary. As monthly salaries in Vietnam are comparatively low, it is clear that the majority of residential apartments and villas for sale are not obtainable for the majority of the population. It is only certain individuals that have savings that can afford to buy at this time.
Should property firms consider developing low-priced housing as a way to overcome the current crisis?
Many developers are considering low-cost housing as there is a common belief that this is where there will be some market activity in 2013. The main concern for developers with this type of development is the profit margin. When you add together the cost of land, approvals, construction costs, and finance costs, selling an apartment for VND10 million (US$480) per square meter is not feasible for many developers, unless there is a compromise in the standard of specification, design, and layout.
"We do not expect to see a recovery in the property market in 2013 and it is possible that we will see further decreases in residential values and rental values"
The government has planned to boost lending to help the market recover. What are the possible risks in this?
While we encourage the government to take measures to stimulate the property market we believe this will only provide short-term relief. The reason why the property market is stagnant in Vietnam is because there has been too much stimulus and speculation in the past. In order to build a sustainable future, we need to get to real values, based on willing buyers and willing sellers that have actual demand.
In general, investors want to see a stable economy and over the past 12 months the government has done an effective job in taming inflation and reducing interest rates. In order to improve confidence in the market we need to see more of the same to create a stable and sound economy.
While there are some measures the government can take to boost the property market, ultimately it is down to the property industry itself. Developers need to understand the property market and carry out detailed research and feasibility studies before undertaking vast developments.
We believe that the property industry is set for a dramatic change over the coming years. Many of the developers that entered the market with no experience have incurred huge losses and will not be seen again. This will provide opportunities for experienced developers to enter the market.
Some other countries including China have also faced crises in their property market. What is the difference between the crises there and the current situation in Vietnam?
The major difference between China and Vietnam is that the government in China has been deliberately using cooling measures to control the booming property market. This is the complete opposite of Vietnam, where the government is trying to use measures to reignite and stimulate the property market.
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