Urbanisation spurs real estate development in Vietnam
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Rising demand in Vietnam’s residential segment is expected to sustain solid growth in the construction industry, though delays to accompanying infrastructure projects and tighter credit conditions could slow the pace of development.
Demographics driving growth
The boom will be fuelled in large part by urbanisation and a growing middle class that is benefitting from Vietnam’s sustained economic growth. GDP is forecast to expand by as much as 6.7% this year, according to the Asian Development Bank.
Meanwhile, the Ministry of Construction expects the level of urbanisation in Vietnam to rise from 33% in 2014 to 45% by 2020, with city dwellers predicted to be younger and earn more than previous generations, further driving changes in construction and home ownership.
While Vietnam’s property market, much like its population, is still very young, this demography and the relatively low level of home ownership presents opportunities for investors, according to Steven Chu, CEO of Nam Long Investment Corporation.
“Great investment potential exists with 30% home ownership in Vietnam,” Chu told OBG. “Companies investing in the residential real estate market will see high returns from consumers, particularly among the younger generation.”
Much of the demand that exists stems from buyers who are able to access loans and mortgages, according to Marc Townsend, managing director of property consultancy CBRE Vietnam, a considerable shift from 2008, when the mortgage market was non-existent.
“There is now more supply from before, considering that take-up and projects are becoming fundamentally larger than in previous cycles,” he told OBG.
A rise in the number of new real estate companies registered in Vietnam highlights the market’s strong potential.
Registrations were up 146% year-on-year in the first quarter, with 596 new companies with combined capital of VD45.5trn ($2.04bn), as per figures from the Ministry of Planning and Investment.
The surge in demand has served as an incentive for local companies to focus their operations domestically, according to Ee Soon Hean, general director of Japan’s Nippon Paint, one of the largest paint manufacturers in the region.
“From 2012 to 2014, several Vietnamese conglomerates and contractors were eyeing markets in Myanmar and Cambodia,” he told OBG. “With the rise in demand in the construction and real estate sectors, these companies have decided to focus on the Vietnamese market.”
Demand for new residential properties in the low- and middle-income housing segment could reach 5.1m units over the next 10 years, Do Duc Duy, deputy minister of construction, told local media earlier this month.
Metro to track growth
Stakeholders expect the development of accompanying transport infrastructure to further underpin the pace of urban construction.
An extensive network of rail links from districts to the city centres of Hanoi and Ho Chi Minh City is central to the development of urban areas and the construction industry, according to Le Viet Hai, chairman and CEO of construction firm Hoa Binh Corporation.
The smooth delivery of large-scale infrastructure projects and road developments should also help ease traffic congestion.
However, with different international companies commissioned to build separate segments of the Hanoi urban railway, some disruptions have delayed the project’s rollout, which developers fear could weaken demand for residential properties in suburbs and satellite districts.
“The most important thing is finishing the entire metro system, something that I hope the government will push for,” Le told OBG. “Similar to other Asian countries, the real estate business will develop alongside the metro line.”
Slower delivery of transport infrastructure projects also affects the commercial segments, according Alex Crane, general manager of global corporate real estate firm Cushman & Wakefield.
“The delay of metro lines hinders companies from preparing a clear, long-term corporate real estate strategy,” Crane told OBG. “With clearer insight into the delivery of infrastructure projects, it would be an easier consideration for large multinationals to base their operations outside of the city centres and closer to industrial and business clusters or port infrastructure, for example.”
“The metro network is also a key component in establishing a competitive, centralised retail zone,” he added.
As the sector expands, Vietnamese regulators are taking steps to temper the accompanying increase in credit to real estate businesses.
After averaging growth of 14-15% per annum between 2012 and 2014, real estate lending expanded by 18% last year to VD360trn ($16.1bn).
Citing concerns that the property market could overheat, the State Bank of Vietnam (SBV) is considering a proposal to impose restrictions on bank lending to the property market, which could take effect next year.
The SBV may require banks to use no more than 40% of short-term deposits for medium- to long-term loans, down from the current 60%. The bank is also contemplating increasing the risk weight of loans to the real estate sector from 150% to 250%.
Although the move is aimed at strengthening the banking system and reducing risk, it could reduce available funds for mortgages and real estate transactions, which could have negative carry-through effects on the construction industry.
Industry stakeholders have urged the SBV to reconsider the move.
This information was originally published by Oxford Business Group (OBG), the global publishing, research and consultancy firm. Copyright Oxford Business Group 2016. Published under permission by OBG. For economic news about Vietnam and other countries covered by OBG, please visit: http://www.oxfordbusinessgroup.com/economic-news-updates