Chinese Love Vietnam Property for All the Wrong Reasons

The market for luxury apartments looks a lot like the mainland’s did 10 years ago. Investors lured by the familiar aspects should think again.
By Shuli Ren

A property boom with Chinese characteristics.
Looking for the hottest residential real estate in Asia? 

Go to Saigon. 
Ever since Vietnam allowed foreigners to own apartments in July 2015, its luxury housing sector has been on a tear. 

Three years ago, when local developer Dai Quang Minh launched the first residential complex in the Thu Thiem area – a 657 hectare grassy plot across the Saigon River from the central business district – the going rate was $2,000 to $2,800 per square meter. 

The Metropole, a nearby project slated for June, will likely cost more than twice as much, between $4,500 to $6,500 per square meter.
Last year, luxury home prices soared 17 percent, while the rest of the residential market stayed largely flat, says Dung Duong, a research analyst at CBRE Group Inc., a real estate services firm.
It’s no surprise, then, that most Vietnamese are priced out. 

In 2018, only 23 percent of luxury homes were sold to locals, outpaced by mainland Chinese, CBRE estimates. 

South Koreans and Hong Kong residents followed closely behind.
To the Chinese, Saigon is irresistible. 

As early as 2016, marketing brochures touted the city as Vietnam’s Shanghai, and Thu Thiem as a newer Pudong, the glitzy central business district that rose from abandoned farm land. 

As they see it, Vietnam now is China a decade ago – a politically stable Communist country that can reap riches through exports and a friendly relationship with the U.S.
And for Chinese investors used to sky-high prices at home, Vietnam's luxury apartments seem like a good deal. 

Earlier this year, China Vanke Co., the third largest developer on the mainland, launched a riverside project in Shanghai’s Pudong with units priced at more than $15,000 per square meter, more than double the Metropole project.
There’s a major pitfall to that logic, however. 

Vietnam today looks nothing like China did 10 years ago.
There’s little point to a luxury condo without nearby infrastructure to support it. 

Keppel Land Ltd.’s Estella Heights is a case in point. 

Advertized for its family friendly location – across a busy highway is a residential area full of international schools and small cafes – the apartment complex has beautiful rooftop swimming pools and a children’s play area. 

Yet, right now, there’s no overhead bridge to walk to the school district. 

Plans to start one are hazy at best.
As for that metro every real estate agent is talking about: It’s being delayed – again. 

The city broke ground on its first subway line in 2012, but financial problems, such as ballooning costs and unpaid bills to Japanese contractors, keep coming. 

The finish date was pushed to 2020 from 2017, and even this deadline may not be met. 

Shanghai, in contrast, finished its first metro line on schedule in 1995. 

It’s built a dozen more since.
From a fiscal viewpoint, the comparison is equally stark. 

At 61 percent of GDP, public debt is edging close to its legal cap of 65 percent, giving Hanoi limited means to spend on infrastructure. 

Ten years ago, China had much more flexibility. 

To insulate its economy from the fallout of the financial crisis, Beijing launched a 4 trillion yuan ($586 billion) fiscal stimulus, building roads, metros and railways that transformed Chinese cities into efficient transportation hubs.
Even if Vietnam decided to lift its public debt ceiling, there’s very little wiggle room. 

A dwindling global trade pie puts the nation’s current account surplus at only 2.7 percent of GDP. China, on the other hand, had a surplus of more than 10 percent a decade ago. 

At that point, Shanghai looked like a big construction site; Saigon feels alarmingly quiet right now.
Back in 2006, apartments at riverfront locations in Shanghai’s Pudong district went for roughly $1,800 per square meter. 

In Saigon, you’re paying more for 20-year-old infrastructure. 

This market is getting too heated – and yet 80 percent of all buyers last year said they purchased for investment purposes. 

What gives?
Meanwhile, all of this is bad news for the Vietnamese. 

At this pace of foreign buying, Saigon is looking like it’s being colonized all over again.

MSCI: Companies In Vietnam Get A Grim Reality Check As China Gets A Lift

By Ralph Jennings

This picture taken on Feb. 21, 2017 shows new high-rise buildings in Saigon.

Vietnam had just finished medicating the sting of Donald Trump pulling the United States out of the Trans Pacific Partnership. 

That trade deal would have lifted exports from Vietnam, where the economy is already growing around 6% per year largely because of a boom in manufacturing. 

Just as Vietnamese officials figured they could lean on a 2015 trade pact with the European Union and work with Japan on a revived Trans Pacific Partnership, they got more sour news.
This week the venerated New York-based builder of stock market indices MSCI placed China’s relatively mature “A” shares in its emerging market index but effectively decided Vietnam’s exchange didn’t qualify. 

A spot in the index would have pushed several hundred exchange-traded funds that track the index to shift a bunch of investor money into Vietnamese stocks, an obvious boon for the capital market that has grown keen over the past two years on luring foreign investment. 

Vietnamese stocks posted Southeast Asia's biggest percentage gain in 2013.
MSCI dissed Vietnam this year by declining to place domestically traded shares on a list of countries for review. 

A review could lead to inclusion on the emerging markets index, but Vietnam will stay in MSCI's Frontier Markets Asia Index instead. 

Although 36 Vietnamese firms had opened to majority foreign ownership or were in the process as of April, continued limited access from abroad still hurts, Hanoi-based SSI Research said in a note Wednesday. 

“The key issues for Vietnam still hinge on conditions of foreign ownership, including individual stock foreign ownership limits and total market-wide foreign ownership limits, and especially…the allocation of equal rights to foreign investors,” the note says. 

“Under the MSCI assessment, Vietnam was judged to be ranked the lowest level among frontier markets on conditions of foreign ownership.”
Prospects of Vietnam making it onto MSCI’s review list by 2018 are “quite bleak” without “major improvements” to market accessibility and ownership limitations for foreign investors over the next half year, SSI Research adds.
Vietnamese shares, though seen as a proxy for its economy, leave more for improvement than just access, people close to the market add. 

“Questions like market access, lack of English-language material, accounting standards and currency are still to be tackled, although a lot of progress has been made on the liquidity and market capitalization to GDP fronts,” says Fiachra MacCana, research head at the stock brokerage Saigon securities.
Some of the 800-plus companies on exchanges in Hanoi and Saigon now attract investors for their business savvy and transparent management. 

An example of both is the dairy producer Vinamilk.
But a lot have come under fire over patchy, slow accounting rather than the type a lot of foreign fund managers prefer to see. 

Then you get the not-so-international management standards of government owners. 

About 3,000 Vietnamese firms were partly state-owned as of 2015, in some cases after partial privatization under the Communist country free market reform efforts. 

Penalties for what Westerners would consider insider trading are light as well, says Frederick Burke, partner with the international law firm Baker & McKenzie in Saigon. 

“There’s no criminal consequences for things that we would consider market manipulation,” he says.