1.    Real estate market environment

During 2011, Vietnam has faced a difficult time as with all the other countries. According to the Vietnamese General Statistics Office, Gross Domestic Product (GDP) growth rate for the first nine months in 2011 is 5.76% while inflation being 18.6% compared to the same period in 2010. However, according to International Monetary Fund’ (IMF) economic forecast, Vietnam economy is predicted to start recovering with the GDP growth rate at 6.2% and inflation constrained at 12.1% in 2012 as a result of tightened monetary policy which is expected to have positive effect on the real estate market.

Chart 1: Vietnam’s inflation rate

Sources: IMF, WEOD 11-2011

Chart 2: Vietnam’ GDP growth rate

Sources: IMF, WEOD 11-2011

The economy is completely unstable resulting in the real estate market facing the hardest time ever. Numerous real estate developers either divest progressing projects or are reluctant to develop luxurious ones considering the gloomy investment forecasts, or even worse, face capital loss. Several developers, who are specialized in high-end segment look for the opportunities in mid-end segment to lure end users, increase liquidity, minimize risks and gain acceptable profitability as well.

2.    Exclusive villa segment

This report aims to focus on the exclusive villa segment pricing from USD 300,000 to introduce the Ho Chi Minh City (HCMC) market overview and its difficulties in a transitional market turning end-user based. Despite of the unfavorable market environment in the first 09 months, exclusive villa projects continue to be launched onto the market. Like other luxury commodities, the attractive markup rate is a convincing attribution for developers. Furthermore, the image boost through a luxury project as such is appealing to developers who would like to expand the breadth of their portfolio as well as their reach to more diverse customer base.

Most of the existing projects are located in District 2 and District 7. The progressing projects will be in District 9, Nha Be and Binh Chanh Districts as land costs around the central business district and within proximity are too high to develop low site coverage villa projects. Developers of such projects, however, have to accept the lower demand than previous years as with all the other segments. The threats come from the macro-economic influences, the cool down housing market, competition intensity, customers’ financial capability, behavior and psychology. These are the concerns that developers within the segment have to consider while developing and launching high end products onto the market.

There are split opinions whether the market has any potential or not at this point. Developers are still convinced that despite of the current situation, the segment is unaffected thanks to the increasing amount of high net worth individuals which is emerging fast in Vietnam in comparison to other countries in Asia Pacific region or in the world, according to COLDWELL BANKER Vietnam’ (CBVN) research.

3.    Current supply

Most of the current supply is concentrated in the new District 9 where land compensation is much lower than within central districts. Moreover, the District remains attractive as governmental infrastructure plan is under developed and land availability is considered high. One characteristic of projects within this area is the diversity of products which is reflected by the varied price range of the villas, ranging from several hundred thousand USD to above one million USD. Another point is the riverside open spaces and the privacy environment offered to the owners to enhance customers’ better living standards.

Meanwhile, most of the existing projects in District 2 are ubiquitous with high price range, well above USD 1 million, reflecting the high land compensation price. The strategic customer target is Vietnamese upper class, expatriates and successful business people. Different from District 9, the projects in District 2 and District 7 mostly focus on customers with real housing demands.

Current supply contributes of 1,162 units in HCMC market, whereas a part of these are valued above USD 1 million.

Table 1: Current supply of exclusive villa in HCMC

Source: CBVN

4.    Future supply

According to CBVN’ research, an expected addition of at least 180 units will be launched onto the market within the next 03 years. The market condition, nevertheless without signs of recovery has had a negative impact on the development within this segment. Consequently, some of the planned projects, most of them during application procedure, might not be realized timely. Furthermore, switch of legal owner might be a common feature during the nearest time spectrum as financial capability remains a major issue causing delay or whole/partly divestment.

Table 2: Future supply of exclusive villa in HCMC

Source: CBVN

5.    The segment’s difficulties

Forecasts state the economic environment remains its grip on real estate market during 2012. 2013 might be a brighter year with economic variables more stable that enhance better project development conditions for developers with real capabilities.

Since 2010, the monetary policy has had a negative impact on the Vietnam real estate market. Recently, The State Bank of Vietnam has issued an annual interest rate roof which makes it less lucrative to put money in the bank. This, consequently, should have directed the capital flow to other investment channels, for instance real estate market. However, as the banks have issued tightened monetary policy resulting in capital flow into real estate market has not been realized.

The Vietnamese customer behavior is mostly dominated by speculation rather than real demands, which is a risky measure applied in investment, especially with consideration to the current economic condition. High profit gain in the real estate wave of 2007 and 2008 has never come back. Besides, the market is highlighted by oversupply and lowered transactions. Customers are more rational in terms of expectations and legal issues as it turns to buyers’ market.

Launching of new luxury projects is advised by experts to put on hold until the recovery signals are existed and the customer behavior has changed to be more positively imposed to the real estate market. Especially customer behavior is essential to drive up the demand in the future. During intense market demand, a real estate factor was driven by aggressive investment incentives. This short term approach is not appropriate any longer and both customers and developers need to have a longer term approach to minimize risks. Nevertheless, when the market is marked by oversupply, potential customers have a better chance to purchase properties at more reasonable prices.