Distressed assets a land of opportunity
Distressed assets a land of opportunity
Vietnam’s real estate market has been stumbling in the dark for some time.
This lack of capital resources for developers, high interest rates and poor sales have led to many unfinished developments blighting country. Indeed, many developers are now technically bankrupt, unable to meet their financial obligations to banks and have had to restructure their debts.
There is an expectation that this will lead to banks using the collateral (i.e. property assets) to recover their debts and a wave of ‘distressed assets’ be released into the market.
We at Cushman and Wakefield believe there are still higher levels of non performing loans (NPL) than the reported 6 per cent in Vietnam, most of which are attributed to the real estate sector.
Some commentators have even suggested that real estate could make up 70 per cent of NPLs in Vietnam.
To today, however, bad debts and their assets have not been available for investors to acquire openly from banks or investors. This toxic situation will remain unless banks and investors can quickly move to deleverage. The alternative is a much slower and more painful recovery.
Amid a landscape of distressed property assets across Vietnam, prudent, capitalised and motivated investors are seeking new opportunities in Vietnam. Only a limited number of investors and developers survive more than one property cycle and we are currently going through Vietnam’s first major downturn. So, there are many casualties but other organisations will come out of it in much better shape to take on the next upward swing.
Distressed assets which are most hunted by developers will be the ones which have good locations, clean, reasonable ownership structure and attractive and competitive priced assets.
I think there is a perception from some Vietnamese owners and investors that the vultures are circling and all of their assets will be picked off by foreign investors over the next three years. There are many foreign investors, however, who still see Vietnam as a too immature market for them to invest in, while many foreign investors have also been badly hurt by the recent market downturn and will not return to the Vietnam anytime soon. Until there is a downward shift in land prices or a release of distressed assets, we will still see a level of foreign investment overshadowing that of local property investment. What we hope to see are more experienced and diligent investors in the market with a lot of the ‘fly by night’ operators taken out of the equation by the downturn. This will hopefully mean a healthier and more professional market for the future.
At present, regional Asian nationalities that have a track record of investing in Vietnam are most interested in distressed assets of Vietnam, since they understand the investment landscape. Those are the Japanese, Taiwanese, Singaporeans and Koreans.
Cushman & Wakefield is working with them on looking to further their real estate development and investment businesses and are often here with long-term business plans in place. We have seen an increasing amount of interest from Middle Eastern and Russian groups, but they generally focus on prime properties or prime development opportunities in Hanoi and Ho Chi Minh City.
In all real estate market segments, prime operating properties or development sites in prime locations will be picked off first in a ‘flight to quality’. Operating assets and development sites at strategic locations are most favoured. But, generally developers and investors can be quite creative in their approach so if they can find an angle to value engineer a site or property then they will look at these too. Often the more experienced developers are the most creative. Those properties in poor locations, with little market demand and with complicated ownership structures in place will see the least amount of attention.
One of the biggest barriers to entry and the single biggest factor in ensuring profitable property development is land pricing.
Both major cities in Vietnam have historically maintained high land prices. In a rising market feasibilities can be justified, but in a declining market the opposite occurs.
For example, prime commercial land prices in Ho Chi Minh City central business districts are 85 per cent of those in Singapore, but rents in Singapore are more than 2.5 times higher than in Ho Chi Minh City. It doesn’t take a genius to work out that these sites can no longer be profitable if acquired at the same land prices as average Grade A rents have subsided by up to 40 per cent since 2007. Land prices have to change with the market cycle just in the same way office rents and residential sales rates do and we are just starting to see this shift taking shape now.
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