Cocobay calamity brings condotel pitfalls to fore
Cocobay calamity brings condotel pitfalls to fore
Condotel project Cocobay Danang – a tourism complex which features footballer Cristiano Ronaldo in its advertising – suffered a PR disaster last week as the developer reneged on its 12 per cent profit commitment, shedding doubt on the promises of other condotel schemes trying to attract second-home buyers with expectations of high profits. .In 2017, the image of Cocobay Danang overwhelmed the country’s media with Cristiano Ronaldo as the face of the venture and “Cocobay – My home in Vietnam” as its slogan.
That year, the condotel project was also presented to an international stage when Danang hosted the major APEC event, featuring participation of more than 12,000 representatives from 21 member economies. And just last year, Cocobay and Empire Group hosted the first phase of Miss Vietnam 2018, with the image of the venture spread far and wide.
Thanks to many large-scale advertisements. Cocobay attracted buyers in quick fashion. However, the true progress of Cocobay was revealed only recently, when its Achilles’s heel was discovered.
A nightmare investment
Buyers who have purchased condotel units at the Cocobay complex faced a shock when Thanh Do Investment Development and Construction JSC (Empire Group), the developer of the project, announced that it could not keep its commitment of paying annual returns and would stop paying yields from December 1, 2020.
Nguyen Thuy Duyen, a Hanoian who bought a Cocobay unit at a price of VND1.5 billion ($63,800), told VIR that she had sued for the annual return from the unit for the last year.
“I am very worried because when buying this unit I had to get a loan from the bank and paid interest for five years. Now, Empire Group cut the yield suddenly and I do not have any other financial sources to pay this,” Duyen said.
Nguyen Hai Long, a representative of 700 owners of Cocobay, was also shocked by the announcement from Empire Group.
Talking with local media, Long said he bought a semi-detached house in Cocobay with insurance from a local bank. “I, and many other owners, trusted the Empire Group and the bank behind it; however, now this incident happened and has put a lot of pressure on us,” Long said
Annual returns from the developer are paid directly to banks as periodic loan repayments under standard three-way agreements, signed when an investor purchases a property. Because Empire Group has decided to step back, banks are asking investors for these sums, Long added.
VIR was told that the yield was due to be paid out every six months, in June and December. However, many owners failed to receive the June yield from this year.
On November 28, many of the buyers stood in front of the Empire Group office located in Hanoi, expressing their anger about the company’s refusal to pay the annual returns to them.
“We don’t agree with the options which Empire Group suggested to us. They are like traps and it is very difficult for us to choose any of them,” said Duyen, a homebuyer from Hanoi.
Another said, “I came here with many other buyers who have invested in a condotel in Cocobay Danang. We all disagree with Empire Group’s one-sided decision. They have committed to this agreement and must keep it.”
Future in doubt
Experts and developers have different opinions on whether the condotel model is going to be successful.
Despite not commenting on any specific condotel case, Troy Griffiths, deputy general director of Savills Vietnam, expects no market crisis from this. “It’s happened all over the world before and is a good learning example. There will certainly be more failures as the operating assets cannot meet the guaranteed returns, and without experienced developers, the premium gets spent elsewhere,” he said
The most common method in solving such an incident, according to Griffiths, is to issue a prospectus for the investment that has audited financial statements linked to guaranteed capital that can service the distributions.
“In many markets such as Singapore, Hong Kong, and Australia, it is mandatory to ensure the developer complies and purchasers are protected,” he added.
Pham Lam, general director of DKRA Vietnam said that even though the Cocobay incident should not represent the whole market of tens of thousands of condotels, buyers will still try to find safer investment opportunities.
“There are many factors that lead to an investment decision, so I don’t think that there is any specific way to approach the whole market,” said Lam. “However, I am sure investors will soon become more hesitant towards the condotel segment. In the long term, however, the condotel sector will be more regulated by laws and be better operated.”
Meanwhile Doan Van Binh, chairman of CEO Group, one of the biggest condotel and tourism developers, believed that the Cocobay incident was a unique case.
“Condotels are good business if the developer strictly follows the regulations and the movements of the market. Condotels have had a positive impact on the Vietnam real estate market in recent years. They have contributed to the development of the market with thousands of condotel units launched, and many of those sold successfully,” Binh said.
He does believe that if the condotel sector is developed in a sensible manner, it represents a key channel to attract investment capital from both domestic and international investors.
Agreeing with Binh, Nguyen Tran Nam, chairman of the Vietnam Real Estate Association confirmed that condotels are good business products. However, with the Cocobay incident, the developer had chosen the wrong venue for the project, far away from the centre, and expected too high a yield.
“The current 8-12 per cent yield which Cocobay has committed to is too high compared to bank interest, so it contains much more risk,” said Nam.
He added that the risk is lessened because the Cocobay properties remain there and its value could still increase during the time, as only the annual return is reduced.
“This is nothing compared to other risks in the real estate market which homebuyers may become burdened with,” Nam said.
Nam was in total agreement with the three options Cocobay presented to the buyers. “I think those options are reasonable and could be further negotiated between the developers and the buyers, to find a feasible solution,” he added.
Developer reflections
Nguyen Duc Thanh, chairman of Empire Group cited financial difficulties as the reason for breaking the commitment of annual returns to the buyers.
Due to the lack of a legal framework, the venture failed to progress in the last two years, forcing the bank behind the project to freeze capital. This led to a state of limbo for the entire project.
Despite having signed operation contracts with two famous groups – StayWell Holdings and the Louvre Hotels Group – progress on the project remains slow due to design and concept revisions. Therefore Thanh said he could not provide an annual return of 12 per cent per year.
According to Thanh, the company had offered buyers several outs upon announcing that it would stop the promised annuities payments.
For instance, the buyer can continue to be a partner with Cocobay and receive a fixed return or sharing return based on the real business result, the buyer can receive their units and self-leasing to benefit or sell it to other secondary buyers, and they can sell units back to the developer.
Among the options, investors can sell back flats and get a full refund. Thanh cited that with this option, there will be "no loss and no damage.”
However, this solution does not account for time spent and additional fees, such as financing, management, and operational costs of getting involved in the project.
In its financial report, Empire Group released that it has been reporting losses since 2017, accumulating VND134 billion ($5.7 million) as of last year.
