Widen opportunity for distressed assets

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As the market has been stumbling, the lacks of capital resources pushes many developers to restructure their portfolios to focus on their core and important projects. Moreover, the market is under the pressure to get rid of its nonperforming loans. The actual ratio of nonperforming loans is believed to be greater than the reported 6 percent, 70% of which are attributed to the real estate sector as some commentators’ estimation. However bad debts and their assets have not been available for investors to acquire openly from the banks or investors at this stage. Unless both banks and investors move quickly to deleverage then the recovery will be a lot slower and more painful. There are clear signs of distressed property assets all over Vietnam. It is just a matter of time before they come to the market.

Only a limited number of investors and developers survive more than one property cycle and Vietnam property cycle is experiencing its first major downturn. Casualties are unavoidable but other organizations will come out of it in much better shape to take on the next upward swing. There is a perception among 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 2 – 3 years. There has been many foreign investors however still see Vietnam as a much too immature market for them to invest in, plus many foreign investors have also been hurt badly during the recent market downturn and will not return to the Vietnam market anytime soon. Until there is a downward shift in land prices or a release of distressed assets, foreign investment will still overshadow that of local property investment. The presence of 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 will hopefully bring about a healthier and more professional market for the future.

At present, regional Asian nationalities that have a tract 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. There is an increasing amount of interest from Middle Eastern and Russian groups but they generally focus on prime properties or prime development opportunities in both Hanoi and Ho Chi Minh City. In all segments of the real estate market, prime operating property or development sites in prime locations would be picked off first in a ‘flight to quality’. Operating assets and development sites at strategic locations are the most favoured. Distress assets which are most hunted by developers would be the ones which have good location, clean, reasonable ownership structure and attractive and competitive priced assets. Generally developers and investors can be quite creative in their approach. If they can find an angle to value engineer a site or property then they will look at these too. 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 Centre Business Districts are 85 per cent of those in Singapore. Rents in Singapore, however, 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 therefore have to change with the market cycle just in the same way office rents and residential sales rates do. This shift just started to take its shape at the moment.

Article in Vietnam Investment Review