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Khanh Nguyen, Associate Director of Capital Market, JLL Việt Nam
M&A activities, in particular the real estate sector in Vietnam, have been recorded to increase substantially in both volumes and value of transactions in recent years. Due to lack of transparency of the emerging market in which most transactions are not publicly announced, it is limited official statistics on transaction volumes as well as their values. While the global economy becomes more volatile, Vietnam, as an emerging country, has turned into an attractive market for investment, livening up the M&A activities in this market.
New quarterly figures from JLL show a 12 percent year-on-year decline in global real estate transaction volumes in Q2 2016, with activity totaling US$148 billion. This brings half year volumes to US$281 billion, a 13 percent decline on the first six months of 2015.
Asia Pacific, investment activity has decreased significantly over the second quarter, coming in at US$22 billion – 28 percent down on a year ago. This is largely due to a slowdown in China and Japan where volumes came in at 39 percent and 20 percent lower respectively. Singapore was the only market in the region to report an uptick on H1 2016 volumes, owing to the US$2.45 billion Asia Square office sale in June. This is the world's second biggest transaction and the largest-ever single tower transaction in Asia Pacific, in which JLL is the investment advisor.
While the capital flow into Asia Pacific region has showed signs of slowdown, the real estate market in Vietnam appears to be attractive to foreign investors, in particular Japan, Korea and Singapore. The key driven factor supporting M&A activities in Vietnam is GDP growth, standing high level of 5.6% which is very competitive in comparision to other countries in the region. A desirable demographic with 70% of population in the age range of 15-64, increasing disposable incomes, and rapid urbanization, in particular Hanoi and Ho Chi Minh City is attractive to investors.
More importantly, a most desirable return promises to be a key driver of investment decision. What can we conclude from the real estate transactions in the first six months of 2016?
1. The new M&A trend of Vietnam investors
While most of the sellers are domestic investors who had difficulties on raising capital during the recession period of the real estate market in 2009 - 2013, the market has witnessed a different movement since 2014. Local developers who are having strong capital sources have been actively looking for investment opportunities. A typical transaction took place in Q1 2016, in which a 30ha development site in South Rach Chiec Residential Area was officially transferred to Novaland by VinaCapital – a listed investment fund on London Stock Exchange and among the first investment funds in Vietnam. On the other hand, VinaCapital Vietnam Opportunity Fund also invested US$47 million* in Novaland convertible bonds as a means to indirectly invest into the real estate portfolio of the company.
2. The shift in capital flows to commercial/investment real estate led by Asian investors/investment funds
Foreign investment funds continue to seek investment opportunities in office assets in prime location of Vietnam, in particular in Ho Chi Minh City, as they expect a potential growth of capital value and yield compression. In 2012, when it was very limited transaction in HCMC, Daibiru – a Japanese Stock Exchange listed group which were specialized in real estate development and investment, acquired the Saigon Tower office building located in the city center from Chiaphua Vietnam, with an estimated yield of 8.5%. Since 2015, as rental rates and occupancy rates of office buildings have improved, especially among high-quality Grade A properties with high occupancy rates and prime locations, there remains a strong demand of those similar assets. Some Japanese investors are willing to offer a yield under 8% but still extremely rare investment opportunity.
3. High-value transactions attract attentions of investors
One of the noteworthy real estate transactions in 1Q16 is the acquisition of 70% of the shares of A & B Office Tower (District 1, HCMC), amounting up to $47 million by a Japanese investor. The market yield is estimated at above 8% as an indicator for Grade B offices in prime Ho Chi Minh City.
Next, in 2Q16, Mapletree Investments acquired the Kumho Asiana Plaza Complex in District 1, HCMC from its Korean venture, which comprised Kumho Industrial and Asiana Airlines at an estimated yield of 9% for the whole complex. These transactions have established good reputation for the market, which attracts investors from private investment funds such as the Blackstone group, Goldman Sachs group or foreign investors with an aim to diversify their portfolios by investing in emerging markets, as well as insurance groups who want to own a separate office building for their operation in Hanoi and Ho Chi Minh.
4. The completion time of a transaction is shortened and the products are ready to be launched in market
Recently, there has been a lot of attention being paid to the names of domestic investors such as Vingroup, Novaland or Van Thinh Phat. Novaland has actively acquired the lands to grow their portfolio from from 4 projects in 2013 to 34 projects as of December 2015 (according to Novaland Group). This can only be done with good preparation of resources and a long-term development plan.
To keep pace with market movement, investors are working at a high level of concentration to deliver their products soon. For instance, Keppel Land Limited entered into a conditional investment agreement to subscribe for 40% equity interest in Empire City Limited Liability Company (Empire City) for a total consideration of US$93.9 million together with the remaining 3 partners of GAW Capital Partners, Tien Phuoc Real Estate Joint Stock Company and Tran Thai Real Estate Co. Ltd. The transaction was completed in March 2016 and now, after 5 months, the developer has been ready to deliver the products to the market.
CHALLENGES IN SEEKING INVESTMENT OPPORTUNITIES IN THE VIETNAM REAL ESTATE MARKET
The majority of foreign investors continue to search for income producing commercial properties; however, there are limited opportunities to acquire investment grade assets.The main reason is that existing landlords are generally satisfactory with the generated stable income streams; therefore they would not wish to put their properties on sale, though investors are willing to offer a low investment yield.
For residential and commercial projects, foreign investors often search for "clean" land (i.e. compensation completion, site clearance, land use fees have been paid, land use right is in place, and good planning). However, those assets are rare as the Vietnamese realty market is still immature.
In addition, The Vietnamese real estate market is tightly held and open market offerings in this high-growth, high-potential sector are rare. The accessibility to the good assets is quite limited; most foreign investors are working with investment consultancy to enter this market.
MARKET OUTLOOK – BIGGER APPETITES
There remains abundant capital looking to be deployed within real estate up to hundreds of dollars for each but there remains challenges associated with deploying that capital without driving prices to unsustainable levels. Income generating assets such as offices continue to attract Asian investors. Although the hotel and serviced apartment market has a short-term difficult period (due to a strong supply during the market economic downturn affecting rents and occupancy rates), they are still receiving the attention of long-term investors seeking prime development sites where strong demand exits. The retail market is still potential to attract investors thanks to a big population of 90 million people and a high rate of urbanization.
There remains a high demand of investors looking for "clean" residential projects. The challenge to place capital is driving the investors to adopt more creative strategies. Therefore, many groups are now considering other sectors and are willing to partner with good quality local developers in order to gain a foothold into the market. Local groups have first mover advantage, understand the dynamics of the market, legal framework, secured land holding while the foreign investors are having capital sources and their 'know how' expertise. Recent transactions in the first 6 months of 2016 between Japanese investors such as Nishi Nippon Railroad Hankyu Realty, and Nam Long or Sanyo Homes and Tien Phat Real Estate company are good case studies. JLL expects this trend will continue in the near future, to attract foreign investment and upkeep the growth of the Vietnamese real estate market.
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