JLL: Vietnam Real Estate M&A in times of uncertainty

Real estate M&A transactions in the first 09 months of 2020 recorded a slowdown in quantity. This could be due to both subjective and objective reasons. Amongst the transactions recorded this year, however, there are some significant deals in terms of value (more than US$500 million) coming well-known global investors with multi-billions assets under management (AUM). JLL observes that many Vietnamese developers are raising capital for large-scale development porfolios. These portfolios are attractive to investor because of the size of cash flow, high returns and growth potential of an emerging real estate market like Vietnam.

Khanh Nguyen, Senior Director, Capital Markets Vietnam, JLL

Although these transactions are still under negotiation and legal review, this is still considered a positive factor for Vietnam real estate market because of foreign investors' confidence in the market recovery and improvement of buyer purchasing power in the coming quarters. We note that the cost of capital for Vietnamese developers will tend to increase in order to compensate for a greater risk as Covid-19 is affecting the global economy and Vietnam is no exception. This can be seen as many local developers have experienced difficulties in accessing commercial bank loans, even though the lending interest rates have decreased compared to previous years. However, commercial banks also place great emphasis on credit quality, hence a number of real estate busineses cannot satisfy these loan conditions.

Real estate businesses have instead found alternative ways to access funding through corporate bond issuance with cost of capital mobilisation ranging from 7.9% to 13% for real estate industry, average 10.5%, 3-5 years term. Some real estate businesses offer 13% rate (excluding capital arrangement costs), which is twice as high as the current deposit rate at commercial banks at 5.3% - 6.0% for 1 year term. This could be become a pressure for businesses to manage the capital effectively when using financial leverage.

Therefore, JLL observes that real estate businesses continue the traditional channel of the capital market through M&A activities depite slowdown as compared to 2017-2018 period. From investors’ perspective, after the government has conducted legal investigation into many real estate projects e.g. land origin, lack of transparency in the process of land allocation and not comply with the State's regulations etc., this has partly helped investors feel more secure about the transparency of the market. Hence, investors could find more investment opportunities with some notable transactions are as following: 

• Participate in auction directly with the government. For example, the Ho Chi Minh City People's Committee has just approved for Department of Natural Resources and Environment (DONRE) to auction 9 plots of land in functional area 1 in Thu Thiem. Previously, in May 2020, the HCMC People's Committee also approved the proposal of the DONRE to auction the 38.4 ha resettlement land located in the Thu Thiem new urban area project, Binh Khanh ward, District 2.

• Buying assets through the Vietnam Asset Management Company (VAMC) or a commercial bank that has collateral which is in in the bad debt portfolio (Non-performing Loan) of the bank. For example, the debt of more than 4,000 billion VND at the Kenton Node project is being auctioned by BIDV Bank, etc.

JLL notes that these investment channels are not unfamiliar to investors, however, due to the lack of information and legal transparency in previous years, very few assets have been successfully acquired. With liquidity problems that arise from suspension of and/or investigation into projects, real estate developers are more actively approaching these aforementioned methods. There are still many challenges, both subjective and objective. However, if transparance is further improved, more disclosure of a portfolio of assets, high investment return, stronger bank support and greater flexibility from investors, we believe there will be more transactions happening through this investment channel in the near future.

Which real estate segments are investors interested in?

Industrial is the hottest real estate segment in Vietnam as the country is establishing itself as industrial hub for Southeast Asia. With the EU – Vietnam Free Trade Agreement took effect from August this year and buoyed by stable fundamentals, Vietnam has received strong interest from both investors and manufacturers for industrial properties. One of recent news, according to a report from Ministry of Planning and Investment, Taiwan-based Pegatron, manufacturing partner of the world’s major tech firms such as Microsoft, Apple or Sony, has plans to invest US$1 billion to build a manufacturing complex at Nam Dinh Vu industrial park in the northern city of Hai Phong.

Although the international travel ban in 1H20 had some impact on initiating new transactions as foreign investors could not inspect the assets, the recent resume in passenger flights for six Asian countries will help expedite the transaction process. Apart from existing industrial investors such as BW Industrial, Logos, Mapletree, Boustead etc., we have observed a number of local investors and most recently, Japanese investors who are looking to tap into this lucrative segment. In addition, the demand for hundreds of hectares of industrial development land to master develop an industrial park from international investors is increasing. However, finding opportunities with suitable zoning and ‘clean and clear’ legal title remains challenging, especially in southern provinces such as Dong Nai and Binh Duong.

Despite being an attractive segment, doing deals is still challenging for investors. Finding the right sizable land suitable for ready-built warehouse / factory for lease development at the right location, coupled with increase in industrial land price while ensuring the investment to meet a certain return are the key concerns for investors, not to mention the arising competition from both existing and new players.

Investment activity in residential segment has been slow down this year; mainly due to both the effect of Covid-19 and investigation from local authority since last year together with credit quality control in real estate. One of the notable transactions that is publicly announced earlier this year is the joint-venture between Mitsubishi Corporation (40%), Nomura Real Estate Development (40%) and Vingroup (20%) to jointly develop 10,000-home subdivision in Vinhomes Grand Park, a residential township in District 9, HCMC. Another highlight transaction is US$650 mil investment by KKR-led consortium into Vinhomes, equivalent to 6% stake in the company. With capital from foreign investors being disbursed heavily recently, many sales activities have been launched along with the rapid construction progress of the project. Another recently announced transaction is the partnership between Swire Properties and City Garden JSC to jointly develop “The River”, a luxury residential project located in Thu Thiem, HCMC. Again, this has shown regional investors’ confidence in fundamentals of Vietnam and its market recovery after Covid-19 impact.

As the global economy remains uncertain, office and retail segments have started to feel the heat. For office, although rents are stabilised and occupancy remains high, the demand for office space acquisition and expansion slowdown. Retail segment has taken a hard hit as shopping malls are struggling to maintain footfall as end-consumers curb their spending in the times of global recession. We observe that the demand to acquire operating assets is still high for core investors whose strategy is to hold the asset long-term and who are very familiar with the market and deal structuring in Vietnam. Value-added investors are still actively looking for distressed opportunities to generate heightened yields. However, given the global economic uncertainty, such investors would be more conservative in their underwriting of the assets and more selective, adding more premiums in their required returns and this often leads to pricing gap expectation between seller and buyer.

The pandemic certainly has impacts on real estate businesses. Unlike in the peak years, in general, there will be a number of domestic real estate firms facing liquidity problems. Foreign investors will also be more cautious in their investment. Mergers and acquisitions are not the only way to grow a business, as there are other alternatives to access larger sources of capital. However, businesses still need to ensure clarity and transparency in order to be ready to participate in the potential but also challenging capital markets.