Early Signs Of A Recovery, But No Property Market Boom In Sight
BMI View: The Vietnamese property market is witnessing early signs of bottoming. However, we nonetheless see limited value in taking an outright bullish view on the sector. Not only is easy credit a thing of the past, but the healthy pipeline of new residential units that will come online over the coming quarters should also keep property prices in check as we head into 2014.
Our long-held view that the Vietnamese property market would experience a slow and bumpy recovery in 2013 is playing out nicely ( see 'Property Market To Experience Weak Recovery In 2013', November 2012). According to figures published by real estate agency Jones Lang Laselle, asking prices for residential apartments in Ho Chi Minh City are down by around 1.2% quarter-on-quarter (q-o-q) and 6.8% year-on-year (y-o-y) as of the end of Q213. Meanwhile, asking prices for residential villas and townhouses have also witnessed similar declines of 1.1% q-o-q and 8.8% y-o-y over the same period.
Early Signs Of A Bottoming Market
We are witnessing signs that suggest the property market may be bottoming as unsold inventory of new residential units have fallen back to more moderate levels by historical standards. Unsold apartments as a share of total units under construction fell from 30.3% in Q412 to 27.7% in Q213, while unsold villas and townhouses fell from 54.3% to 10.7% over the same period. More recent data indicate that property prices are already starting to pick up. As the accompanying chart shows, the Vietnam Real Estate Index, which tracks transaction prices of highly liquid apartments in Hanoi and Ho Chi Minh City, jumped by 6.8% m-o-m in July. The latest reading has sparked speculation that the property market may have bottomed out and could be poised for a forceful recovery over the coming months. Despite these early signals that the worst may already be over for the Vietnamese property market, we nonetheless see limited value in taking an outright bullish view on the sector. To be sure, our view that the property market would embark on a mild recovery towards the end of the year remains unchanged. However, we believe that the rebound in property prices is likely to resemble that of a slow and bumpy grind rather than the forceful boom that Vietnam experienced in the years prior to 2011.
|The Worst May Already Be Over|
|Vietnam - Real Estate Index|
Easy Credit A Thing Of The Past
Firstly, we argue that the ease at which investors could obtain credit from local banks to finance property purchases is now a thing of the past. Indeed, we believe that easy credit was a major factor in fuelling the previous boom. The lack of regulatory oversight and prudent lending guidelines encouraged speculators who would otherwise be denied a loan to take on highly leveraged bets on the property market. This contributed a significant extent to the build-up of bad debt across the banking sector over the years, eventually leading to today's government-led bailout of the banking sector. Since then, the State Bank of Vietnam (SBV) has implemented various measures to improve lending practices, strengthen regulatory oversight, and other macro prudential policies. We believe that these measures will play a significant role in preventing another property market bubble going forward. Crucially, this also suggests to us that a large portion of the speculative demand that was partly responsible for driving the previous boom has now been cut out of the market.
A Healthy Pipeline Of New Units
Secondly, we believe that a healthy pipeline of new residential units that is expected to come online in late-2013 and 2014, will help to keep property prices in check. According to figures published by various real estate agencies, an estimated 1,400 to 1,500 new residential apartments are expected to be completed towards the end of 2013. This, when compared to the current take-up rate of around 1,100 apartment units in Q213 (the take-up rate fell 35% q-o-q in the quarter according to figures published by Jones Lang Laselle), suggests that the existing stock of unsold units should remain relatively stable even as demand begins to pick up as we head into 2014.
Liberalising Foreign Ownership To Have Muted Impact
Lastly, we believe that the government's newly-proposed measures to reignite demand in the property market will have a limited impact, at least in the short term. The Ministry of Construction has submitted a proposal to lift existing restrictions on foreign ownership of real estate in Vietnam, which is widely expected to be approved by the end of the year. The proposal will allow foreign organisations including investment funds, banks, representative offices of multi-national companies, as well as individuals who possess a valid visa, to purchase and own residential properties in Vietnam. The proposal has been well received by local developers, while surveys conducted by various real estate agencies suggest that foreign investors generally view the move as a highly positive development for the property market.
However, foreign investors have also highlighted complicated regulations, inefficiencies with the regulatory authorities, the lack of liquidity, and other delays throughout the entire process of purchasing a property, as key factors making the Vietnamese market less attractive relative to the region. Accordingly, we believe that more aggressive reforms will be needed to boost foreign participation in the Vietnamese property market over the long run (so far, progress has been slow on this front). For now, we believe that domestic investors will remain the main driver of the property market, and given that general sentiment towards Vietnam's economic prospects in 2013 and 2014 remain relatively cautious, we believe that demand for residential properties will remain weak going into 2014.