S'pore developers unfazed by rising Viet market risks

July 21, 2008
S'pore developers unfazed by rising Viet market risks
They're upbeat over longer term outlook, despite current high
inflation, labour cost
By JOYCE HOOI

(SINGAPORE) Low Keng Huat's plans to pour money into a 267,000 square
foot development project in Vietnam must have raised a few eyebrows
when it was announced earlier this month.

Against the backdrop of a 25 per cent inflation, 14 per cent interest
rates and a Vietnamese dong that is expected to weaken a further 30
per cent before the year ends, market insiders are wondering if local
property developers are simply whistling in the dark.

Low Keng Huat is not alone in digging its heels in the Vietnamese
market, where property prices have fallen 30-40 per cent from their
peak late last year.

Several weeks after the Vietnamese stock market lost 60 per cent of
its value in June this year, CapitaLand - one of South-east Asia's
largest property developers - announced plans to build 6,000 homes in
Vietnam over the next three years.

Earlier this month, Frasers Hospitality told BT that it was looking
for bargains in premium Hanoi and Ho Chi Minh areas, amid the
carnage.

Despite the unabated enthusiasm for the Vietnamese market, the ride
has been a bumpy one of late.

Developers in Vietnam have been hit hard by inflation across the
board.

'The increased cost of construction have been quite substantial.
There's been a 50 per cent increase because of more expensive raw
materials and the sudden demand for contractors in Vietnam,' said Ang
Wee Gee, Keppel Land's chief executive officer.

The cost of labour is also making itself felt.

'Labour costs have increased by 15 per cent since we signed a new
agreement with labour unions in May this year, compared to the
previous 5 per cent increase,' said Wan Yew Kwan, Low Keng Huat's
general director for its Vietnamese hotel operations.

And the vagaries of doing business in an emerging market like Vietnam
have gotten costlier.

'We've adjusted the wages of our Singapore staff in Vietnam upwards
by 20-30 per cent because accommodation costs have gone crazy but we
want them to live somewhere safe,' a spokesman for Mapletree
Investments told BT.

A report by CB Richard Ellis Vietnam estimates that residential
rental rates there will reach half that of Singapore and Hong Kong's
this year.

Tenants are expected to pay US$40-45 per square metre for properties
developed by international firms.

Choe Peng Sum, Frasers Hospitality's chief executive officer, noted,
however, that rising prices have been underpinned by the fundamentals
of rising demand.

'For the serviced apartment market, demand is still strong and supply
is not excessive. We still see 80-90 per cent occupancy rates, even
as guest rates have increased,' said Mr Choe, whose firm operates
Fraser Suites Hanoi, a serviced apartment.

'Because the rates have gone up in tandem with demand, there has been
no eating up of profits,' he said.

The sentiment is echoed by Keppel Land, which has the bulk of its
Vietnamese interests in high-end residential areas in Ho Chi Minh
City.

'The speculators have left and we are now seeing genuine buyers who
are buying to stay,' said Keppel's Mr Ang.

While average selling prices (ASPs) might have plunged from their
euphoric peak of US$3,500 per square metre late last year, Mr Ang is
quick to point out that ASPs for their development in Ho Chi Minh
City, The Estella, range from US$2,000 to US$2,500 per sq m, twice
their expected ASP when Keppel bought the land last year.

'Our margins actually increased from the middle of last year. And
ASPs for our projects are expected to hold,' he said.

Keppel Land, which has the largest Vietnamese exposure among local
developers - valued at S$360 million in total - is convinced that
stability is due to return to Vietnam.

'Economic indicators have turned a bit more positive. I'm confident
that things will get better in six months to a year,' said Mr Ang,
citing the country's improved trade deficits and a slower rate of
increase in inflation.

The slower rate of gross domestic product (GDP) growth is also
reassuring, with Vietnam clocking in its lowest GDP growth to date at
6.5 per cent in the first half of this year, compared to its
breakneck rates of 8-9 per cent over the last decade.

Confidence in the Vietnamese government has also remained high with
property developers.

'We think the government will be able to take care of the inflation
and social unrest,' said the spokesman for Mapletree Investments,
which currently operates two logistics parks near Ho Chi Minh.

So optimistic is their view that they are planning on venturing into
residential development in Vietnam for the first time - as part of a
100 hectare business park township project.

Even rising interest rates have not dampened developers' interest in
Vietnam, as most local house buyers are not expected to borrow
heavily for residential purchases.

'The mortgage market is quite new in Vietnam. The Vietnamese are
increasingly affluent and most of them are going to pay in cash,'
said Keppel's Mr Ang.

Developers also appear to be taking the weakening dong in their
stride.

'The Vietnamese's savings are going to be either in US dollars or in
gold, so affordability will not be affected much,' said Mr Ang.

In any case, developments in residential, hospitality and office
areas are currently billed in US dollars by developers, mitigating
currency risk.

And where they are billed in Vietnamese dong, like the mid-level
residential sales that Mapletree might soon have, such revenue will
be immediately converted to US dollars on the spot rate, according to
its spokesperson.

The Vietnamese dong interbank rate currently stands at 17,201 dong
per US dollar, down almost 6 per cent from the beginning of the year.

Despite the recent turmoil, all developers have indicated that they
are in Vietnam for the long haul.

CapitaLand, in its latest update on Vietnam, likened the property
market there to China's 10-15 years ago, noting that it is a good
time to get in for long term investors.

And while doing business in China 10-15 years ago might have been a
daunting endeavour, Singapore firms have had a much easier time in
Vietnam.

'There's still a fair amount of wheeling and dealing, but it is very
businesslike on the whole.

'It is a great place for doing business as long as you do your due
diligence and pick the right partner,' said Frasers's Mr Choe.

Relationships and protective clauses have also helped developers
avoid pitfalls in Vietnam.

'You need a good reputation, a good network and holding power so that
you can negotiate deals to your advantage. We pay very little capital
upfront in Vietnam,' said Mr Ang from Keppel.

While Singapore's property developers might be whistling, they are
certainly not in the dark.