Condotel—the future of the real estate industry

Michael Piro, director of Strategic Services

Can you share with us your general opinion about the potential and prospects of condotel development in Vietnam?

There is tremendous opportunity for condotel products in Vietnam. Condotels typically find themselves on resort properties, a holiday destination option that has become increasingly popular in Vietnam. If you look the country, it has a more than 3,000km of coast line, so naturally you are going to find a lot of beachfront hotel and hospitality developments. This is what makes Vietnam an attractive destination for condotel products. I think Vietnam has a lot to offer to both developers and buyers of this product, but I do have concerns about the speed in which it is progressing in—it is happening too quickly.

The key driver for success and sustainability in this market is transparency. Developers need to be very open with buyers to make sure they are clear on both the risks associated and the rewards of these types of purchases.

Overall, I think the market has great potential, given that the Vietnamese coastline and hospitality market is extremely exciting and still has a lot of untapped potential.

However, I would say that there will always be some winners and losers in this industry. I look at the guarantees that are being given out in the market and I understand, as a hospitality professional, the economics of hotels. Specifically, how the revenues are derived and how the net income is disbursed, and I look at some of these offerings on the market and I worry for the developer’s ability to fulfill their guarantee.

I am concerned that too much is being offered to the buyers and maybe not all developers will be able to deliver and pay back their customers. While it is a great product, I would say to people out there who are considering purchasing a condotel to really pick your developer carefully, because there will be clear winners and losers in this industry.

Currently, some developers are committing to provide a profit margin of 8-12 per cent. Do you think this figure is feasible?

"Condotel is a great product only if it is managed responsibly and transparently."

To be honest, when I look at numbers like 8-12 per cent guaranteed for anywhere between 8-10 years, it concerns me. These large guarantees are unique to the Vietnamese condotel market—no one in the world is offering returns on this level, which makes Vietnam a bit of an outlier in that sense—these returns are clearly quite aggressive.

I know from owning, running, and managing hotels that it is very difficult in the first four years of operations to be able to generate those types of returns organically, so I think it is really a question of cash management.

Buyers need to trust in the developers’ ability to manage cash effectively and to know when it is time for their customers to get paid the 10 per cent that they have been guaranteed at the start of the transaction. I do not want to be negative, since I do love condotels and I think it is a great product when managed responsibly and transparently, but I do believe that over the next two to three years, and in some cases this has already started to manifest, you will start to see some developers who can no longer honour the commitments they made when they originally sold the units. This is worrying.

Can you share your international experience in managing condotels in several other countries, particularly the issue of managing and granting pink books?

What Vietnam is experiencing right now with the condotel market is not that much different from what happened in developed markets. In the US or in North America, where I come from, these types of products became extremely popular, which resulted in a lot of buyers who bought them without really understanding what they were buying.

This led to a lot of the issues with condotels that we see today, which pushed the government to create a legal framework around the second-home and condotel market.

Thus, I believe that this is the same transition that Vietnam is going through right now. In Vietnam, condotels are getting a lot of attention from the government, from buyers, and investors, which is a perfect storm for the establishment of a strong legal framework and more stringent regulations.

I would say that most of these regulations are going to be in favour of the buyers and you will see laws being created to be much more protective of condotel buyers.

Therefore, developers will have to be even more transparent, declare what they are doing with the money they are collecting from buyers, and have a greater obligation to explain how they are going to pay them back.

What we are currently observing is the intersection between finance and real estate—the new way of selling condotels in Vietnam has become a way of financing development opposed to just selling lifestyle properties. It will be very interesting to see how this all plays out in the short term.

As one of the longest standing condotel developers in Vietnam, can you share what are the pros and cons of investing in this type of property in Vietnam?

The pros are fairly well-pronounced. Developers are able to sell units relatively quickly, even those that do not have that much experience in the market, due to the fact that they are offering guaranteed returns. Buyers are willing to buy, because of the financial implications.

This gives the less experienced developers a chance to enter the market, while being able to achieve relatively good sales results. It is a good way to speed up sales, but it is only beneficial if you plan properly for the future, because there will come a time when developers will have to start paying back. The key is to manage your money properly and to work with the right operator.

That brings us to my second point, which also has a big impact on the success of the development—working with the correct operator who understands these types of products. By getting the right management partner involved and being careful about money management, the developer can make sure that they honour their commitments in the future.

At Indochina Capital, we were the first to ever develop a condotel product in Vietnam. We did it without a single guaranteed return. In my opinion, you should sell the lifestyle—it should be about a choice someone makes to improve the quality of their life and not about making money. The market is always going to go up and down, there is no way around it.

Some people are going to win, some are going to lose, but overall, the development of condotels is going to be good for the country, good for the hospitality market, and good for future investment in Vietnam.

In Vietnam there are legal issues around issuing the pink book for condotel investors. Do you see the same situation in other countries? Do they issue the pink book for condotel investors?

In other countries, I do not think there is a distinguishable line between condotels and traditional real estate condominiums. In Vietnam, there is this problem of how to categorise condotels—is it a serviced apartment or is it a hotel? This issue is unique to Vietnam.

In other countries, it is very clearly a residential product and you would get a residential product title for owning it. They do not have the same issues that we experience here in Vietnam.

We are struggling to determine how to categorise this type of real estate product. The reason why this is happening is because it is tied to land use rights. This forces us to ask the question: is it freehold land, commercial land, residential land or a hotel?

This explains why it has become difficult to navigate Vietnamese real estate regulations, because of how we classify land use rights, taxes, and annual land payment. These issues are unique to Vietnam, so you will not find the answer in the US or Europe.