Gazing into property’s crystal ball

Buyers must look for red flags before they sink capital into an apartment

Recently, a number of developers have offered discounts for their flats, which is said to be a mode of sales based on the currency’s time value rule rather than merely discounts.

Selling a flat at a price of VND15 million ($725) per square metre and getting money within 10 days since the selling date is the same as selling a flat at VND20 million ($966) per sqm and getting money after two years.    

Like any other goods, values of housing and of apartments are determined by the supply and demand on the market regardless of costs paid by developers. However, whether developers incur losses at the selling price of VND15 million per sqm and what factors will create the value and ranking of an apartment.

This article is aimed to find out the answer. It will provide basic information about how long developers  can stand with loans and their pressures of financial costs.        

What factors drive the development costs of a residential apartment?

We have conducted an intensive investigation into a typical project in Ho Chi Minh City’s District 2 and found out that development cost of an apartment averages VND15 million per sqm. The development costs include building and installing costs, land lease and equipment such as elevators and fire alarms.

If counting interest of bank loans, marketing expenses, selling costs and management costs, the price of a Grade B flat in Ho Chi Minh City is around VND15-17 million ($725-$821) per sqm. Thus, developers will face big losses. However, the project that we have analyzed has basic investment levels as follows:          

• Land rent at VND15 million ($725) per sqm, including site clearance costs
• Land at 13,000sqm and construction rate at 40 per cent.
• Building and installing costs for contractors at VND5 million ($241) per sqm and for finished products at VND8.5 million ($410) per sqm.   
• Area of flats per total construction area at 65 per cent.
• Costs for equipment including elevators and fire alarm system.  
• Other minimum costs such as design, work supervision and project management.

Via analyzing a typical project at middle segment, which is common on this market, we give some important assessments as follows: The development cost of a Grade B flat ranges around VND15 million ($725) per sqm.

Among the costs, construction and installation cost is the highest. In the sample project, the cost is about VND8.5 million ($410) per sqm of finished product, accounting for 55 per cent of the total development cost of VND15.4 million ($744) per sqm. The key point is the costs of equipment and infrastructure while community facilities are almost at minimum level.   

The development cost of a flat will be higher based on costs of equipment, infrastructure and facilities for residents. Development costs of high-end and luxury flats will depend on costs for equipment and land rent and on the location, especially infrastructure and facilities for the community such as parks, green trees, social security system and wastewater treatment.  

Equipment cost, comprising elevators, air-conditioners, information network, security services and others normally account for a quite large part. It is dependent on the kind of equipment.   
For example, for a housing standard, an elevator is only permitted for a maximum of 40 flats while it can serve up to 60 flats for the middle segment. An elevator assembled in Vietnam is around VND1.6 billion ($77,294) while a Japan-made Mitsubishi elevator is able to reach VND6 billion ($289,855), excluding extra costs which increase when the number of stories rises.
     
Thus, the classification of flats and development costs and later selling prices will largely depend on kinds and quality of equipment as well as standards applied by investors. In this aspect, the development cost of a flat can add VND5-10 million ($241.5-$483) if developers  spend much on expensive equipment with an aim to promote the ranking of a flat and look forwards a perfect real estate product.

Costs of infrastructure and community facilities include roads, bridges, water supply and drainage, wastewater treatment, green trees, park and yacht. For the above analysed project, these costs are excluded or at minimum level so as to have a development cost of VND15 million per sqm.

These costs are not fixed and along with equipment and location of the apartment building, they will contribute to creating a real estate product as expected. Because these are free-of-charge facilities so all costs for them will be added to the development cost of products.    
For example, the value of green trees is quite high.

For the above project, if the developer spends VND50 billion ($2.4 million) on green trees and parks, the development cost will increase by VND1 million ($48.3) per sqm. Therefore, the development cost of property products will be variable and at that time customers and investors will need information transparency so as to make investment decisions.

How is the pressure of loans?  

Our survey showed for almost all projects with 80 per cent of their flats having been sold, loans stand at quite low level of around 25 per cent as the volume of capital raised from customers earlier accounts for around 50 per cent. The remainder of some 25 per cent is equity. With such a rate of loans and interest rate of 20 per cent, developers have to pay the interest of VND1.5 million ($72.4) for each square metre.

Why are property enterprises incurring a big burden from loans? The answer is that the volume of money paid earlier by flat buyers has been poured into other projects of the same developers, even pumping into non-property projects. This is a red flag for customers.

It is the same as a listed company that uses wrong purposes of capital raised from its shareholders. Thus, as for us, it is baseless when developers attribute the delay and suspension of real estate projects to difficulties in approaching bank loans while they have already received money from buyers. The profound reason is the use of money of buyers for incorrect purposes.      

Buying flats or real estate products?
 
In the above analysis, a flat will be created at maximum costs of VND15 million per sqm. Thus, if a flat is sold at a much higher price it means buyers have to pay for its community facilities. It is obvious that with the cost of VND15 million per sqm, developers can only ensure a low-quality flat amidst costs for materials have been escalating as in the recent time.

When developers provide a real estate product, it means they aim to make a big income source. Many people claim Vietnamese are currently much short of housing accommodation, especially high-quality housing but there are shortages of financial support mechanisms to deal with the problem.
      
In short, prices of flats will be dominated by values of equipment, infrastructure and attached facilities rather than building and installing costs. We think sellers will suffer losses if selling Grade B flats at VND15 million per sqm.