Opportunities in a disarrayed real estate market

December 10, 2020 | 09:00
Mergers and acquisition deals in the real estate sector across Vietnam are currently on an uptrend. Jack Nguyen, partner at Mazars in Vietnam, shares his expert opinion on the methods to expand various opportunities for international partners in order to participate in such deals in Vietnam, while also retaining the advantages of Vietnamese partners.
opportunities in a disarrayed real estate market
Jack Nguyen, partner at Mazars in Vietnam

Although the Vietnamese real estate market has slowed down significantly in the past couple of months, the very high interest from foreign investors in real estate mergers and acquisitions (M&A) continue unabated.

There have been a number of noticeable M&A transactions that involved some of the biggest names in the industry: Vingroup sold a stake to Singapore’s GIC with the total value of $1.3 billion in 2018 while South Korea’s SK Group invested around $1 billion in the conglomerate in 2019.

Keppel Land acquired a 60 per cent interest in Phu Long Real Estate Corporation’s three residential projects in Saigon South, Ho Chi Minh City in July 2019.

In 2020, a group of investors including Singaporean Temasek Holdings and US-based investment firm Kohlberg Kravis Roberts & Co. LP, purchased a 6 per cent stake in property developer Vinhomes for VND15.1 trillion ($656.5 million) from parent Vingroup.

M&A deals in the Vietnamese real estate sector have typically involved large-scale projects, newly developing urban areas, resort properties, and luxury hotels in various beach areas across the country.

We have noted that international investors that are on the hunt are mostly from Japan, South Korea, Indonesia, Singapore, China, and more recently from the Middle East. Many of these investors look for projects that will generate good cash flows, stable profitability, and long-term appreciation.

These investors generally look to partner with Vietnamese developers that have experience, financial capacity, and approved projects. Projects that generate interest include quality assets, those demonstrating rental growth, larger transaction sizes, and those with longer tenure.

Many landowners are also seeking new partners as the government has tightened loans. Foreign developers and investors are looking for companies with a large land bank or projects not too far from the city centres to acquire or co-develop.

Whilst international investors are always welcome in Vietnam, there have always been concerns that too much foreign investment in Vietnam’s real estate sector may reduce local developers’ advantages. However, aside from such negative perspectives, it is important to, first of all, consider the advantages foreign investors can offer.

There is significant “dry powder” sitting in real estate funds around the world, more and more of which is being directed towards Southeast Asia and Vietnam. With yields around the world at record lows across multiple asset classes, there are few markets able to offer long-term returns comparable to Vietnam. These returns are underwritten by all the growth fundamentals already highlighted, such as the young demographics, rapid urbanisation, improving infrastructures, and the growing middle class.

These funds are diverse in nature and targeting all key real estate sectors. Perhaps the hottest in Vietnam now is the industrial and logistics market. Momentum has been building for years, with cheaper labour, land, and transportation costs starting the shift of manufacturing to Vietnam.

The EU-Vietnam Free Trade Agreement and the US-China trade war in the last two years have also pushed manufacturers to diversify supply chains away from China.

In addition, logistics markets around the world are reaping the benefits of rapidly-growing e-commerce. With its large population, the country is set to become one of the more attractive destinations for capital.

Whilst some more developed markets have seen a marked shift to remote working, in Vietnam, we have seen a rapid return to the office environment, with no sign of any significant long-term impact on office use. We may see changes in the way that offices are used, with more flexibility in the design of office spaces, however, office buildings will likely remain a key target for real estate investors.

There is no doubt that real estate M&A remained active during COVID-19 and that it will be even more robust post-pandemic. In many ways, Vietnamese landowners and developers retain the advantage when it comes to partnering with foreign investors. Local landowners with large unencumbered land plots in desired areas with clean title will be best-positioned to attract foreign investors.

Meanwhile, local developers that have built a brand for themselves and had successful developments will also be targeted for joint ventures or partnerships. Vietnam will remain attractive for real estate development, and local landowners and developers with successful track records have all the advantages to woo foreign investors.

What the stars mean:

★ Poor ★ ★ Promising ★★★ Good ★★★★ Very good ★★★★★ Exceptional