Players search for the bottom

Many players are hedging their bets as to when the market will finally bounce back

This declining price trend was fed by the deteriorating economy, as evidenced by soaring inflation and the government’s tightened monetary policy that caused home mortgage lending rate to rise from an average of 16 per cent in 2010 to a record  high of 23 per cent mid-2011. (chart 1).

The residential market crisis in Hanoi started at around early 2011, slightly behind Ho Chi Minh City, suggesting a high correlation between the residential market and the general economic downturn.

Has  it reached the bottom? This is among the most common questions that have been raised to CBRE since early 2012. From CBRE’s observation, prices continued to decline in the second quarter of 2012 in Hanoi market, suggesting that we’re not yet at the bottom. However, we’re likely in a very close neighbourhood with the trough, since several positive signals emerged this quarter that indicates the possible recovery of the market.

All hope is resting upon the recent series of interest rate cuts from 14 per cent to 9 per cent in just 3 months, which makes real estate a more attractive investment option. Evidently, buyers’ interests seem to be back with increasing inquiries in the review quarter. Additionally, mortgage lending rate is now back to the pre-crisis level in 2010 (16 per cent). Its impacts are more noticeable in banks that target high income borrowers, since mortgage is a modern concept in Vietnam that is more accepted by high income earners.

Hopefully, the economy outlook will brighten with interest rate declines and petroleum price drops, which would improve businesses’ performance, thereby increasing income among real estate buyers. This would potentially enhance affordability for residential products, and wake up the market.

Throughout the crisis, prices in Hanoi dropped by more than Ho Chi Minh City, explained by the fact that prices in Ho Chi Minh City  were already quite low and more affordable than Hanoi, which provided little room for a large decline. Additionally, prices in Ho Chi Minh City seemed to stabilise in the second quarter of 2012, while Hanoi continued the downward trend, suggesting that Ho Chi Minh City  is closer to the market trough  than  Hanoi.

Financial incentives such as discounts and promotions have been widely used  to assist sales. This has developed into a frenzy of price competition, which stirs up wide media coverage and large public attention. What lies hidden behind the scene, usually  unnoticed by the public and the media, is actual construction progress at project sites. Many developers, usually those with long-term vision, do not immediately join this price competition but silently maintain good construction progress to wait for the tide to turn, while figuring out the next best course of action. Their reaction may be slow, but usually well thought through.

There is always the question of competing by quality or competing by price, and that often differentiates one brand from another. We believe in most cases, competing by quality should come first. Price competition would lead buyers to continue the “wait-and-see” attitude, hoping for prices to drop further or for more attractive promotion as developers try to beat each other with bigger incentives. Developers should not rely on price competition, but rather should differentiate themselves with the uniqueness of their project.

Financially strong developers do not offer large incentives, since they can build their projects to completion and wait for a better market condition then. Several developers, however, would use promotional price strategy. This might indicate an aggressive sale strategy but may also communicate to the market that the company is in urgent need of cash flows. “There is no such thing as a free lunch”. Buyers at those projects would enjoy heavy discounts, but at the risk of lower quality or late handover should the project fail to raise enough capital from presales.

Pricing seems to be the primary area of public attention, as indicated by the frequency of media coverage on sales incentives and discounts. A word of caution, though, is that prices can be misleading. After all relevant factors have been taken into account, the quoted prices may turn out to be expensive. For example, the unit will be delivered bare shell, or with arbitrary facilities & fixtures.

It is never too much to stress the fact that buying off-plan units is like investing in the future. If the future product is worse than expected, buyers are most likely overpaying for that product. Be a smart buyer by studying developers’ reputation and past track records, since reputable developers will have the least incentives to fail buyers.

Good construction progress and clearly branded finishing materials are also good indicators of future quality. It is not unreasonable to believe that if the developer is responsible and wants to deliver a good product, they would be as well-prepared as they can, and would not abandon their commitments should the road turn a bit bumpy.