Real estate M&A still afloat

Michael Piro COO, Indochina Capital

COVID-19 is making its impact felt across all markets in Asia. For the real estate market, investors are still digesting the implications of the outbreak and how it will affect real estate assets in the long term.

Some investors are already feeling an immediate impact: hospitality and retail are the two sectors facing the most visible pressure with social distancing leaving shopping malls empty and travel bans leaving hotels without guests.

Companies have also been forced to implement remote working, and this could influence the future of the traditional office market. If employers learn from this unprecedented episode that they can operate efficiently without a fixed office, demand can decline, especially with the current economic slowdown forcing companies to find ways to cut costs.

As the largest hospitality conferences in the world – such as MIPIM in Cannes and the 2020 ULI Summit in Tokyo – have been postponed or cancelled across the globe, the gravity of the situation has become clear: real estate, in particular hospitality, will be one of the most impacted industries. A drop in transactions is also already happening in the region – initial data shows that deal volume in Asia-Pacific during the first two months of 2020 was down almost 50 per cent on-year.

Despite the country's macro-economic challenges and the current uncertainty surrounding the pandemic, the sentiment on Vietnam remains positive. The government has implemented strict outbreak control measures and efforts in stabilising the economy.

Though the virus has caused the hospitality sector to come to a complete halt, Vietnam has been supported by strong market fundamentals with high rental yields along with one of the lowest real estate prices in the region, on top of a high urbanisation rate, low labour costs, and a young population. The abundance in labour supply, new free trade agreements, and being arguably the biggest benefactor of the ongoing US-China trade conflict are helping Vietnam attract investors.

Before the outbreak, there was already abundant existing capital, both overseas and domestic, waiting to be dispatched in the Vietnamese real estate market. As real estate transactions are still one of the most common ways for foreign capital to flow into the local market, the outlook for real estate mergers and acquisitions (M&A) in Vietnam may not be as gloomy as some are saying.

For the majority of large institutional investors, the impact of the outbreak on real estate does not interfere with their long-term investment strategy, as current delays are only expected to be temporary. In times of economic uncertainty, performance of assets will be affected, thus the adjusted valuations will not be indicative of potential returns.

Asset owners who are looking to improve cash flow during this difficult economic period will give buyers the opportunity to buy at a discounted price. With these turbulent times, the number of distressed sales may be on the rise, and given the lower valuations, this could be an attractive proposition for investors with longer term investment strategies.

Once travel bans are progressively lifted, transactions, especially cross-border deals, will start to pick up, though in moderation as global financial markets will be in recovery mode. Assets in prime locations such as in Hanoi and Ho Chi Minh City, as well as premier hospitality projects, will still garner a good amount of interest if they are put on the market.

There are still many unknowns about the current situation, and the full impact of the outbreak on Vietnam’s real estate market cannot be quantified at this point. Nonetheless, the country will continue to be a real estate hotspot and capital inflow, as well as at the local level, will remain abundant.

In the midst of turmoil, there is opportunity. For businesses looking to sell or to raise capital, action plans need to be ready to be implemented once the pandemic is under control in order to take advantage of a fresh market and seek out those looking to invest in Vietnam.