The Wall Street Journal-20080130-Vietnam-s Hottest Market Is Real Estate- Not Stocks

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Vietnam's Hottest Market Is Real Estate, Not Stocks

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Hanoi -- Housing markets around the world may be in the doldrums. But not in Vietnam, where speculators are lining up to buy condos and international developers are building whole cities in what amounts to an enormous bet on the country's economic future.

Six months ago, thousands of individual Vietnamese investors swarmed the trading floors of brokerages in Hanoi and Ho Chi Minh City hoping to make a quick profit in stocks. Today, with parts of the global economy showing signs of slowing and Vietnamese shares also taking a hit, those investors have relocated to real-estate offices.

"Buying condos seems a more secure investment than the stock market," says Nguyen Van Thai, a 32-year-old advertising executive from Hanoi. "There's a lot more interest from foreigners in Vietnam since we joined the World Trade Organization [in 2007], and this is giving the property market a boost."

At the launch of closely held property developer Hoang Anh Gia Lai Group's new condo project in Ho Chi Minh City last month, 3,000 local investors lined up for the opportunity to buy one of the available 800 units. In the following days, 10,000 more people lined the sidewalk outside the company's offices, blocking traffic in the sweltering heat.

Foreign investors can also get in on the game. Individual foreigners can buy condo units as long as they are for their own residential use. Vietnam-based Indochina Capital Advisors Ltd. is launching a fund to enable foreign investors to get wider exposure to Vietnam's property market. Ho Chi Minh City-based VinaCapital Group manages a $633 million London-listed fund offered to global investors and which is dedicated to the real-estate market.

In Vietnam's capital, Hanoi, South Korean company Keangnam Enterprises Co. is building Pride Tower, a $1 billion, 72-story structure, reflecting how cash-rich global investors are still willing to gamble on up-and-coming markets. Keangnam will own the building when it is completed.

Another Korean concern, Posco Engineering & Construction Corp., is building a $3 billion satellite city outside Hanoi in a joint venture with a Vietnamese company on a site currently occupied by herds of grazing cows.

"Some people think this kind of development isn't appropriate for Vietnam at this early stage of its development," says Sohn Juk Weon, Posco's chief manager at its joint venture with Hanoi-based Vinaconex Corp. "But we aren't building a city for the next 10 years, but one for the next 100 or 150 years."

Vietnam, like most countries with open or partially open economies, is vulnerable to a global slowdown. Much of its economic progress in recent years has been built on exporting electrical goods and agricultural products to the U.S. and other developed countries that are now teetering on the brink of recession. Vietnam's exports to the U.S. alone grew 39% in 2007 to more than $10 billion. Trade and Industry Ministry officials say they expect exports to the U.S. to rise 30% this year to $13 billion. Total exports are forecast to rise to $58 billion this year from $48 billion in 2007.

Since eschewing Communist economic planning in the early 1990s, Vietnam has been moving toward becoming the next "Asian tiger." Global manufacturers -- particularly Asian companies such as Samsung Electronics Corp., Canon Inc. and Taiwan-based chip-producer Hon Hai Precision Industry Co. -- have chosen Vietnam as a low-cost production hub, just as Japanese and American companies built up Thailand, Malaysia and Mexico in the 1970s and 1980s.

As a result, Vietnam's economy has grown an average 7.5% a year since 2000; last year it grew 8.5% and officials predict similar growth this year, although economists say it won't fully escape the ill effects of a U.S. slowdown.

Although no reliable countrywide statistics are available on property investment in Vietnam, anecdotal evidence and property professionals say some of the money going into the market comes from foreign-based specialist funds investing in emerging economies -- places such as Algeria, the Gulf States and Kazakhstan -- which are attracting fresh interest in part due to the economic problems now confronting the U.S. and other larger economies.

"Investors are looking for opportunities in previously untapped markets outside the emerging market mainstream," Merrill Lynch analysts Michael Hartnett and Lucila Broide said in a recent report. "The key positive is the enormous growth potential of frontier economies in the Middle East, Africa and Asia, particularly Vietnam."

That potential is reflected in rising condo prices and office rents in Hanoi and Ho Chi Minh City, the southern commercial hub formerly known as Saigon. In a global survey of office-rental prices released in November, property consultancy CB Richard Ellis found that annual office rents in Ho Chi Minh City had risen 29% in the previous 12 months to $49 per square foot.

That compares with $53 per square foot in downtown Manhattan. It is double the $24 per square foot charged in Bangkok.

Officials at Keangnam and Posco say they are unconcerned with the problems in the U.S. banking sector and a broader economic downturn. Instead, they are eyeing the growing demand from local and multinational companies for office space and homes as Vietnam continues its advance toward free-market economics.

"We saw there is a need for a new urban district, and we have experience building new cities in South Korea," says Ha Jong Seuk, Keangnam's chief representative in Hanoi. "We didn't think it would be hard to bring the concept to Vietnam."

While Posco is jointly developing a new satellite city with a local partner and Keangnam is erecting its 72-story tower, Vietnam's leaders are planning a similar development on state-owned land to the north of Hanoi across the Red River. Officials say it will feature exhibition centers, high-rise office buildings and residential areas among levees built across the flood plains of the river. Its estimated cost: $7 billion.

Local investors share the Koreans' confidence in Vietnam's property market. Many prosperous Vietnamese are trading condo units before they are even built, just as investors in Hong Kong and Singapore have done for years.

Brokers say residential prices have risen 50% since the beginning of 2007, although in some areas prices have tripled, and Vietnam's leaders are drafting a new capital-gains tax to skim the froth off the market. Some property specialists worry there is so much investment in the sector that there could be oversupply when many projects are completed in three to five years.

In 2006, 25 condominium projects were launched in Ho Chi Minh City, with an additional 22 beginning construction last year. CB Richard Ellis expects 49 new office buildings will be completed there in the next three years, injecting an additional supply into the marketplace.

In Hanoi, a glut of office space will hit the market in the next three years. That means projects such as Keangnam's Pride Tower may take awhile to earn a solid profit.

"You could call it diplomacy by other means," says Marc Townsend, Vietnam representative at CB Richard Ellis, suggesting that companies that pitch in to help deal with Vietnam's office-space shortage now might be well placed to pick up more business later.

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Nguyen Anh Thu in Hanoi contributed to this article.