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Residential Prices Driven Up in Ho Chi Minh City CBD Despite New Supply

29/07/2019

A total of 4,900 residential units were launched in Ho Chi Minh City during the second quarter of 2019, bringing the total number of primary market units available to 13,700. This represents a 52% decrease year-over-year and indicates that absorption volumes remain strong. Of the units launched, 42% were in the grade A segment with a peak asking price of over VND 200 million per square meter in Ho Chi Minh City’s central business district.

“The high watermark on asking price in Ho Chi Minh City is extreme, but we understand from the developer that these are selling well,” commented Alex Crane, Managing Director at Cushman & Wakefield Vietnam. “The price that investors are willing to pay continues to surprise us to some extent, but we must bear in mind that there is an increasingly limited supply downtown.”

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Ho Chi Minh City is expected to launch approximately 80,000 units in 2019, and an additional 90,000 units are in the pipeline for 2020. Crane added, “Of the 2020 pipeline, almost half will be developed by Vinhomes and we are well aware that buyers know and trust their products, so we expect them to launch with a strong sales rate. The remaining half is spread over a number of developments, each below 5,000 units. Based on sales performance over the last few years, we expect this to be absorbed naturally, assuming confidence in the market continues.”

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Impact of Circular 36 on New Projects

In 2014, the State Bank of Vietnam released Circular 26 to regulate the safety limits and ratios for transactions performed by credit institutions and foreign bank branches. What has been the impact of this regulation on the developers’ ability to finance new projects, specifically in relation to the risk factor applied to loans?

Crane explained, “In 2016, we commented favourably on the legislation and we are seeing developers proactively seeking cash via capital markets. Right now, we are typically seeing an interest rate for corporate bonds at 11-15% over three to five years on average. This is a tolerable level of cost of capital for the developers and, incidentally, where the bank rates were before Circular 36 came into effect.

“With the market performance as it is, we see no immediate concern regarding capital flows in residential developments. That said, we continue to encourage developers on rationalised planning in terms of sales volume and price, which is broadly accepted and suggests lessons have been learned from market setbacks in past years.

“Our view currently is that the Ho Chi Minh City apartment market is robust, supply is not under too much pressure, and the underwriting of the market is rational. One area we are keeping close watch is the rental market, which might eventually disappoint a few investors if rent guarantee periods come to an end and if supply forces rent prices to stagnate or decrease. Nonetheless, even if disappointed, those investors are unlikely to flood the market with apartments on resales; they will typically be held,” he added.

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