Condotel - a difficult and risky problem in Vietnam

unfinished promises

Recently, Mr. Nguyen Duc Thanh - Chairman of Thanh Do Investment, Development and Construction Joint Stock Company has just issued Notice No. 233/CV-TD on the implementation of condotel profit commitment with customers at Kokobay Da Nang project.

Accordingly, despite great efforts to fulfill its profit commitment, Thanh Do Company still had to officially announce that it could not pay the committed profit as promised in the contract.

At the Vietnam Real Estate Forum held on November 27 in Hanoi, many real estate experts expressed their views on the condotel market in recent times.

"The situation in recent times is the result of our not clearly defining what a condotel is. Now we define a condotel not as a house but as a tourist accommodation facility, leading to adjustments in the market pace," Mr. Nguyen Manh Khoi - Deputy Director of the Department of Housing and Real Estate Market Management analyzed.

Since 2015, the condotel fever has started to flourish in the Vietnamese market when a series of projects were launched. The competition between projects on committed profits has led to incredibly high committed profits of 8-14%/year. While this figure in neighboring markets such as Thailand or Indonesia is only a maximum of 7%/year.

By 2018, the condotel market began to show obvious problems when it came into operation. In the second quarter of 2018, according to statistics from DKRA Vietnam, the inventory of this type began to skyrocket, with the entire market launching 2,100 units but only 850 units were sold.

What causes the risk?

Also at the recent Vietnam Real Estate Forum, experts pointed out the causes of the decline of condotels, of which there are three causes that are expressed in many aspects.

Firstly, this type of condotel still does not have a legal framework in the Vietnamese market. Secondly, banks have begun to tighten capital sources for real estate investment loans, causing capital flows into resort real estate projects and condotels to be severely affected. And finally, most importantly, the capacity to develop and operate condotels is very limited due to lack of experience, leading to the inability to pay profits to investors. The situation of breaking the condotel profit commitment has happened in other markets around the world and the Kokobay shock in Vietnam is an opportunity to take a comprehensive look at the market as well as this investment channel.

From the above situation, there are currently three problems with the condotel model that is rapidly developing in Vietnam: the land use regime for this model; the regulations recognizing the ownership of condotel models; and the management and operation of this model. Expanding further, there are also problems with profit agreements and commitments of investors to customers.

SOLUTIONS STILL IN FORMATION

After synthesizing the problems, the Ministry of Construction reported to the Government and the Prime Minister to assign tasks to three ministries. The Ministry of Construction must also urgently issue standards for condotels and officetels.

In a situation where guaranteed returns are difficult to achieve, the most common solution is to issue an investment prospectus with audited financial statements, which is then linked to the blocked capital to meet the project's operational needs. In many countries such as Singapore, Hong Kong and Australia, this is a mandatory solution to ensure that the developer complies with its obligations and the buyer is protected.

Recently, the real estate market has also seen the emergence of many "second home" resort projects that do not have profit commitments but simply share profits between the owner and the investor/operator. This could be a more sustainable and less risky direction for the resort market in Vietnam.

The advantages of condotel cannot be denied. According to Associate Professor, Dr. Tran Dinh Thien - former Director of the Vietnam Economic Institute, condotel itself is a type that has had positive impacts on market growth in recent times. Tens of thousands of products are supplied to the market with high liquidity, bringing two values ​​at the same time: cash flow and added value.

However, how to invest in the right place and make a profit from condotel in the current period in Vietnam is still a big problem, requiring careful calculation as well as "safe" ambition of investors.

My Tong