New Year 2018 & Bright Expectations for the Tourism Real Estate Market

What can we expect from resort real estate?

According to Mr. Pham Van Dai – Head of Research, Savills Ho Chi Minh City

 

 

Vietnam is currently experiencing a tourism boom thanks to low-cost airlines, technological advancements in the tourism industry, visa exemption policies, reduced language barriers, and the growing demand for experiential travel and exploration of new countries and destinations.

 

The rate of international tourist arrivals to Vietnam grew by approximately 28% in 2017, the highest in Asia. This growth rate even surpassed the record 26% of 2016. Key tourism markets such as China, South Korea, and Russia all experienced rapid and stable growth. The opening of new direct international flights and the creation of easier access for international tourists will help Vietnam maintain its competitiveness with other Southeast Asian countries.

 

Many experts believe that 2017 was a favorable year for hotels in the two major cities of Hanoi and Ho Chi Minh City. The combination of high demand from leisure and business travelers and a shortage of supply helped hotels in these two cities achieve better occupancy rates and business results than initially targeted. Given the limited number of new hotel additions expected in Hanoi and Ho Chi Minh City in the coming years, investors can consider developing hotels due to their profit potential and to diversify their real estate investment portfolios.

 

The tourism industry continues to provide a promising source of income for Vietnam, with ever-increasing demand for accommodation and many promising new projects expected to enter the market in the coming years.

 

Potential and challenges

 

Despite the positive signs, investors still have many considerations regarding expected performance and project budget in the coming years.

 

The majority of new supply is concentrated in coastal destinations, and the number of serviced apartments currently exceeds the number of resort hotel rooms. This easily creates a high risk of price competition, especially in the event of a decrease in demand.

 

 

Furthermore, some developers have not been careful in the planning and positioning of their projects; they simply focus on developing high-rise buildings to increase the number of rooms without considering how to increase the value of their project area. For long-term development and sustainable growth, Vietnam's resort industry needs comprehensive and synchronized development planning.

 

Besides the impressive numbers of tourists, the business performance of hotels and resorts in different markets has also improved, but not at a rate commensurate with the growth of demand.

 

Second home

 

The second home market is becoming increasingly popular. As of August 2017, there were approximately 42 second home projects operating in the Vietnamese market, offering over 9,700 units ranging from mid-range to high-end, primarily concentrated in six coastal locations (Khanh Hoa, Da Nang, Phu Quoc, Ho Tram, Ha Long & Quang Nam), with over 19,200 units expected to enter the market within the next three years.

 

Condotels are currently the most popular type of second home property. Specifically, by 2019, condotels will account for 80% of the second home supply in major coastal markets. One of the main reasons for the popularity of the condotel model in Vietnam in recent years is the combination of growing confidence in resort real estate and the desire of investors to shorten their payback period.

 

However, in Vietnam, second homes and condotels are increasingly perceived as investment products rather than "lifestyle products" primarily intended for vacationing. This is due to intense competition in sales, which has impacted the marketing strategies employed by developers.

 

 

To boost sales, some projects have adopted guaranteed return programs, putting pressure on other developers with smaller projects to offer similar guaranteed returns to keep up with the competition. More and more projects are being launched, attempting to surpass previously launched projects in terms of scale and guaranteed return levels. These guaranteed return products become particularly risky for buyers if the developers lack experience in developing large-scale projects, sufficient capital, or bank support.

 

Typically, Condotel and Second Home products are unlikely to generate attractive returns because their nature requires Condotel and Second Home projects to have amenities and operational capabilities similar to a regular hotel and resort project in order to compete with other hotels and resorts in the market. Furthermore, this return on investment depends on market conditions, the owner's usage of the hotel apartment, and the management company's ability to operate the project to achieve the expected profit level.

 

It can be said that 2018 was a very promising year for resort real estate, especially as the concept of "Special Economic Zones" was gradually taking shape in areas with great tourism potential.

 

The booming tourism real estate market.

According to JLL's assessment.

 

Vietnam's tourism real estate market is booming, and the hotel and resort sector has attracted significant interest from foreign investors over the past 24 months. Vietnam has become a promising market in the Asia-Pacific region.

 

According to statistics from the Vietnam National Administration of Tourism (VNAT), in 2017, Vietnam welcomed over 12 million international tourists, an increase of 29.1% compared to the same period last year. Vietnam aims to welcome 20 million international tourists by 2020.

 

 

The tourism industry is expected to create 3.5 million jobs, generating total revenue of US$35 billion, accounting for approximately 10% of Vietnam's GDP. By 2030, total tourism revenue is projected to double compared to 2020.

 

These seven tourist areas have been further developed thanks to their unique destinations. These areas will seek to offer a range of attractions to cater to a wider variety of tourists.

 

Vietnam recently announced it will extend its 15-day visa exemption policy for citizens of Germany, France, the UK, Italy, and Spain until the end of June 2018, while most Asian countries have already been granted visa exemptions, and several other European countries also have been exempted.

 

Tourist numbers continue to rise in Ho Chi Minh City, with 2017 reaching a record 6.3 million visitors, a 22.88% increase compared to the previous year. Ho Chi Minh City is also a popular entertainment destination with numerous museums, shopping areas, and an increasingly diverse culinary scene.

 

 

A number of high-end and luxury international hotel brands have been launched in Ho Chi Minh City, including IHG, Accor, Marriott, and Hyatt. Domestic hotel brands in this high-end segment are also more prevalent in Ho Chi Minh City compared to Hanoi, creating a competitive advantage against international investors. Notable domestic brands include Revierie Hotel, Caravelle Hotel, Majestic Hotel, and Rex Hotel.

 

Furthermore, golf is another area where Vietnam is looking to grow – recently, four golf tournaments held in Da Nang and Hoi An have led to a surge in South Korean tourists, who flocked to the area to try their hand at these tournaments. This series of events followed the conclusion of the Ho Tram Open, which was won by the current Masters champion, Sergio Garcia. The Ho Tram Open is currently Vietnam's most prestigious sporting event, with a total prize pool of $1,500,000.

 

 

Given the recent growth in international tourists, leading to increased efforts in promotion, infrastructure improvement, human resource development, and service enhancement in Vietnam, the outlook for the tourism and hospitality industry is very bright.

 

Adam Bury – Senior Vice President, Investment Sales Asia, JLL

 

 

Adam Bury noted that the key to Vietnam's tourism industry is whether tourists want to return. Taking Thailand as an example, tourists return to Bangkok very frequently. Similarly, people living in Singapore often take vacations and visit Thailand for a while. Previously, tourists returning to Vietnam wasn't common, but the number of returning tourists is increasing. The potential of Vietnamese tourism is clearly enormous; it's the most impressive tourism market in Southeast Asia.

 

Speaking of potential cities for investment in tourism real estate, Ho Chi Minh City is a large market, and Hanoi can also be mentioned. Following closely behind are Da Nang and Nha Trang, two cities with significant potential for tourism real estate development.

 

There are resort ideas and models that can be effectively implemented if local project developers present sound business plans and demonstrate their feasibility. Cities like Ho Chi Minh City, Hanoi, Nha Trang, and Hoi An are good markets for investment. Some investors from Singapore also want to invest in Vietnam, but their obstacle is that they haven't found many suitable locations yet.

 

Vietnam is clearly attracting investment in tourism for investors. Among Asian countries, Vietnam ranks second in terms of tourism investment. Japan ranks first, partly because the Olympic Games will be held in Japan in 2020.

 

Currently, Vietnam is attracting not only foreign tourists but also domestic travelers. With a population of nearly 100 million and a significant increase in the number of wealthy individuals, the demand for tourism is also rising. Therefore, the increased demand for hotels to serve tourists is inevitable.

 

 

For individual investors looking to invest in Condotels, the most important factor remains the reputation and capabilities of the developer. Buyers typically consider the reputation of the operating company and whether the project's construction is feasible and reliable. Additionally, buyers often look at the success of the operating company's previous projects.

 

Foreign investors have different perspectives and viewpoints when choosing to invest in Vietnam. Investors from Singapore and Hong Kong tend to invest short-term, typically operating condotels for 3-5 years before reselling them. Investors from South Korea, Japan, and Thailand, however, tend to conduct more thorough research and be more cautious before investing. Therefore, they often hold onto their properties for longer periods, operating them for 15-20 years.

 

Investment opportunities in tourism real estate in 2018

According to CBRE Vietnam's assessment.

Mr. Nguyen Trong Thuc - Manager, Research and Consulting Department, CBRE Vietnam

 

 

Looking at the overall picture of 2017, in the three main markets (Da Nang, Nha Trang, and Phu Quoc), the Da Nang market was particularly vibrant with the launch of subsequent condotel units in the mega-project Cocobay, or villas in Pan Pacific. In Phu Quoc, the market was significantly more active than in 2016 with new projects managed by international brands such as InterContinental, Best Western Premier, Novotel, Movenpick, and Wyndham. Many investors also expanded into new markets such as Ha Long, Quy Nhon, and Ho Tram.

 

Policy commitments: Are they sustainable?

 

In the current competitive market, many developers often have attractive sales policies to attract buyers. A typical example: if buyers participate in the Rental Program (which may or may not be mandatory), after receiving the condotel/villa, they will have to entrust it back to the developer for operation and will share 50-85% of the profits.

 

Additionally, buyers have 15-20 days per year to use the condotel/villa, and for the first 5-10 years will receive a guaranteed minimum return (5-12% of the condotel/villa value per year). Some developers even guarantee buyback at 108% of the initial value after the minimum return guarantee period ends.

 

It would certainly be difficult for developers to guarantee that operating profits will be sufficient to cover their commitments to buyers – profit sharing, minimum returns (especially high ones like 11-12%), and buyback commitments. Therefore, developers usually factor these commitments into the selling price, which will be higher than when there are no commitments.

 

 

Many buyers may have considered this issue, but the commitment to a high minimum return on investment for 5-10 years from reputable developers still provides them with greater peace of mind. On the other hand, beyond its investment potential, resort real estate also reflects the buyer's lifestyle, so many are still willing to invest in well-known projects in prime locations.

 

Beyond its investment potential, resort real estate also reflects the lifestyle of its buyers, which is why many are still willing to invest in prestigious projects in prime locations.

 

Currently, because these guaranteed return policies have only emerged in the last three years, the extent of compliance by developers is still unverified. However, in 2017, a project in Nha Trang – with a guaranteed return of 15% per year – proved unsustainable upon completion, leading to outrage from buyers. The developer subsequently proposed reducing the guaranteed return to 8% per year, and the case remains unresolved. This serves as a reminder for buyers to carefully consider the project's operational viability after sales are complete – typically, if a reputable management company operates the hotel component within the same project, buyers can feel more secure.

 

Vietnam's tourism sector is optimistic for 2018.

 

In recent years, visa application procedures for Vietnam have improved significantly. While at the end of 2015, Vietnam granted visa-free entry to citizens of five European countries, 2017 marked the first year of piloting electronic visa issuance for citizens of 40 countries (and this was recently expanded to six more countries according to a resolution issued in December 2017). Regarding infrastructure, there are increasingly more international flights directly to key tourist destinations (such as Bangkok Airways with the Bangkok-Phu Quoc route or Thomson Airways with the London-Phu Quoc route).

 

 

In the near future, Van Don International Airport is expected to be put into operation in the first quarter of 2018, further boosting tourism in Quang Ninh. These signals will certainly create a solid foundation for Vietnam's tourism industry in 2018.

 

In the near future, the southern coastal area of ​​Da Nang, extending to Hoi An, or the Cam Ranh area, is expected to be a bright spot for the supply of resort real estate, due to the availability of vacant land awaiting construction. Furthermore, if the Law on Special Economic Administrative Units is passed (expected in mid-2018), the Van Don, Bac Van Phong, and Phu Quoc areas will attract more investors seeking land for tourism development projects.

 

Legal framework for foreigners investing in resort real estate.

 

In reality, foreigners are reluctant to buy resort real estate due to legal issues. Because resort properties, such as condotels, are dual-purpose products—both residential and commercial land—there is no established legal framework surrounding them. Furthermore, according to the law, land ownership certificates cannot be issued to foreigners in areas requiring national defense and security protection, while in many localities these areas are not clearly designated. Therefore, many developers are not enthusiastic about marketing their products to foreign buyers.

 

Resort real estate: A potential crisis of oversupply?

 

Resort real estate only truly boomed in 2015-2016, coinciding with the upward cycle of the overall real estate market. For investors, properties for sale (such as condotels and resort villas) typically allow for faster capital recovery compared to properties for rent (such as hotels and serviced apartments).

 

 

With Vietnam's economy and tourism booming in recent years, and people's incomes steadily improving, more and more investors are showing interest in resort real estate. This has boosted demand and encouraged developers to be more confident in launching projects.

 

Most current projects are located in prime coastal locations, belonging to the high-end segment targeting buyers with high budgets. Projects from major developers such as Vingroup, Sun Group, Empire Group, and CEO Group are still experiencing good absorption rates, thanks to the developers' reputation and strong sales forces.

 

Policies and solutions to promote the tourism real estate market in the period 2018-2020

 

First, it is necessary to establish a legal framework for resort real estate, clearly defining the circumstances under which buyers will be granted certificates of land use rights, ownership of houses and other assets attached to the land, thereby increasing transparency in the market.

 

 

To ensure the binding nature of commitment policies, regulatory agencies should require developers to have bank guarantees. In the event that the developer fails to fulfill their obligations, the bank will compensate on their behalf, mitigating the investor's risk. This requirement will encourage developers to be more cautious with their commitments, making the commitment levels more realistic. Only developers with substantial financial resources will dare to offer attractive commitment levels.

 

Another extremely important factor is that tourism development must go hand in hand with environmental and landscape protection, preserving the "soul" of the place, and improving services. Because these are the factors that will attract and retain tourists.

 

Article: Bao Khuyen