Savills publishes its assessment of 'The tourism real estate market and considerations regarding condotels'.

Mr. Rudolf Hever – Director of Hotel Advisory, Savills Asia Pacific

Nha Trang, Da Nang, and Phu Quoc continue to experience strong growth in tourism demand.

In 2016, Nha Trang welcomed nearly 1.2 million international tourists, an increase of almost 23% compared to 2015. Similarly, Da Nang also received nearly 1.7 million international visitors, a 33% increase compared to 2015. The government has provided significant support for this development, with the country now having 9 international airports compared to 5 in 2010. These airports are still being upgraded, with the addition of new terminals and runway expansions. Visa policies for tourists have also improved significantly, with easier procedures and lower fees than before. Phu Quoc is a prime example of this successful support, with a surge in international visitors of 25% (2014 compared to 2013) thanks to the visa exemption policy for foreign tourists. Currently, Phu Quoc is also the only location in Vietnam where this policy is applied.

Positive market signals have boosted investor confidence and attractiveness, leading to intense competition for supply over the next 2-3 years as new projects continuously emerge. According to Savills Hotel Consulting, in Nha Trang and Cam Ranh, the supply of mid-scale to luxury hotels and resorts is projected to grow at an average annual rate of 29% over the next three years. Similarly, Da Nang and Phu Quoc markets are also expected to experience strong supply growth, reaching 30% and 27% respectively over the next three years.

However, the real estate market is volatile and can be affected by many factors. For example, in 2014-2015, the number of international tourists to Vietnam decreased sharply due to a significant drop in the number of Chinese and Russian tourists, the impact of the South China Sea dispute, and the depreciation of the ruble, which strongly affected the tourism market. This was especially true for markets heavily dependent on tourists from these countries, such as Nha Trang.

Therefore, if demand does not keep pace with the growth in supply, future occupancy rates and room prices are expected to continue to face significant pressure, and developers will have to carefully consider expected performance and project budgets in the coming years.

Considerations regarding the Second Home model, along with the "darling" condotel.

When discussing the resort real estate market, it's impossible not to mention the boom in Second Home investment projects. Currently, there are approximately 36 Second Home projects offering over 7,000 units in the mid-to-high price range operating in Vietnam. The real estate market is predicted to continue its strong growth as a large wave of Second Home supply, mainly concentrated in six coastal locations (Khanh Hoa, Da Nang, Phu Quoc, Ho Tram, Ha Long & Quang Nam), comprising over 17,000 units, is expected to enter the market within the next three years. However, the number of completed projects remains very modest compared to the number offered on the market.

Condotels are currently the most popular type of second home property. Specifically, by 2019, condotels will account for 65% of the second home supply in major coastal markets. Recently, more and more projects have been announced, with strong competition in terms of scale and attractive guaranteed returns. Developers are quickly naming their projects in tourist destinations as condotels.

However, a point to note is the "tel" (hotel) component in the condotel model. In most cases, we see that very few hotel-style management and operational elements are considered in the development of this component. This is particularly worrying because it is difficult for developers to guarantee the promised returns. To generate revenue to pay for the guaranteed returns, condotels must be operated flawlessly like hotels and achieve impressive business results. However, most projects are not well-planned for operational aspects, and intense competition in this segment forces developers to intensify product promotion and apply guaranteed return policies to attract buyers.

Products with these guaranteed return programs are becoming increasingly risky for buyers, as some developers with little experience undertake large-scale projects without strong financial resources such as equity capital or bank financing. These risks mainly stem from post-construction operations, and in cases where the guaranteed return exceeds the operating cash flow. In such situations, the developer needs to raise additional capital to meet the commitment. Currently, guaranteed return rates in Vietnam are quite high, with some projects reaching 12% over 8 years.

Therefore, when choosing resort real estate products for investment, buyers should consider selecting quality products from reputable developers. On the developer's side, when choosing a development model, they need to plan well and conduct feasibility studies from the outset to ensure a product that suits market conditions, financial capabilities, and guarantees successful operation in the future.

The Thanh