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Mr. Rudolf Hever – Director of Hotel Advisory, Savills Asia Pacific
Nha Trang, Da Nang and Phu Quoc continue to see strong growth in tourism demand.
In 2016, Nha Trang welcomed nearly 1.2 million international visitors, an increase of nearly 23% compared to 2015. Similarly, the number of international visitors to Da Nang also reached nearly 1.7 million, an increase of 33% compared to 2015. The government has greatly supported this development process, as there are now 9 international airports nationwide compared to 5 international airports in 2010. These airports are still being upgraded, opening more terminals as well as expanding runways. Visa policies for tourists have also improved significantly, with the process becoming easier and fees lower than before. Phu Quoc is a typical successful example of this support, with the number of international visitors skyrocketing by 25% (2014 compared to 2013) with the visa exemption policy for foreign tourists being applied. Currently, Phu Quoc is also the only location in Vietnam where the above policy is applied.
Positive signals from the market have contributed to boosting the attraction and confidence of investors, leading to strong competition in supply in the next 2-3 years when the market continuously witnesses the emergence of new projects. According to statistics from Savills Hotel Consulting, in Nha Trang and Cam Ranh, the supply of hotels and resorts in the midscale to luxury segment is expected to grow at an average annual growth rate of 29% in the next three years. Similarly, the markets of Da Nang and Phu Quoc also have strong supply growth, reaching 30% and 27% respectively in the next three years.
However, the real estate market is volatile and can be affected by many factors. Typically, in 2014 - 2015, the number of international tourists to Vietnam decreased sharply due to the sharp decrease in the number of Chinese and Russian tourists, the impact of the East Sea dispute and the devaluation of the Ruble, which had a strong impact on the tourism market. Especially for markets that depend mainly on visitors from this market such as Nha Trang.
Therefore, if demand does not keep up with the growth in supply, future occupancy and room rates are expected to continue to be under pressure and investors will have to carefully consider their expected performance and project budget in the coming years.
Considerations on the Second Home model, along with the "favorite" condotel
When it comes to the resort real estate market, it is impossible not to mention the boom in the investment trend of Second Home projects. Currently, there are about 36 Second Home projects providing more than 7,000 units with prices ranging from mid-range to high-end in operation in Vietnam. The real estate market is expected to continue to grow strongly when a large wave of Second Home supply is mainly concentrated in six coastal locations (Khanh Hoa, Da Nang, Phu Quoc, Ho Tram, Ha Long & Quang Nam) including more than 17,000 units will be put on the market within the next 3 years. However, the number of completed projects is still very modest compared to the number offered on the market.
Condotels are currently the most popular type of Second Home products. Specifically, by 2019, condotels will account for 65% of Second Home supply in major coastal markets. Recently, more and more projects have been announced, with strong competition in terms of scale as well as attractive profit commitments. Investors quickly named their projects in their tourist destinations as condotels.
However, the point to note is the “tel” (hotel) part of the condotel model. In most cases, we see that very few operational management elements such as hotels are considered for development for this component. This is particularly worrying because the Investor can hardly guarantee the committed profit. To generate revenue to pay for the commitment, the condotel must be operated perfectly like a hotel and achieve impressive business results. However, most projects are not carefully planned for the operational element and the fierce competition in the segment forces Investors to increase product promotion as well as apply profit commitment policies to attract buyers.
Products with this commitment program are becoming more and more risky for buyers, as some inexperienced investors develop large-scale projects without strong budget sources such as equity or capital support from banks. These risks mainly come from operations after construction is completed, and in cases where the profit commitment is higher than the business operating cash flow. In that case, investors need to add more capital to ensure the commitment. Currently, the profit commitment rate in Vietnam is quite high, some projects up to 12% in 8 years.
Therefore, when choosing a resort real estate product for investment, buyers should consider choosing quality products from reputable investors. On the investor side, when choosing a development model, investors need to plan well as conduct feasibility studies from the beginning to be able to have a product that is suitable for market conditions as well as financial capacity and ensure good operation in the future.
