Vietnam Property: 5 Bagger! - Part 2

This is the continuation of the previous post on Vietnam Property.

We have established the following in the last post:

1. Vietnam has a huge and hungry population and is on the growth trajectory to be a developed country. GDP will continue grow at high single digit and property prices at a multiple of that over time. It might be the last Asian Tiger in our lifetimes.

2. The development of the Ho Chi Minh City (HCMC), mirrors the development of Shanghai. With the east of the city growing much faster: the analogy of Pudong and Puxi vs HCMC's District 2 and District 1. At current $2,000 psm, we can expect prices to see $10,000 psm in the future when HCMC becomes like Shanghai or Bangkok.

One big secular trend behind this is also the urbanization of Vietnam. As a country develops, its population moves from the rural farmlands to urban cities. Urbanization ratio over time climbs over 50% to reach 60-70% eventually. Vietnam today is at 34%. As we already know, Vietnam has a population of 94 million of which only a mere 8 million lives in HCMC (another 7.5m in Hanoi). As the country urbanizes we can expect HCMC population to explode. Most big cities in the world houses 15-20 million people when we include the sub-urban population, HCMC should see its population increase at least 50% over the next 5-10 years. 

Big Picture: HCMC City 

This is a major point because it debunks the over-supply argument. Most amateur investors would point to the enormous number of property development in the two big cities and say that over supply would come and prices would collapse. But when we think about how 5 million or even 10 million people would eventually find homes in HCMC, or for that matter Hanoi, over supply would never be an issue over a long enough time frame. Besides we are investing in the Central Business District or CBD, the core of the city where land will be limited. It is too easy to paint a bear story without seeing the big picture. 

Today, Vietnam is at an inflexion point. It's GDP per capita has almost doubled from $1,300 in 2010 to $2,200 today (chart below) and is likely to hit the all important $3,000 in a few years where the demand for cars, properties and modern goods takes off. The Vietnamese government relaxed regulations and allowed foreigners to own properties in 2015 and started to privatize many state own enterprises in 2016. These are all important milestones for growth. We can pretty much say that Vietnam is all out to transform from a developing to a developed country. 

Vietnam GDP per capita

If history is any guide, Vietnam would continue to grow its GDP at a high single digit, not unlike China in the 1990s and 2000s and its GDP per capita would reach $10,000 to 15,000 in time. The same chart above shows how it has grown steadily over the years but still at a low $1,300 which is lower than Indonesia, South East Asia's largest economy at $3,500 GDP per capita and Philippines, another rising star at $2,800 GDP per capita. The difference is that Vietnam is going to be another manufacturing hub, from shoes, to white goods to electronics. The formula that has proven to work as we saw how South Korea, Taiwan and needless to say China transformed their economies that way.

Coupled with the reasons hitherto, Vietnam stands to prosper and Ho Chi Minh City, being the commercial centre, stands to benefit the most. There is an estimated five or six new condominium developments coming on-stream in the next 1-2 years that are targeting foreigners. The HCMC property market is finally recovering after its huge decline as it was dragged down by the Global Financial Crisis (GFC). The Singapore developers already has some successes with a few earlier project launches, building on Singapore's brand name and property development prowess. One of the prominent project in District 2 called The Nassim launched by the Jardine Group targeting the luxury segment had done really well (more than 90% sold) and is set to redefine HCMC's luxury segment with potential for astronomical price increase.

The Nassim

The cherry on the cake is the affordability as a result of the low quantum of these projects. The Nassim, is going for c.$200,000-400,000 per unit and for the less luxurious projects, a state-of-the-art 90 square metre condominium can be bought for c.$150,000 - a quantum that can't even buy a 2 litre car in Singapore. Such is the irony of life. This is the function of Vietnam still being a frontier market and perhaps a reflection that everything in Singapore is really too expensive.

Well, if the story is so good, why isn't everything sold out?

As described before, there's always risk. Nothing is certain in investing and the future, though painted here as rosy and prosperous, is always but "one of the probably futures". The future is a set of probabilities. There isn't just one but many possible futures. When pundits predict one future and it turns out to be correct, more often than not, it's just luck. The true expert, points out all the possible futures and assign accurate probabilities, knowing that one of them would come true and how to bet in a win-win manner. The high probability future of Vietnam is that it succeeds as another Asian tiger and we get our 5 bagger. There is always another chance that it would falter. The government reforms could fail and the Vietnamese Dong collapses again and the story is pushed out for another decade. Or infighting in the Communist party resulting in some power struggle and the politics is thrown into disarray. If these futures pan out, unfortunately, the money put in would see substantial losses. The author would attribute a 10-20% chance of this happening. But still, the risk reward profile is highly favourable. It's 5 bagger vs losing say 30% of the capital. More likely than not though, investors won't lose their pants. There is always a buyer to sell to if the price is low enough.

The other major concern for investors at this juncture is actually financing. Because the Vietnamese economy only started to open up, there is actually no means of financing. There is no such thing as a mortgage in Vietnam today. The mortgage market is non-existent and the banks don't know how to do it. This is the state of affairs in frontier economies. However over time we can expect the Vietnamese banks to introduce mortgages and future investors would have it easier. Without mortgage or financing means, investors must put in 100% of the cash needed and be subjected to full currency risk. The Vietnamese Dong is ultimately an emerging market currency, the exchange rate is volatile and the bid-ask spread is very wide. These are the costs to investing. Although if the story pans out as we have discussed, then such trivial should be overlooked. Why think about a 3% spread or a 10% currency depreciation when the return is going to be 500%?

The other risk is the possibility of intermittent rental income.

As alluded to in the previous paragraphs, Vietnam is only starting to open up very recently. There is no concept of mortgage yet. Global manufacturing firms only started to setup shop 1-2 years ago. The rental market is only for expats working with the global firms. Most Vietnamese people are still living in villages and couldn't afford rental. The rich and famous Vietnamese are actually fellow investors in these luxury properties and they are not about to rent. They just buy properties when they need to stay in the city. Hence while the rental yield is touted to be a good 6-8%, actual rental would be a function of how good the property agents are, whether they can secure good tenants working for MNCs. The rental market is thus highly competitive given the new capacity for these luxury condos coming in the next 1-2 years.

Nevertheless, if the main scenario pans out, then the return should be in the tune of a few hundred percent and missing one or two years of rental yield of 6-8% shouldn't move the needle too much. To reiterate, this is a five bagger story. Vietnamese properties in Ho Chi Minh today sells at $2000 psm but should reach $10,000 psm which is closer to what global cities like Shanghai, Taipei and Bangkok is selling at. Such opportunities don't come often. 

Seize the day!

Read from the first post! This author owns a property in HCMC.

Vietnam Property: 5 Bagger! - Part 1

Here's an investment opportunity of a lifetime, yes once in a lifetime. If there is one post that you should read in 2016, this is the one. It's about Vietnam - the last Asian Tiger.

For most of us in sunny Singapore, Vietnam is probably not on most people's radar. It's not as vibrant as Bangkok and the rest of Thailand, there is no historical site like Angkor Wat or Borobudur, hence not as big a tourist attraction. There are also no famous beaches, and no theme parks. Even the traditional costume Ao Dai (pic below) doesn't appeal much (sorry Vietnamese ladies) because it is an obvious rip-off of the Chinese cheongsam with an added disadvantage - showing less skin. Also, the investment story sort of pales against Myanmar's, which we saw a huge hype that started when Ms Aung San Suu Kyi was allowed to run office after spending 21 years under house arrest. Of course, Myanmar's property prices actually skyrocketed since 2012. Meanwhile, Vietnam had major issues after the Global Financial Crisis (GFC) which it still hasn't fully recovered from. It's currency, the Dong depreciating big time, the nascent property bubble burst and most investors then were still licking their wounds.

Vietnamese lady in Ao Dai

So what's the story now? Well here's the plot. In the past few years, China has gotten really expensive as a manufacturing base and global MNCs were looking for alternatives. Vietnam has a huge and young population (c.100m! Almost as big as Japan!) that is highly literate, hardworking and hungry. The Communist government has also seen how successful China has become and strived to modernize Vietnam. It's the same roadmap that all the past Tigers had followed, including our own beloved motherland's plan: start with manufacturing, lure MNCs with cheap workforce and government support, built up the skills of the people and put money in their pockets. As the nation prospers, GDP per capita compounds and property prices skyrocket. South Korea, Taiwan, Hong Kong and Singapore all prospered. Before the Asian Tigers, we had Japan and after, China, the biggest dragon of them all, basically following the "manufacturing to first world status" master plan. These countries succeeded following the same path transforming from developing to developed countries. So will Vietnam.

What's more: Vietnamese are also descendants of Han people, known for their tenacity and vigour. They will work hard and compete hard. Vietnam is also a coastal country with access to the vast oceans (as with all the other Tigers), which allows it to export manufactured products and import goods for internal consumption when the economy grows and its people become rich enough to buy good stuff. Hence it is highly probable than not that Vietnam will be as successful as all the Tigers and Dragons before her, if not more successful. She will also most likely be the last Tiger of our lifetimes, barring North Korea opening up. That's another story for another day though.

But why property?

Well, stocks are also possible, but I believe the property story is easier to understand and probably gives higher ROIC and lower risk as we shall discuss below. As the country develops, not all regions will grow as quickly, it's good to bet on the commercial centre of the nation - usually the one or two main cities. Stocks are more difficult to capture one or two city's growth. In the case of Vietnam, the commercial centre that we are talking about is the Ho Chi Minh City (HCMC). This is a beautiful city originally named Saigon but changed to be named after the Father of Vietnam - Bac Ho, who led the country to freedom by defeating the Americans after a bloody ten year war. Or rather it was the Viet Cong, using guerrilla tactics against modern technology that won the day. The Vietnamese dug elaborated labyrinth of tunnels beneath American camps and surprise attacked them until the US soldiers were so fed up that they decided to wipe out Vietnamese by the villages. Elderly, women, kids were all not spared. (Well, that's an over-simplification but for more, check out Wikipedia or google My Lai Massacre).

Bac Ho on a T-shirt

That's all history btw. The war ended in 1975 and the country started to rebuild after decades of trial and error, the last effort thrown off course by the GFC and set the country back for a few years. But today, HCMC is a spiralling city, something like Singapore in the 1960s, Shanghai in the 1980s and Bangkok some years ago. Motorbikes, rather than cars, jammed up the roads, high rise buildings are starting to pop up and road side stores and shophouses co-exist to provide local food and international cuisines. In today's world, we also see the co-mingling with global brands and modern concepts. Starbucks and designer cafes littered downtown HCMC and Zara and H&M have also setup their flagship stores. So this is the first important point - at the rate the city develops, we should see more modernization and property prices go up multiple folds.

Today, HCMC property prices range from $2,000 to $4,000 psm or per square metre (the convention used in Vietnam). In comparison, Shanghai is at $10,000 or more per square metre, Taipei is at $8,000 psm, Bangkok high end properties are at $6,000-9,000 psm. Needless to say, Singapore and Tokyo are much higher at $12,000 psm or more. If HCMC becomes on par with any one of these cities, we can expect HCMC properties to be multi-baggers. At the very least, it should double. 

Now let's look at HCMC in detail, this is where it gets even more interesting.

Ho Chi Minh City (HCMC) is divided into two halves much like most major cities by a river. The Saigon River runs through it like a snake and the old city was mostly built on the west of the river. This is very much like Shanghai where Puxi was the old town and Pudong was designated as the new CBD, given that land was abundant and bare, so the government could designate and plan much better without historical baggages.

Stylized HCMC map

In HCMC, the old CBD (marked as CBD in a white circle above) was labelled District 1 or D1 while the new areas were labelled District 2 to 7 (D2-7). District 2 (D2) is the most interesting, spanning from the north east to the east with parts of it already connected to the upcoming metro network. The stylized map above from Capitaland's Vista Verde project shows it better. D2 spans from the area near the top two bridges are where current expat communities and international schools are located with metro lines being built to where Vista Verde stands, which is supposedly near the new CBD. Capitaland, Keppel as well as other developers are building multiple projects in the areas mentioned above. The price for some projects starts at $2,000 psm while District 1 prices are now at $4,000 psm and above.

If we trace the development of Pudong, we can perhaps see where HCMC D2 will go. Pudong started development in the 1990s when the Chinese government realized they needed to grow the city to cope with the development of the country. Pudong was ideal given its proximity as well as the availability of raw land. Today Pudong commands higher prices than Puxi which is why HCMC D2 could see prices leapfrog that of D1 and go even higher. Bearing in mind that both D1 and D2 prices will keep going up as the economy grows which means that D1 can go from $4,000 to $8,000 psm while D2 can go from $2,000 to perhaps $10,000 psm ie five bagger.

Of course this process will take many years as development of a new CBD would not be just a 1-2 year affair. While it is possible for stocks to achieve similar returns, it would take a lot more effort trying to analyze which stocks could do that with better risk reward profiles. It's also more difficult to buy Vietnamese stocks given that its stock market is still too nascent and lacks liquidity and depth. 

Next post we look at some other factors and the risks, stay tuned!