2008 Hanoi Real Estate Year-End Review

and 2009 Outlook

HANOI – 15 January, 2009. The Hanoi real estate market began 2008 on a high note with the continuance of the hot 2007 market. The market then faced a series of difficulties - including rapid inflation, tightened credit flows and the fallout from the global financial crisis - through the remainder of 2008. Increasing construction costs slowed interest in projects while the rapidly tightened credit market took financing options away from local developers. Towards the end of the third quarter, as inflation fell and construction costs came in check, the global financial crisis forced many foreign investors and developers to withdraw from Vietnam or halt their projects. Though expectations were that growth would occur very quickly, the reality is that the vertical progress of development has been slow.

In a sense however the slower than expected pace of development has been positive for Hanoi, as it insulated the market from over-supply. Though inevitable in any real estate market a cyclical downturn is often more disconcerting in a modernising real estate market like Hanoi, when the overall economy has experienced a sustained period of strong economic growth. In a buoyant yet relatively small market driven by sentiment, the general public and real estate participants tend to be unnerved more easily and can be overly quick to stop transacting.

The natural reaction to a market downturn is pessimism, but there is no doubt that Hanoi and Vietnam’s other property markets will return to a positive cycle at some point in the mid-term (2-6 years). Although enthusiasm for global and Vietnam real estate dwindled in 2008, there is still widespread belief in Vietnam’s economic and demographic fundamentals, and optimism about the market’s mid- and long-term prospects.

High inflation in 2008 slowed the accelerating pace of growth by hindering availability to capital, posing liquidity problems for both Vietnamese and international developers and investors. The developers that continue to progress with projects are still predicting healthy returns, but a considerable number of projects have been put on hold.

As construction material prices came down in the second half of 2008 and inflation was reined in, the property market recovered some steam and quality projects such as Vincom Park Place, Sky City Towers, Hanoi City Complex, Ciputra Hanoi Mall, BIDV Tower, Crown Complex, Keangnam Hanoi Landmark Tower, Thach Ban New City and other significant developments moved forward. The flooding of November 2008 tested some areas of Hanoi to a great extent and we witnessed obvious problems with infrastructure. The maturation of the Hanoi market will take time, as the market awaits the traffic and transportation infrastructure, flood controls and other benchmark infrastructure that create a successful city. However many buildings under development are introducing new technologies to Vietnam and new architectural design standards are seen in many new constructions throughout the city.

Though the pace will be less hurried than in 2007 and early 2008, construction in 2009 will continue throughout the city.

Office Sector

The Hanoi office sector experienced minor fluctuations in 2008, mostly due to the extreme tightness of supply. The first half of 2008 was dynamic; new supply was absorbed quickly, driving rents higher. The market slowed in the second half as enquiries and transactions declined. Market indicators for the year as a whole however, reflected a good market. Average asking rents for Grade A office space at the end of 2008 were approximately US$53 psm per month, 37% higher year-on-year. For Grade B space, average asking rents were US$34 psm per month as at end 2008, a 23% year-on-year increase. The vacancy rates of Grade A and Grade B buildings were stable at less than 2% and 3.5%, respectively, for the entire year.

Office leasing activity declined in the second half of 2008, as businesses delay market entry and expansion plans. During the fourth quarter of 2008, a number of Grade B office buildings reduced their asking rents, causing a 3% quarter-on-quarter decrease in average asking rents of Grade B office.

Both tenants and landlords have become more conscious of trends, with landlords becoming more aware of future competition and beginning to consider the possibility of reducing rents, while some tenants are leaving high-standard, high-rent buildings for more affordable space, knowing that more options will be coming on stream in 2009.

The Hanoi office market may “re-calibrate” in 2009, but the tight market needed relief. Note that healthy office markets often have vacancy as high as 8%, and even 10% to 13% is not unusual or “dangerous”.

Retail Sector

Well-established shopping centres including Hanoi Tower, Trang Tien Plaza, Vincom City Towers, Big C, OBC, Pacific Place and Parkson Viet Tower maintained occupancy rates at or near 100%, and average rent at US$60 psm per month. Shopping centres in less favourable locations, with inferior tenant mix and management, tend to have higher vacancies and lower rents. The refurbishment of high street shop houses will continue to be a major trend in 2009. The most significant new retail projects, scheduled for completion in late 2009, are the Garden Lifestyle Mall and Vincom Park Place.

Site-clearance and construction started at the Hang Da and Mo wet markets. Construction of Indochina Plaza Hanoi and Times Square in the new business district of My Dinh-Pham Hung Road began during the last quarter of 2008.

The impact of the opening of the retail market to full foreign participation in accordance with WTO commitments is expected to be minor in 2009, but may have broader ramifications later when the global economy recovers and international retailers return to their expansion plans.

Residential Sector

In the residential-for-sale market, Keangnam Hanoi Landmark Tower’s 918 condominiums opened with anecdotal reports of a good sales rate in mid-2008. Two months after the launch, Vincom Park Place has sold more than 70% of its total condominium units (50-year lease). The developer has introduced an attractive payment scheme with 80% of the contract value to be paid after hand-over as opposed to 30% which is commonplace. Furthermore, if buyers obtain financing in order to purchase at Vincom Park Place they receive support from the developer who partners with BIDV. Specifically, Vincom Park Place buyers will enjoy a 3% annual interest rate for eighteen months from February 2009. An estimated 650 units of new stock was launched in the fourth quarter of 2008. Hanotex plans to launch Sky City Towers at US$2,100 psm (VAT inclusive) in February 2009.

Indochina Land broke ground on the Indochina Plaza Hanoi, which will offer approximately 300 units during the quarter, while UDIC broke ground on the 536-unit N04 next to the N05 Building.

Condominium asking prices on the secondary market continued to trend downwards in the fourth quarter of 2008, and few transactions were reported.

Demand has shrunk because of the gloomy economic forecast and expectations that prices will decline further in 2009. As continued softness is predicted in 2009, buyers will likely maintain their “wait and see” approach. Some potential sellers in 2009 were left holding units because they would not lower prices. The decline in the buy-to-let sub-sector as expectations of being able to lease out the unit purchased has also undermined total demand in the residential market. Both buyer and seller attitudes are likely to keep market participants on the sidelines over the short-term.

Serviced Apartment Sector ^

The Hanoi serviced apartment sector in 2008 was marked by a spike in new supply as 464 units came online in the first half of the year in three projects: Somerset Hoa Binh, Skyline, and Fraser Suites Hanoi. The total supply of serviced apartments in Hanoi at the end 2008 was 1,886 units (21 projects).

Average vacancy at year end 2008 stood at about 20%, compared to 5% at year end 2007. Excluding the three new projects, vacancy of the 18 established projects remained at 5% during the first three quarters and slightly increased to 9% in the last quarter of 2008.

By the end of 2008, the monthly average asking rent had increased to US$32.66 psm, a 0.14% quarter-on-quarter decrease and a 13% year-on-year increase. The increase was most acute during the first half of the year, when the two new projects asked rents at the upper range of the market (over US$40 psm per month).

2008 saw an increasing number of “non-serviced” or “semi-serviced” apartments offered by private owners. These private apartments typically have security and maid service, and are usually situated in buildings having less than 10 units, or in converted villas. The expatriate community is becoming increasingly aware of such products and looks for good bargains.

The traditional serviced apartment market anticipates direct competition from this substitute. Demand for serviced apartments in the near term will see a contraction. In this period of global economic turbulence, multinational companies (MNCs) will be cautious in their growth initiatives and tighten accommodation budgets. Pressure from the global economic slowdown and new private apartments in Hanoi will change the dynamic of this sector in 2009.

Hotel Sector

The Hanoi hotel sector cooled in the fourth quarter and in 2008 as a whole. Occupancy rate of five-star hotels in Hanoi in the first quarter of 2008 dropped to 71% (compared to 84% in the first quarter of 2007) with the opening of InterContinental Hanoi Westlake (359 rooms). The effect of the global economic slowdown became more apparent in the fourth quarter when occupancy rates fell to around 63% (a decline of 20% year-on-year). Occupancy and average daily rate (ADR) of the entire year 2008 were 65% and US$154, while those of 2007 were 80% and US$131. It is projected that high-end hotel occupancy rates will face downward pressure in 2009 as the global crisis continues to impact business and leisure travel.

Movenpick Hanoi Hotel held a soft-opening of two floors in late November 2008. Completion is due in early 2009. VinaCapital, the owner of Movenpick Hanoi Hotel, also had a ground breaking ceremony for Times Square Hanoi, a commercial complex with high-end hotel component in December 2008. Two 4-star hotels are scheduled to come on stream in 2009: the Dan Chu Hotel and the Mercure La Gare. About 1,800 of four- and five- star hotel rooms are tentatively slated to come online during 2009-2011.

© 2008 CB Richard Ellis, Inc. We obtained the information above from sources we believe to be reliable. However, we have not verified its accuracy and make no guarantee, warranty or representation about it. It is submitted subject to the possibility of errors, omissions, change of price, rental or other conditions, prior sale, lease or financing, or withdrawal without notice. We include projections, opinions, assumptions or estimates for example only, and they may not represent current or future performance of the property. You and your tax and legal advisors should conduct your own investigation of the property and transaction.

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