Rising Dragon, Hidden Dangers

A forest of cranes rises skyward. The sight of the unfinished towers and neighborhoods – immediately seen by drivers emerging from the Thủ Thiêm Tunnel connecting the rest of Ho Chi Minh City to now-bustling District 2 – delivers a clear message. Despite the 2010 downturn here, Vietnam is growing again, and growing fast.

“I think there’s still a good ten years of steady growth, simply because the base was so small to begin with,” said Matthew Lourey, founder and managing partner of Domicile Corporate Services, which helps companies enter Vietnam.

With less than half of nearby Thailand’s per capita GDP (about $2,100 versus $5,800, according to 2015 World Bank figures), Vietnam only recently began moving toward “a needs- and wants-based society,” Lourey said.

Exports, real estate, insurance and consumption all are growth sectors, said several market watchers interviewed by The Suit Magazine. Those same people also cautioned that Vietnam, in many ways, remains a high-risk investment. 

Investing in this complex market takes careful planning.

The next big thing?

Vietnam often draws comparisons to China circa 2000. Fast growth, low labor costs and rapid development all characterized the middle kingdom 15 years ago, until everything slowed down. But many experts dispute the inevitability of the country repeating China’s mistakes.

“Vietnam, I’d like to think, can learn quicker than China, and evolve,” said Eddie Thai, venture partner with 500 Startups, a leading global venture capital seed fund and startup accelerator. Thai recently spoke at a December forum titled “Is Vietnam the next big thing?”

The answer? It depends.

Vietnam relaxed limits on foreign ownership in recent years, but local idiosyncrasies often confuse foreign investors. “For example, an LLC in Vietnam lacks shares, and accounting procedures differ from the developed world,” Lourey said. Government bureaucracy, while moving in the right direction, still  a “one step forward, two steps back” mentality, often with an inexplicable “no” given in answer to foreign business proposals. “Those are becoming rare, however,” Lourey noted.

Locals have recently become quite pessimistic about the economy. Foreign experts, meanwhile, describe a brighter, wealthier future. Domiciles’ Lourey said that both are right. That’s because Vietnam’s growth potential remains locked in foreign-dominated sectors like exports, creating two perceptions of economic performance.

“The local view tends to see Vietnam in a vacuum as well,” said Sven Roering, managing partner of Tenzing Pacific Investment Management, a financial services provider in southeast Asia. “The mid-2000s saw annual GDP growth above 8 percent until a downturn in 2010 pummeled the economy. Post-rebound expectations of returning to unsustainable growth fuel frustration,” Roering said.

“If I’m Vietnamese and I know that in the mid-2000s we had a major expansion, and then a downturn and now we’re at 6 percent, I’ll be disappointed,” he explained. “It’s still a fantastic growth story.”

Frontier market

“Investing in Vietnam’s two stock exchanges – Ho Chi Minh City and Hanoi, the capital – requires active management,” Roering emphasized. And investors need to know they’re buying more than just stock.

“The biggest issue when you invest in any emerging market, especially Vietnam, is that you’re investing in the market and the currency,” he said, adding that the U.S. dollar’s post-election surge prompted Tenzing Pacific to divest from the Market Vectors Vietnam ETF as the Vietnamese dong plummeted [as of this writing, $1 equaled 22,727 VND]. “That’s the big issue foreigners need to take heed of, you are buying a currency as well as a stock.”

The Vietnam dong is pegged to the dollar, meaning the currency gradually depreciates, averaging about 2 percent annually.

Entering the Vietnamese securities market currently means going through an ETF like Vectors, which declined significantly last year, down 26.8 percent from 2014-2016. Vectors has been criticized in the past for exposing investors to Vietnam’s largest, and most inefficient state enterprises. Other ETFs, such as the DeutschBank Extractors ETF, have fared somewhat better, but investing there requires double currency conversion for U.S. investors, creating extra complexity. “Unfortunately, the ETF universe here remains small,” Roering noted.

“It’s very hard to get access to these markets directly,” he said. “You could invest directly in these markets through a Vietnamese broker, but that’s a huge leap of faith.”

Trading directly in Vietnam requires a locally denominated account. The market here, for foreigners, also trades on a T+2 model, meaning trades go through two days after they are made. That’s one reason why Tenzing keeps its Vietnam-related trading in New York, where trades are immediate, and in dollars.

Roering pointed out that the liquidity in Vietnam’s market make it a “stock-picker’s dream.”  The opacity of information – the market is rife with insider trading and speculation – also allows people to come in and beat forecasts. And major brokerages have set up reliable research operations in-country, Roering noted, adding that analysts often see through the exaggerated information common to Vietnam’s market.

Real property, real problems

Booming development in recently gentrified District 2 – home to affluent expats and Vietnamese elites – is just one sign of progress. Other areas, such as District 7, another expat haven, has seen prodigious growth over the past decade. Meanwhile, real estate speculators are snapping up tracts of land on the city outskirts near Long Thanh, where a new international airport is planned. Woodland Realty sales manager Long Phi said that an unfinished metro system (slated to open in 2020) and infrastructure projects also are driving up property prices along the city’s eastern edge.

Beyond Ho Chi Minh City – still “Saigon” to the locals, who never accepted the hub’s post-war name – the country has seen industrial expansion in suburban towns and non-stop real estate development in coastal communities such as Danang, the country’s third-largest city, and Nha Trang, a centrally located beach town. Hanoi’s market, meanwhile, was described as more complicated; the city also is less central to the economy than Ho Chi Minh City, Vietnam’s commercial hub.

Long Phi remains positive about the property market, despite 130,000 new Ho Chi Minh City apartment units reaching completion over the next four years. “Prices might dip temporarily,” he said, “but those apartments still won’t meet demand.”

Real estate ownership pitfalls abound for foreigners. While Vietnam began allowing anyone with a valid visa to buy property in 2015, foreigners often fail to understand Vietnam’s definition of ownership. Vietnam is still a communist state, meaning that technically property cannot be owned. Buyers instead receive what amounts to a 50-year lease on the property, with the option to extend. The property can be sold during that time.

This kind of information asymmetry puts buyers at a disadvantage in Vietnam.

“Most of the real estate information comes from developers and agents themselves … so I believe that you can find quite a lot of information bias,” Roering said, adding that Vietnam’s demographics and rising incomes are positive signs for the real estate market, but that housing over-supply will be a serious problem.

“Still, the profit potential can be high,” Long Phi said. Owners can expect a 5 percent-of-value annual average return on rental properties, and “condotels” – a developer-managed but owner-rented serviced apartment – can return 50 percent over the first five years, although the returns drop significantly afterwards.

Walk, don’t run

Vietnam’s tremendous growth potential can benefit foreign investors greatly, but navigating the country’s bureaucracy and culture can be difficult. Domiciles’ Lourey said that local expertise is essential to success in the country. Still, the growing southeast Asian nation of 90 million has much to recommend it.

“It’s still growing more than most places,” Lourey said. “Vietnam is one of the few hubs in the world that is really exciting.”

Follow Us

Subscribe to Our Newsletter

What's Next, Updates & Editorial Picks In Your Inbox

Related Articles

© 2017-2019 Advisors Magazine. All Rights Reserved.Design & Development by The Web Empire