News Room - Business/Economics

Posted on 19 Mar 2008

The Vietnam property boom: Will Indonesia follow?

Over the past year we have seen many international property developers in the United States and Asia, including Indonesia, start to look to Vietnam for property investment. 

It was reported foreign investment in property in Vietnam had reached US$5 billion in 2007, contributing 24.6 percent of the total foreign investment in the country.

Foreign investment in property is only second to investment in the producing industry. On the other hand, land prices in Vietnam have sky-rocketed recently, by 50 percent in 2007.

This has made land ownership another form of speculative investment that yields higher returns compared to the stock market.

It is clear Vietnamese property over these past years has been identified by the global investment radar. However it is interesting to learn why this has happened, if it will continue and more importantly -- will something similar happen in Indonesia?

For starters, the clarity of property regulation reforms has revived the property market in Vietnam.

A new land law passed in 2004 established private land-use rights. It aimed to make sure both state-owned and private companies would have an equal opportunity to own or lease land in the market with unregulated prices.

Recently the Real Estate Trading Law was passed, making it easier for foreign businesses to provide property transaction services such as pricing, property management, advertisements, even property brokerage services.

In the industrial property section, Vietnam's relatively cheap labor is an incentive for foreign corporations to inject capital into the country.

The GDP growth in Vietnam in the last three years has reached above 7 percent, creating an attractive environment for investment. With stable political conditions, it also provides a sound environment for foreign investment.

How long will this phenomenon continue?

Sky-rocketing prices have made land unaffordable for many Vietnamese. With this in mind, it is possible the lack of demand from the average consumer could put prices on a leash.

However, for office space, the situation might be different.

In 2007, rental value for luxury offices in Ho Chi Minh City grew 69.4 percent to $657 per square meter. This is compared with Indonesia at $111 per square meter, according to the Jones Lang Lasalle fourth quarter 2007 Property Digest. Demand from foreign investment will, in my view, stay robust in the favorable economic environment.

Obviously, property in Vietnam, especially in industry and commercial markets, will still benefit the country.

On the other hand, residential property could be in an alarming state if housing becomes unaffordable for Vietnamese residents. The banking industry's reining in of mortgage loans, in order to slow down price rises, has only made things worse.

If Indonesia is to follow Vietnam, it must first streamline its property regulations, by extending the leasehold period for foreigners and giving them an equal oppurtunity to invest in property assets.

It must cut red tape for land ownership licenses, which has added to land purchase costs. In industrial property, infrastructure still has a long way to go.

Whether Indonesian property will follow the boom in Vietnam remains to be seen, but expectations should be low while regulatory hurdles remain and infrastructure is far from satisfactory.