Is 564 per square metre sustainable in Vietnam

Respected property firm CBRE research shows the average rent for A-grade office space in Hanoi (Vietnam’s capital) during 2009 was averaging around $47 per month or $564 annually. Today the economy has turned and the rate of growth is slowing. Many have speculated that the financial system will be left with bad loans that are unsustainable and the centrally planned economy will struggle to brush off the impact of these and high inflation. But have the bulls capitulated or is this a small blip in the overall growth story? Is all hope lost in Vietnam?

CBRE research shows the average rate of office rent was around $42 per square metre in the past few months, down from the high but still a level that is at a premium to Bangkok and Kuala Lumpur. The Vietnamese stock market, as measured by the Vietnam Ho Chi Minh stock Index, is down around 4% over the past month, but again when put into perspective, it is still up 8.5% year to date. This compares with Australia’s ASX200 index which is up by an almost identical amount over the same year to date period. The real test of Vietnam’s market will come when government controlled enterprises start pulling money out of property development and stock speculation and back into core operating responsibilities – such as power generation, infrastructure, social housing etc.

Like most economic downturns in emerging markets, there will be winners and losers. One Australian bank comes to mind when looking at exposure to Vietnam and that is ANZ with only  very modest exposures. We estimate ANZ’s exposure in Vietnam to be around US$1.1bn in loans, of which it generated around US$94m in revenue out of eight branches. Data is as of June this year, so there may have been some minimal changes since. HSBC in comparison has around US$1.1bn in loan exposure to Vietnam but generates up to US$200m in revenue from 16 branches.

Asia Commercial Bank (ACB) has the largest exposure at around US$4.7bn, generating US$360m in earnings from over 320 branches. Shares in the lending sector are down around 33% year to date and down 43% over the past six months. ANZ is likely to use any downturn in Vietnam and distressed selling as an opportunity to expand its wings, but it will be very cautious knowing full well the consequences of buying into distressed assets too early. If Vietnam can show a gradual shift towards moderate growth and the government plans the transition correctly, then foreign players like ANZ can feel comfortable buying into value to further expand capacity.

Around 650,000 square metres of retail space is expected to enter Hanoi over the next year, adding pressure to the local economy. However this capacity is coming off a very low base and retail sales are still growing in excess of 15% – a lower than previous rate of growth but still one that is respectable by emerging market standards. We will be watching the Vietnamese market very closely in the coming months and key Asian financial institutions, listed across the region in their own respective markets, which are exposed to the real estate market there.

Key names: ANZ Bank, Standard Chartered Bank, HSBC, Asian Commercial Bank, Sacom