Friday Letter Emerging risk

From the Alternative Investment Market in London to private property firms in Asia, investors the world over are seeing promise in the Vietnamese real estate markets.  

This week, for example, VinaLand, a public real estate fund listed on London’s AIM, raised $407 million (€313 million) to invest in Vietnam’s emerging property market, more than double its original target.

The company will use its newfound riches to build a diversified portfolio of prime real estate assets spread throughout Vietnam’s most populated areas. For starters, the firm is reportedly buying the 249-room Omni Saigon Hotel, a four-star property.

The private markets have responded to the burgeoning Vietnamese property sector, as well. One financial services firm, Indochina Capital, closed its first property-focused vehicle on $45 million in April 2005. Then, in late 2006, it closed a second fund with more than $265 million in commitments. Indochina is also looking across property types and focusing on three geographic regions: Ho Chi Minh City, Hanoi and the Central Coast area.

Dragon Capital, an investment firm with stakes in hotels, serviced apartments and golf courses in Vietnam, is reportedly planning to ramp up its real estate activity this year, while Singapore developer Keppel Land is also boosting its presence in the country. The publicly traded company recently entered into a joint venture to build 1,600 apartments in Ho Chi Minh City.

With interest in the country’s real estate steadily growing, it is obvious that both the public and private markets are developing a taste for more exotic property. It’s not hard to see why.

Vietnam has a population of more than 85 million and its economy has proved both robust and resilient—during the Asian financial crisis, GDP growth still averaged 6.8 percent. Last year, the economy grew by 7.8 percent and it saw an estimated $5.2 billion worth of foreign capital invested. The country has also been much more successful than India or China, the two Asian countries receiving the bulk of foreign capital, in cutting poverty. This is translating into good news for private equity and real estate investors.

But not everything is smooth sailing. Vietnam remains a communist country sans Chinese-style market reforms. While the country’s economic fundamentals are encouraging, there are still very real risks, including concerns about corruption and an overvalued stock market. Reports surfaced this week predicting that Vietnam’s stock market could decline by 30 percent after a significant run-up in prices.

As more and more capital looks to emerging markets like Vietnam, the real question is not what opportunities are available, but how a country’s economy will cope with the influx in foreign investment. Never before, one could argue, has so much money poured into so many untested emerging markets.

When those markets finally are tested, will investors stick around or will they take their money out just as quickly as they put it in?