Friday Letter Vietnam falters

This week PruPIM, the property investment arm of British insurer Prudential, revealed that it has held a first close on its Vietnam property fund and has entered the second phase of its fundraising. The reassuring noises from the firm’s chief executive for Alex Hambly, made at the Reuters Global Real Estate Summit in Singapore on Monday, were perhaps in response to some speculation that the firm would pull back the reins on fundraising in light of Vietnam’s recent economic troubles.

PruPim’s news came this week as it was revealed Vietnam's inflation hit a whopping 27 percent in June, accelerating for the 16th month in a row. The country’s inflation is now rising at the fastest pace in Asia, and this month’s jump is the highest in Vietnam since 1992. And inflation isn’t the country’s only worry. Interest rates in the country are also the highest in the region, with the central bank increasing rates three times this year. Food prices leapt 74.3 percent in June from a year earlier, the statistics office said. The worsening situation forced the government at the start of the month to cut its economic growth target for this year to 7 percent from 9 percent as it tries to slow price gains. That’s after last year’s growth of 8.5 percent, the highest in over ten years.

The situation has to a large part been caused by the huge amount of foreign investment that has flooded into the country over the past two years. The government, which only opened the country to private and foreign investment two decades ago, has been slow to respond to the building crisis. After all, the country has only recently become comfortable embracing the free market; returning to a heavy hand might seem counterintuitive.

So how is all of this going to affect the numerous property funds that have been raised for the country in the last two years since the country entered the World Trade Organization, such as VinCapital’s $633 million dedicated Vietnam fund and Protego’s $200 million vehicle? Despite the recent economic turbulence, the macro factors for the country are still quite strong. Though still technically communist, Vietnam now has undertaken major free market reforms that have made it an attractive investment target. Unlike other countries in the region it has a stable government and no history of modern terrorism. The country also has a desirable climate and a 3,000 km coastline, with the government is slowly deregulating foreign ownership of property.

At the Reuters summit, Hambly said the firm was taking a long-term view on Vietnam. The country, he said, would overcome its current difficulties, but in the mean time PruPIM would invest “sensibly” over an 18-month period. He noted that the firm would have to “think our way through the current situation,” acknowledging that the short-term situation was a risk.

Though property prices have more than doubled in the country in the last few years, those valuations may follow the stock market and other economic indicators and take a dive. But considering that property prices have risen so quickly and dramatically, perhaps a correction wouldn’t be a horrible thing. Hambly noted at the conference that if foreign investors start leaving the country, it could open up a number of investment opportunities. But with the economic news from the country recently being so negative, it may take some convincing for foreign real estate funds to convince their investors that Vietnam is still a good bet over the long haul.