Historically, the chief beneficiary of private equity investment in Southeast Asia has been Thailand, particularly in the tourism industry. With its pristine beaches, relative isolation from the region’s turbulent wars of the 1960’s and 70’s and notoriously debauched attractions, hospitality has been Thailand’s most outstanding sector for some time. Yet having recently suffered from a major natural disaster, terrorist attacks and a military coup, this pre-eminence is starting to be seriously challenged by its neighbour – Vietnam.
By contrast, the communist nation next door has a stable government, no history of modern terrorism, and the fastest-growing economy in East Asia after China. Current GDP growth in Vietnam is at 8.2 percent, a number that is viewed as sustainable over the medium term. Given that the country has a desirable climate and a 3,000 km coastline, and that the government is slowly deregulating foreign ownership of property, it is no wonder investors are taking notice.
So far there are two private equity funds exclusively targeting Vietnamese real estate. Hanoi-based Indochina Capital has two dedicated Vietnam property vehicles totalling $300 million, and the Pacific Alliance Group, a Hong Kong-based hedge fund and private equity manager with $3.5 billion in assets, has launched a $633 million dedicated Vietnam real estate fund through its subsidiary, VinaCapital.
Launched in March 2006 and listed on London’s Alternative Investment Market in 2007, so far VinaLand’s acquisitions have focused on the country’s two main cities, Hanoi and Ho Chi Minh City (formerly Saigon). The firm has been particularly active in the tourism sector, and so far acquisitions have included the Hilton and Goldman hotels in Hanoi and the Omni Hotel in Ho Chi Minh City.Stephen O’Grady, managing director of VinaCapital’s hospitality division, says that the genesis of the fund came when the firm found that so many of the investments from its Vietnam Opportunity Fund were in real estate that the area deserved its own targeted vehicle.
However there are still difficulties in investing in this market. For one thing, land acquisitions can be very challenging. In the rest of Asia, Greenfield development has been the main way to go for most investment. Yet in Vietnam, foreign investors are unable to completely buy land.
“The fundamentals of the country are Communist, the land is the property of the country,” says O’Grady. “Nobody owns the land, whenever you take land you’re leasing it from the state, at the moment for 49 years, though the government has recently implemented an extension to 70 years.”
This leaves acquisitions as the main route for investment, but O’Grady says the difficulties involved in land acquisition are so high that, as a fund, VinaLand would prefer to do almost all acquisitions. However the limited hotel stock in the country means this just isn’t an option, and they have to find ways to make development opportunities happen.
“There’s only a certain amount of acquisitions available, due to limited availability,” he says. “As a fund, we don’t really go into development, we like to invest in developers. But we’ve created a highly experienced development team who are addressing this issue so we can invest in assets.”