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Condotel Investors in Vietnam Caught in Precarious Position
With tourism boosting the country, condotel projects are soaring with the hope of lucrative profits but the lack of a specific legal framework and long-term management monitoring make investors think cautiously before pouring in money.
Tourism in Vietnam has drawn in voluminous income and portrayed a positive future for investors, among them, condotel subinvestors. Condotel, short for condo hotels, has been soaking up the resort real estate market, known to become the favorite “second homes” for tourists. Condotels now account for 56 percent of total condotel, officetel and serviced apartment market segment, higher than the supply of hotels and resorts, which simply account for 44 percent. The trend is anomalous as usually resorts and hotels should have a higher share. According to a survey done by DKRA, a real estate developer, 26 condotel new projects with 15,000 apartments were launched in 2016 in six coastal provinces and cities: Nha Trang, Da Nang, Phu Quoc, Quy Nhon, Binh Thuan and Ba Ria—Vung Tau, and in the first quarter of 2017, three more condotel projects have joined the ambitious market with yet another 1000 new products. In other tourist-heavy coastal locales like Khanh Hoa, Ho Tram, Ha Long, and Quang Nam, 17,000 units over the next three years are expected. With such an outpouring upturn, the red flag is seen flying over the surging segment, not only because of the surplus supply but the legal ground, profit sharing policies, and long-term management issues that come along.
Till now, Vietnam does not have the necessary comprehensive regulations regarding ownership rights and management for condotel property. So for subinvestors who favor over the flexibility and the promised profit sharing, the cost of such leniency might be the high risk of struggling over or even the loss of ownership as pink books (also known as red books or title deed) will not be issued for condotels. As for the much anticipated profits, for most condotel investors, they are said to commit to a profit of 12 percent for 8-12 years, but the number is just too high, more than the deposit interest rate. And in the tough competition, according to DKRA, in Q1 2017, only 30 percent of 1000 marketed condotels were sold. Thus, the whole picture isn’t as auspicious with latent risks hidden for subinvestors who are usually promised a share of profit after around 10 years. Developers, on the other hand, welcome investment to pitch in, and so guarantee high returns to attract investors. But the fact is in most cases, especially with problematic condotels, cash flow is limited and bearing the burden of financial responsibility, the only solution is to underwrite additional funding, sometimes for the entire period of operation, which simply brings in an adverse cycle to further shatter the condotel segment.
The long-term management of condotels is another issue. According to Rudolf Hever, Director of Hotels for Savills Asia-Pacific, the “tel” of “condotel” will need to match many impressive components to have the property qualified to be named “condo‘tel,’” but that’s exactly what seems to be missing. Without striking performance and in such a flooding market where oversupply is already obvious, no matter how eager the burgeoning interest in Vietnam’s beaches is, accommodation rates of these “second homes” are vowed to be unfulfilling and in turns, affect the estimated profit gain.
Condotel supply and actual consumption should grow in tandem rather than treating the surplus supply as the phenomenal surge and totally neglecting the underlying risks. Subinvestors especially should bear in mind the many conflicting factors like the lack of legal guidelines, the possible loss of property ownership, and the failing returns before an investment decision is to be made.