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ANALYSIS OF THE VIETNAMESE COMMERCIAL REAL ESTATE MARKET STRATEGIC INVESTMENT IMPLICATIONS FOR EVERGREEN PROPERTIES OF MICHIGAN, INC. LAHTI UNIVERSITY OF APPLIED SCIENCES Degree programme in International Business Thesis Spring 2013 Bui Thi Hien Thao (Ruby Bui) Lahti University of Applied Sciences Degree Programme in International Business BUI THI HIEN, THAO: Analysis of the Vietnamese commercial real estate market Strategic investment implications for Evergreen Properties of Michigan, Inc. Bachelor’s Thesis in International Business, 94 pages, 6 pages of appendices Spring 2013 ABSTRACT In the last decade, Vietnam has emerged as one of the fastest growing economies in the world. The Vietnamese commercial real estate industry is among markets attracting a major share of foreign investment. Consequently, a medium-sized real estate company in the U.S. raised its interest in the new market and assigned the author to do initial market research. This research aims at assisting the case company in answering the question of whether investment in Vietnam should be added to its growth strategies. In order to achieve this purpose, the case company requested the author to focus on different aspects such as: relevant information about Vietnam as a target country, characteristics of the Vietnamese commercial real estate industry, and strategic investment implications in light of the case company’s current situation. A combination of theories is adopted to facilitate the process of gathering the requested information. This process involves the external analysis of Vietnam and the Vietnamese commercial real estate industry, the internal analysis of the case company, and strategy formulation with international entry mode selection. An inductive approach is employed in parallel with a qualitative research method in this thesis. Data is collected from various sources, including: books and journals in the theoretical framework, and legal documents, newspapers, published real estate reports, personal observations, and the company’s unpublished reports in the empirical study. The analyses reveal that the Vietnamese commercial real estate market has massive potential for the case company but is a risky market with some of the fundamental problems of a new market, such as lack of transparency and inefficient legal frameworks. Overall, the author highly recommends that the case company invest in Vietnam’s commercial real estate market, especially in Ho Chi Minh City, utilizing joint venture as the mode of entry with a focus on retail and office properties. Further research is strongly advised for deeper knowledge of the market once the case company determines to internationalize to Vietnam. Key words: Commercial real estate, Vietnam, joint venture, office buildings, retail properties. CONTENTS 1 2 3 INTRODUCTION 1 1.1 Background information 1 1.2 Research questions, objectives, and limitations 3 1.3 Theoretical framework 5 1.4 Research approach 5 1.5 Thesis structure 8 LITERATURE REVIEW 10 2.1 International real estate investment 10 2.2 The strategic planning process 12 2.3 Situational analysis 13 2.3.1 Macro environment 15 2.3.2 Micro environment 17 2.3.3 Internal environment 20 2.4 Strategy formulation 23 2.4.1 SWOT analysis 23 2.4.2 Directional strategy 25 2.4.3 International entry options 26 2.5 Summary of literature review 30 THE VIETNAMESE COMMERCIAL REAL ESTATE MARKET 3.1 31 PESTLE analysis: Macro environment analysis of the Vietnamese market 31 3.1.1 Political factors 31 3.1.2 Economic factors 33 3.1.3 Socio-Cultural factors 36 3.1.4 Technological factors 38 3.1.5 Legal factors 40 3.1.6 Environmental factors 46 3.2 Porter’s Five Forces: Micro environment analysis of the Vietnamese commercial real estate industry 47 3.2.1 Threat of new entrants 48 3.2.2 Rivalry among existing firms 51 3.2.3 Threat of substitute products or services 54 3.2.4 Barganing power of buyers 55 3.2.5 Bargaining power of suppliers 56 3.3 4 5 Summary of the Vietnamese commercial real estate market 60 CASE COMPANY PRESENTATION 62 4.1 Internal environment analysis 62 4.1.1 The Vietnamese real estate industry’s value chain 62 4.1.2 Company analysis 65 4.1.3 Case company’s value chain 66 4.1.4 Resource audit 68 4.2 Strategy formulation 69 INVESTMENT OPPORTUNITIES 73 5.1 Hot spots 73 5.1.1 Ho Chi Minh City 73 5.1.2 Hanoi 79 5.2 Investment entry mode 83 6 STRATEGIC IMPLICATIONS 87 7 SUMMARY 92 REFERENCES 95 APPENDICES 104 LIST OF FIGURES FIGURE 1. Research design 7 FIGURE 2. Thesis structure 8 FIGURE 3. Strategic planning process 13 FIGURE 4. Situational analysis framework 15 FIGURE 5. Forces driving industry competition 18 FIGURE 6. Porter’s corporate value chain 21 FIGURE 7. Resource audit 22 FIGURE 8. SWOT analysis 24 FIGURE 9. Directional strategy 25 FIGURE 10. Modes of entry 27 FIGURE 11. Internet penetration rates for Vietnam and comparison countries 39 FIGURE 12. Control of corruption-Vietnam and comparison countries 43 FIGURE 13. Selected doing business indicators for Vietnam and comparison countries 44 FIGURE 14. The five forces model of the Vietnamese commercial real estate industry 60 FIGURE 15. The Vietnamese real estate industry’s value chain 63 FIGURE 16. Evergreen Properties’s value chain 66 FIGURE 17. Office supply by grade 77 FIGURE 18. Office market performance by grade 77 FIGURE 19. Retail market performance in Ho Chi Minh City 78 FIGURE 20. Office market performance by districts 81 FIGURE 21. Retail market supply in Hanoi 82 LIST OF TABLES TABLE 1. SWOT’s pros and cons 24 TABLE 2. Pros and cons of being a first mover 29 TABLE 3. Vietnamese economy fact sheet 2012 34 TABLE 4. Competition in the Vietnamese commercial real estate market 49 TABLE 5. Total supply of offices in Hanoi and Ho Chi Minh City 57 TABLE 6. Rent and vacancy rates of offices in Hanoi and HCM City 57 TABLE 7. Total supply of retail spaces in Hanoi and HCM City 58 TABLE 8. Rent and vacancy rates of retail spaces in Hanoi and HCM City 58 TABLE 9. SWOT analysis of Evergreen Properties in the Vietnamese commercial real estate industry 70 TABLE 10. Ho Chi Minh City economy fact sheet 74 TABLE 11. City investment prospects 75 TABLE 12. City development prospects 76 TABLE 13. Hanoi economy fact sheet 80 TABLE 14. M&A in Vietnam-Advantages and disadvantages 84 TABLE 15. Joint venture in Vietnam-Pros and cons 85 TABLE 16. Key factors affecting the case company’s investment decision in Vietnam 87 GLOSSARY ADB Asian Development Bank AFIRE Association of Foreign Investors in Real Estate APEC Asia-Pacific Economic Cooperation ASEAN Association of Southeast Asian Nations BCC Business Cooperation Contract CBD Central Business District CIT Corporate Income Tax CPI Consumer Price Index CRE Commercial Real Estate CS Current Supply: The total amount of cumulative office/retail space that has been completed at a given time FDI Foreign Direct Investment FIE Foreign Invested Enterprise FOE Foreign Owned Enterprise FS Future Supply: The total amount of office/retail space slated for completion in the future at a given time. GDP Gross Domestic Product GFA Gross Floor Area: The total amount of all covered areas including columns, walls, common passageways, lift lobbies, and toilets. Grade A A Grade A property meets all of a set of criteria regarding its offerings to a typical sophisticated occupier. These criteria are broadly concerned with the property’s overall profile, location, amenities, management standards, and technical specifications. Grade B A Grade B property meets some of a set of criteria regarding its offerings to a typical sophisticated occupier. These criteria are broadly concerned with the property’s overall profile, location, amenities, management standards, and technical specifications Grade C A Grade C property meets a set of criteria regarding its offerings to a typical non- sophisticated occupier. These criteria are broadly concerned with the property’s overall profile, location, amenities, management standards, and technical specifications. HCMC Ho Chi Minh City IMF International Monetary Fund JV Joint Venture LURs Land Use Rights M&A Merger & Acquisition OC Occupancy Rate: The number of units in a building that have been rented out, compared to the total number of units in the building ODA Official Development Assistance REITs Real Estate Investment Trusts SBV State Bank of Vietnam TI Transparency International US The United States VC Vacancy Rate: The number of units in a building that are not rented out, compared to the total number of units in the building VND Vietnam Dong WB World Bank WTO World Trade Organization 1 1 INTRODUCTION This chapter begins with the background information of this study, indicating the reasons for choosing Vietnam’s commercial real estate market as a subject of research. There will be a brief overview of the commercial real estate market followed by an explanation of the objectives, questions, and limitations of this study. An introduction to the theoretical framework and the research approach is also included. 1.1 Background information This thesis is conducted for Evergreen Properties of Michigan Inc., a real estate company with its headquarters located in the United States. As the U.S. real estate market has been stagnant for the past few years, many U.S. corporations have crossed the border to seek new growth beyond their home market. Following this trend, Vietnam has become one of the strategic markets in Asia in which Evergreen Properties of Michigan, Inc. is considering establishing their presence. The aim of this thesis is to assist Evergreen Properties of Michigan, Inc. to determine whether they should invest in Vietnam, and if so, in which areas they should invest in order to fully utilize their available resources. Vietnam is the fourth fastest growing economy in the region, after China, Indonesia, and Thailand (see Appendix 5). Vietnam’s booming economic growth and increasing demand have attracted numerous foreign investors with a huge flow of capital into different industries. The real estate market in general, and the commercial real estate market in particular, has had a long history of being considered one of the most important markets, ensuring the economic growth and societal security of Vietnam (Vietnam Briefing 2012). The market has grown at a fast pace over the past few years, fuelled by the increasing demand for serviced apartments, residential housing, and office spaces in the country (Overseas Property Mall 2006). Recent changes in investment and real estate business law have opened the commercial real estate market to foreign investors and Vietnam’s membership in WTO has raised many U.S. investors’ interest in this market. 2 Since the Doi Moi (Renovation) policy was carried out in Vietnam in the mid1980s, the country has experienced rapid growth. The reform has put an end to the closed market economy and has been an influence toward the building of an open market economy with international capital flow as one of the most crucial growth engines for Vietnam (Vuong 2010, 31). The international economic integration has brought to Vietnam a number of business opportunities and investments as the result of the process of globalization. The increase in the demand for quality housing and better infrastructure has fuelled the era of real estate development. However, the Vietnamese commercial real estate market, like other international markets, is marked with volatility and uncertainty due to the economic crisis in the world market and high inflation in the country. The State Bank of Vietnam (SBV) has tightened lending policies and increased the interest rates to curb high inflation, which has led to too much bad debt in local housing projects. On the other hand, this has created a new period and many opportunities for foreign investors, such as investment by buying back these projects at low prices (VietnamNet 2012). The Association of Foreign Investors in Real Estate (AFIRE) has ranked Vietnam as the fourth emerging market in the region in 2011 after China, India and Brazil and the fifth emerging market in the region in 2012 in terms of foreign attraction (AFIRE 2011 and 2012). Also, Vietnam is predicted to enter the top ten tourist destinations in the coming decade (Greenwood 2011). Most studies seem to agree that Vietnam’s real estate industry has enormous potential for investors but is a highly risky market. For example, Jehan and Luong (2008) cite that Vietnam’s real estate market is a young but fast growing market faced with some of the fundamental problems of a new market such as inefficient legal frameworks, lack of transparency, and lack of financing resources. As far as lack of transparency is concerned, Nguyen (2012) acknowledges that property investment is expected to give higher return in the long term for an emerging market like Vietnam; however, an assessment in a longer time frame is currently difficult due to the unavailability of data. In addition, EPM Advisers (2011) also states that investors worry about the “under-developed” legal system and regulatory framework in Vietnam. Despite these concerns, there are a growing number of investment opportunities in Vietnam’s real estate market.