The Burning Furnace: will the property market rise from the ashes?

The Vietnamese government famously embarked on a corruption crackdown labeled as "The Burning Furnace" in 2017, which targeted high-ranking officials, business leaders, and state-owned enterprises involved in financial misconduct.[1] This soon rippled over to the property sector in 2022, resulting in high-profile arrests and the imminent collapse of many financial institutions that were deeply intertwined with the real estate sector. This was exacerbated by a weak global macroeconomic environment due to elevated U.S federal funds rates and rampant inflation, which weighed down on exports and consumer sentiment.[2]

The principal near-term downside risk would be short-term liquidity issues in financial institutions heavily implicated in the real-estate industry. Total exposure to real estate was 37% of balance sheet assets for private banks, and liquidity squeezes in these financial institutions following high-profile corruption cases and stringent regulations on bond-issuance have resulted in a downturn in the real-estate industry as well. [3] These adjustments have meant that property developers now find it much harder to borrow and therefore commence construction. However, this is likely to recover given salient government efforts to reinject capital and loosen credit conditions to the financial sector. Yet, the outlook for real estate is discriminatory. While industrial real estate seem to be solid bets this coming year, residential and commercial real estate remains more speculative due to fundamental issues of supply-demand mismatch.

In 2024, 64.4% of FDI went into the processing and manufacturing industries, while 17.9% went to real estate, which saw an 89% YoY increase.[4] Given the high weightage of the former industry, it is likely that a sizeable chunk of real-estate investments were also industrial developments. Recent developments also point to exciting growth potentials for industrial real-estate projects, such as the Southern Haiphong Coastal Economic Zone and newly signed land-leasing terms by notable foreign investors in the Northern and Southern industrial parks. Occupancy rates are roughly 80%, suggesting healthy demand-supply dynamics, and transaction volume for industrial real estate has dominated 2024.

Fig 1. Transaction volume in the real estate sector by year and category; Industrial Real Estate has dominated in 2024. Source: Cushman & Wakefield, MSCI RCA

More importantly, underlying drivers such as the transition to green energy, greater high-tech capital exports, and booming e-commerce and logistics sectors will further spur demand. Meanwhile, supply is projected to grow at 7.5% in the key Northern and Southern Economic zones. [5] [6] [7] Additionally, recent legal reforms regarding the real-estate sector disproportionately benefit large-scale, industrial real estate. The proposed Land Law in July 2024 allows for dynamic land pricing—instead of government mandated fixed prices—to better capture Vietnam’s booming real-estate market. This will be particularly beneficial to profit margins of industrial real-estate developers, who have seen explosive growth in land prices due to waves of foreign investment.[8] Potential deterrent effects to foreign investors would be mitigated by allowing greater flexibility to Foreign-Invested Companies (FIEs) to engage in real-estate businesses such as leasing and subletting.[9] The Real Estate Business Law also introduces uniform measures that seek to standardize inconsistencies in non-residential real estate, which would increase investor sentiment due to greater clarity in doing business.

Conversely, commercial and residential real estate seem to still be bogged down by supply-demand mismatch. Occupancy rates have ticked up for office-spaces and projected growth has been sluggish, likely due to lagging demand in Grade-B, or mid-range offices.[10] [11]

Fig 2. Projected CAGR for commercial real-estate stands at 2.34%; this figure is slower than Vietnam’s annualized CAGR of 8.7% the past 10 years. Source: Statista

The same inequality is seen in residential real estate. Prices have skyrocketed for high-end, premium properties in large cities, driven by intense speculatory activity and high demand.[12] However, supply has only kept up marginally in these high-end properties, resulting in two vectors of downward pressure on the lower-middle/middle class: 1) they are competing with a greater pool of buyers— individuals forced to shift towards inferior housing due to their lack of purchasing power—and 2) the restricted supply of affordable apartments. In August, the Vietnamese government also suggested price-controls if there were excessive fluctuations (>20% over a period of 3 months) in housing prices. This suggests a high degree of volatility driven by speculation instead of proper market dynamics. [13] Effective demand for housing is therefore low, and supply is equally problematic. The majority of new building projects are concentrated within several large, established developers that operate in Class A and Class B housing. This results in a top-down, lopsided market dominated by large players. Options are even narrower for locally listed companies that are publically listed in domestic markets. [14] This limits diversification opportunities and inherently increases idiosyncratic risk, as there are fewer substitutes available to spread investment exposure.

Fig 3. Ongoing or New real estate projects in Ho Chi Minh and Hanoi. Large, (VinHomes, Dat Xanh Group) often private (MIK Group, Masterise Homes, Thu Do II, Kita Group) or overseas-listed (Capitaland, Samty, Gamuda Land) property developers monopolize the market. Source: The Investor VN

Fig 4. Residential Real Estate sales and absorption rates; Grade C housing has almost disappeared since 2020. Source: Savills Vietnam

Real estate continues to be an attractive investment, with a particular emphasis on industrial and logistical properties. This trend also points to increased capital allocation toward materials, especially construction resources like cement and steel. These materials are further supported by major infrastructure projects, including the USD 67 billion Hanoi–Ho Chi Minh high-speed rail, the USD 2 billion Ho Chi Minh Metro Line 2, and the USD 14 billion Long Thanh Airport.[15]

References

[1] Nguyen, B. (2023, March 11). Vietnam's 'blazing furnace' corruption purge spotlights political tug of war, economic unease. South China Morning Post.

[2] Asahi Shimbun. (2023, March 10). Vietnam's anti-corruption campaign sparks political infighting.

[3] Nguyen, P. (2023, June 15). Vietnam's boom looking like a property bust. Asia Times.

[4] Ministry of Planning and Investment. (2024, December 13). FDI attraction in eleven months of 2024.

[5] VietnamPlus. (2024, December 10). Real estate demand for e-commerce and logistics rises in Vietnam.

[6] Vietnam Investment Review. (2024, July 31). Experts delve into outlook of Vietnam's industrial real estate market at VIPF 2024.

[7] Cushman & Wakefield. (2024, November 29). The strong development of industrial real estate in Vietnam.

[8] Russin & Vecchi. (2024, June 21). The real estate business for foreign invested enterprises in Vietnam – some new developments. Mondaq.

[9] CBRE Vietnam. (2024, January 24). Vietnam Market Outlook 2024.

[10] Cushman & Wakefield. (2024, October 4). 5 trends shaping the commercial real estate market in the year of the dragon.

[11] Property Report. (2024, December 20). Demand surges for Ho Chi Minh’s office market, plus additional reports. Asia Property Awards.

[12] Vietnam News. (2024, April 22). Supply-demand mismatch drives sharp increase in apartment prices.

[13] Vietnam Briefing. (2024, August 16). Vietnam government to regulate property market if prices surge over 20%.

[14] The Investor. (2024, December 16). Vietnam property market in the hands of large developers: Savills.

[15] The Investor. (2024, November 4). Mega Long Thanh airport first phase should be completed in Sept 2026: Senior parliament official.