Wednesday, 17 May 2017



By: Rudolf Hever, Director of Hotels, Savills Asia Pacific

The tourist arrivals to Vietnam growth curve continues ever upward. Within the last 7 years, international arrivals by air doubled to 10 million in 2016 and domestic tourism arrivals jumped from 28 million to 62 million. All this movement is driving remarkable growth in the second, or holiday home segment with condotels taking centre stage.


Nha Trang, Da Nang and Phu Quoc: stealing the spotlight

Viet Nam’s key coastal tourism destinations Nha Trang, Da Nang and Phu Quoc have all benefited. In 2016, Nha Trang arrivals were up 23% on 2015 with1.2 million international visitors, a trend improved upon in Da Nang as the City achieved a 33% increase on 2015 with 1.7 million international arrivals.
The government is playing an important supporting role. Viet Nam now has 9 international airports that all seem to be constantly under upgrade with new terminals opening and runways being extended. The visa policy has been streamlined and improved making it easier and cheaper than ever before to visit the country.
Although inbound numbers are impressive and performance of hotels and resorts across the submarkets have generally improved, it has not been at the pace arrivals numbers would suggest. The last few years have seen robust activity in resort real estate development and this year we are starting to see the implications of all this new supply. Resort and hotel competition is intensifying and as its still early stages of the trend we anticipate it only getting hotter. For local and international guests this will mean an ever increasing choice of options across the budget spectrum as resorts compete with fresh appeals. With exciting new and established brands to experience and an abundance of new properties to choose from, at no doubt often heavily discounted rates during start-up periods, the next couple of years will be a great time to discover or rediscover Vietnam.
Particularly in Nha Trang, Cam Ranh and Phu Quoc. These markets growth has been at double digit rates, and with the abundance of new resort and hotel properties in the pipeline will no doubt at some point, have to overcome their case of supply ‘indigestion’, just as Da Nang managed to do a few years earlier. However, owners may need to sober up expectations of future performance and perhaps even prepare for leaner years ahead.


Second homes and Condotels: market sweetheart

Another segment that has grabbed and is holding market attention is for second, or holiday homes. Segment products include branded or non-branded villas, second home condominiums and condotels (a blend of hotel and condominium: resort hotel levels of service with the independence of a condo) There are approximately 36 second home properties operated in Vietnam with over 7,000 affordable to luxury units. Khanh Hoa, Da Nang, Phu Quoc, Ho Tram, Ha Long & Quang Nam are set gain second home supply of more than 17,000 units in the next 3 years. It will take time for inventory as significant as that to be absorbed by the market – perhaps another case of ‘indigestion’ to over come. Supply in the main coastal destinations will account for 65% of stock by 2019.
The standout mainly in coastal locations, is the profusion of condotel developments. The fervour developers are showing for building these units is starting to raise concerns of future over supply but the market is so far accommodating them and with that, more become planned. We are seeing more and more projects announced, all seemingly trying to outdo one other in terms of scale, appeal and often outlandish promised returns. The guaranteed rental return in Vietnam can be as high as 12% guaranteed for 8 years.
Developers are quick to name projects located in or close to a destination as condotels but the concern is the ‘tel’ part of the condotel. In many cases we see little regard for the hotel part of the project and the long term management implication it entails. The concern is to have any chance of matching promised returns, the projects need an impressively performing hotel component. Yet in most cases this seems to be missing or at best, incomplete.
Guaranteed return products become more risky for buyers when less experienced developers enter into large scale projects with insufficient equity or by not being fully supported by banks. Buyer risk tends to appear after completion and mainly in operation. If the guaranteed return is higher than achieved cash flow, the developer is then required to underwrite additional funding, potentially for the entire period of operation. In several cases, guaranteed return is being incorporated in the planning stage and reflected by higher selling prices in order to manage the long term return commitment. This structure could be attractive both for buyers and for developers but needs to be very well planned, requiring careful analysis before being implemented.