Bright spots in Indochina’s property market

By Tan Kok Keong

/ REMS Advisors |

June 29, 2016 9:00 AM SGT

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The Indochina property market has caught the imagination of the investing public in Singapore over the past few years. The hot favourite over the last three years has been the residential property market in Phnom Penh, Cambodia. There has been more interest in the resurgent Vietnam property market and increasing curiosity over property in Myanmar. While investing in each of these countries carries its different unquantifiable risks, it might be worthwhile looking at the measurable factors prior to investing in any of them. We review some of the typical quantifiable fundamental drivers of demand for real estate in this article.

In general, property prices and rents in Myanmar have outpaced fundamentals, suggesting that expectations of further large price increases in the near term are unrealistic, especially with a number of large projects pending completion

People and potential

When a country’s population grows and more of its residents are gathered at urban centres, it suggests there is a better chance that its property prices will increase relatively faster. Vietnam’s potential is most apparent — its 93 million population eclipses that of Myanmar and Cambodia (see Figure 1). Surprisingly, Myanmar has the largest proportion of its population living in urban centres.

Figure 1

Typically, in the major urban centres of these cities, the population is supplemented by foreigners who can help sustain the increase in property prices because of their ability to consume. As data is sporadic, the increase in visitor arrivals can be a good proxy. Growth in visitor arrivals in Myanmar has been much faster than that of Cambodia and Vietnam, and is likely to continue.

The potential of each real estate market can only be unlocked if there is sustained economic growth. According to the latest forecast by the International Monetary Fund, Myanmar’s economic growth over the next three years is expected to far surpass that of the other two countries (see Figure 2).

Figure 2

This quick analysis suggests that the potential for growth in property prices is better in Myanmar, followed by Vietnam and Cambodia. There are many other factors — the quality of the property, transparency of the market, enforceability of legal contracts and control of supply, for example — that will determine how property prices grow. Investors are advised to evaluate these factors as well.

Myanmar: The Golden Land remains unreachable

We have been active proponents of investing in Myanmar since 2012.

Much has been written about the country’s transformation, its potential for growth and heightened expectations owing to its new government. However, the growing pains it is experiencing as an emerging market are becoming more apparent, and investors must be prepared for heightened volatility and be increasingly selective.

In general, property prices and rents have outpaced fundamentals, suggesting that expectations of further large price increases in the near term are unrealistic, especially with a number of large projects pending completion. The much-hyped Condominium Law (a bill formally approved on Jan 22) has thus far failed to reignite prices. This is because of the lack of administrative rules to implement this law. Prospective foreign investors will do well to understand the basics of the law, underlying lease of the land, details of the legal rights of a purchaser and mechanisms for resale.

Figure 3

Among the property sectors, perhaps the most resilient have been the hotel and serviced apartment segments. In fact, rents at established serviced apartments have been surprisingly resilient. Our property rental index showed that despite general weakness in the market, rents increased 1.3% q-o-q in 1Q2016 (see Figure 3). While there is some uncertainty in the short term, we remain positive on the market’s longterm prospects. Over the next two to three years, investors should focus on quality assets that cater for foreigners (hotels, serviced apartments, logistics and warehousing) or the mass market (low-cost housing). This is because the next leg of growth in property prices and rents will have to be driven by the influx of foreigners as income growth among the domestic population remains slow.

Another key segment is Myanmar nationals who are residing overseas and could potentially return home. Based on the Census 2014, Myanmar households have two million family members residing overseas. Most of them are in their twenties and thirties (see Figure 4). This provides a rich market for developers.

Figure 4

In conclusion, property prices and rents in the above three main Indochina markets have enormous potential for growth in the next five to 10 years. In the meantime, investors seeking to enter these markets should be wary of short-term uncertainties, focus on the fundamental analysis of prices and rents to determine where to invest, do more homework to understand the issues faced when owning properties in each market and prepare to hold out for the unexpected.

Tan Kok Keong is CEO of real estate consultancy REMS Advisors, and co-founder of Fund places, a real estate- dedicated crowdfunding platform. He can be reached at kk.tan@ rems.asia.

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