Paul T. Rubens
Participating in Vietnam’s Growth Through Commercial Real Estate
The passage of the Trans-Pacific Partnership (TPP), even without the U.S. as a founding member, holds promise for ASEAN and Vietnam in particular. It applies best-in-class frameworks to a range of urgent issues, from worker protections, including child and forced labor to intellectual property, copyright infringement, competitive neutrality for SOEs and services. It carries the strongest environmental protections the region has seen to address illegal over-fishing, wildlife trafficking and illegal logging and provides incentives for environmental technologies, such as solar panels, wind turbines, waste water treatment and air pollution control. There is a lot to like there.
Vietnam, being the least developed founding member country to the agreement, looks set to reap the biggest benefits. TPP’s passage has set in motion a range of positive macro markers,
from increasing FDI and remittances to stable inflation, increasing foreign reserves and record numbers of new business registrations. A boom in exports of manufactured goods, declines in the costs of imports and productivity gains resulting from TPP are estimated to create a direct impact to Vietnam GDP of 11% in the next decade, according to analysts. By demonstrating strong leadership in marshaling the resources to comply with the agreement and joining as a founding member, Vietnam has elevated its geopolitical status and helped accelerate its own road to growth.
TPP also provides Japan a platform to help it foster Vietnam’s success. Japan wants, maybe even needs, Vietnam to work. In recent years, due to geopolitical risks posed by strains in Japan’s relationship with China evolving around China’s territorial claims over certain islands and the trade dispute between China and the U.S., Japanese companies have been seeking to diversify their overseas manufacturing base away from China and Vietnam is one of the preferred destinations to set up a new manufacturing and export base.
Inside Japan, Vietnam is already the largest supplier of semi-skilled labor in the form of “Trainees”, and this year, Japan revised its labor laws to further open its labor markets to such “trainee” workers, a move which is expected to increase the number of workers from Vietnam even further. After gaining technical knowledge and company acculturation in Japan, these workers then return to their home countries to high wage jobs in the same industry or with the same companies.
Core-Plus Real Estate in Vietnam an Alternative to Equities?
The Vietnam equity market has produced periods of extraordinary performance these past few years, but not without massive volatility. For investors who see what is happening in Vietnam but remain uncomfortable with the risks of local listed and pre-listed equities, commercial real estate in core- and core-plus properties represents a more predicable alternative to participate in this growth.
Kiyoshi Hirasawa, CEO of Tokyo-based REAL Capital, has teamed up with Japan’s Fujita Corp. to create the first income yielding Vietnam real estate fund that realizes capital gains through exits on regional capital markets. Investing in quality leases and “stabilized” core- and core-plus assets generates the income needed to pay an 8% preferred dividend, producing the base of an equity-like total return with much lower volatility.
“One of the reasons why we prefer to work with stabilized assets rather than development projects in Vietnam is a very important concept in real estate – the time value of money”, says Kiyoshi.
Commercial real estate in Vietnam is one of those asset classes where developing the right strategy is only part of the challenge and not very meaningful without an ability to successfully execute on the ground. This is where the team’s 60 years of experience in real estate transactions and 20 years investing in Vietnam become critical.
“You need partners with local experience to ferret out opportunity, as nothing is “for sale”. Lack of clarity in statutes, continually evolving tax treatments, prolonged development processes resulting in increased costs become added challenges”, says Kiyoshi.
Participating in Vietnam’s accelerating growth path requires local partners, local knowledge and information networks. The right strategy, but also, an execution mindset and willingness to take on research challenges. It also doesn’t hurt to have a view towards the demand side of the equation. REAL Capital seems to have put together a sensible complement to local equities for investors looking to join in on Vietnam’s ascendance.