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  Foreign Investment

Foreign developers still waiting in the wings

Few of the foreign property developers who flocked to Vietnam before the 1997 regional financial crisis have returned to the office building market, but Vietnamese developers appear to be picking up the slack.

Most current office building projects are joint ventures with Vietnamese companies, where foreigners get access to land if they invest in the construction costs of a project.

In other countries in the region, there are ways for a developer to own land, however, in Vietnam it is not possible for foreigners to own land, said the general director of property management firm Dinning & Associates, Peter Dinning.

Dinning said developers had seen other joint-venture buildings not make a profit and blamed this on the lack of flexibility in the joint venture form of partnerships.

The partners in a joint venture often had conflicting aims, Dinning said.

"For example, it takes a long time for a joint venture to make a decision while 100% foreign or Vietnamese-run projects can make decisions more quickly," he said.

Dinning said developers also took into account changes in rental rates, construction costs and land value before deciding on new investments.

If the value of the completed development is less than the cost of development, the building is not constructed. The value of a completed building can be higher than the combined cost of the land and construction in cases of high rents.

Most of the current office buildings were conceived during the early 1990s, when foreign developers expected rental rates to be very high.

Construction costs for foreign companies were much higher six years ago, increasing total development costs and pushing rents up.

However, Dinning said that investors, mainly from Japan, Singapore and the Republic of Korea, did not undertake proper sensitivity analyses that should be carried out to show what would happen if rents decrease as well as increase.

During the Asian financial crisis in late 1997, the huge fluctuation in property prices were the result of several buildings within the central business district being completed at around the same time, increasing dramatically the amount of available office space.

Developers said they believed rentals would stay high -at perhaps US$30 per sq.m. per month. However, for buildings that opened just before or during the regional economic crisis, rents were only US$15 to US$20-much lower than expected.

"As a result, many office projects were delayed as rental rates were reduced to levels which made property development unprofitable."

"It is only now that rents have started to increase to a high enough level to make a profit and of course, the buildings must catch up with the losses they have made in previous years before they will show a profit."

Dinning said Vietnamese developers would accept a lower return on their investment if they decided to build new office buildings now. - (06/10/2003)

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