Cautionary lessons for seaside real estate investors

By Michael Modler* - Aug 27, 2018 | 08:05 AM GMT+7

TheLEADERVietnamese readers are probably aware of the many risks associated with the property market in Vietnam, but if we look at overseas luxury property booms that later went bust, we can see a few other lessons for investors to consider.

Cautionary lessons for seaside real estate investors
Novotel Phu Quoc

The rationale and risk of seaside real estate in Vietnam

Seaside real estate in Vietnam offers investors several enticing rewards. Promises of high returns will allow buyers to recoup their capital in a short period. Prime coastal properties are still affordable compared to other markets like Thailand, Hainan province in China or Malaysia. And unlike owning a conventional apartment, “condotel” properties come with a management team that can take care of maintenance problems or other headaches that the owner would normally have to deal with.

Additionally, seaside real estate has the same appeal as other luxury products like Swiss watches, French wine or Italian sports cars do. Even if they don’t really work out as an investment, you can still enjoy them yourself. The same cannot be said for gold bullion or financial instruments like stocks.

There are some risks as well. While you don’t get any pleasure from owning stocks or gold, those are very liquid investments that can be sold quickly and easily with low transaction costs. Real estate generally has low liquidity, and this is especially true for unconventional properties with relatively few potential buyers (i.e. very expensive and not centrally located in a major urban area).

Speaking at TheLeader’s recent conference on seaside real estate, Novotel Phu Quoc general manager Lee Pearce also noted that buyers are basically at the mercy of the property developers, who may make big promises that they cannot really deliver. Many property firms have highly leveraged business models in which they use cash flow from the sale of unfinished units to finance the building of other projects. Mr Pearce suggested that the condotel market is already overbuilt, with the supply of units far outstripping demand. What if the developer runs out of money and is unable to complete the project?

Vietnamese investors are probably aware of these risks, but if we look at overseas luxury property booms that went bust, we can see a few other lessons for investors to consider.

Be realistic about foreign demand

In some rich global cities like Singapore, London and the San Francisco Bay area, foreign buyers have played a huge role in driving demand for real estate and putting a floor on property prices. However, real estate developers, bankers and homebuyers have made the mistake of overestimating foreign demand in other markets.

For an example of how this can go wrong, we can turn to the famous American financial writer Michael Lewis. In his book Boomerang, which covers the Irish property bubble that popped after 2007, Mr Lewis noted with utter disbelief that Ireland was building half as many houses as the United Kingdom. (Ireland has a population of less than 5 million while the United Kingdom’s is over 65 million). Because margins were higher, new supply consisted heavily of coastal homes and expensive townhomes in Dublin (Ireland’s largest city). Mr Lewis interviewed developers and their lenders to ask who was expected to buy these homes, given that there simply weren’t enough Irish people to fill them. They responded that wealthy foreigners and the vast Irish Diaspora (more than 20 million in the USA alone) would provide demand.

Alas, this thinking was exposed as delusional when the bubble burst. Dublin is not really a global city. It does not have the glamour and reputation to attract rich foreign investors the way Paris or London do. Moreover, just because a person can trace his ancestry to a particular place, that does not mean he will want to own a home there. Indeed, nostalgia for the “mother country “ among overseas Diaspora communities will tend to fade as generations pass, and only a tiny fraction of the Irish American population was born in Ireland. Most, including myself, have never even been there.

Vietnam’s coast may have more international appeal than Ireland, but it is not really established as a luxury destination in the way the French Riviera, Hawaii, Bali or Phuket are. It may become like that in the future, but in the meantime, investors should be sceptical of claims that foreigners will jump at the chance to buy homes locals cannot afford.

Lifestyle trends over time

During Japan’s long economic boom after World War 2, golf became a symbol of worldliness and status. And because so many wealthy Japanese loved the game, golf clubs became places where business executives could get to know each other and make deals. This sparked demand from corporate golf club memberships, and by the 1990s Japan had 2,300 golf courses, more than all the rest of East Asia combined.

Unlike in America, the UK or Australia, golf could not reach a mass market in Japan because high land prices and taxes made the game too expensive for most people to play. As a result, Japan’s golf course could only succeed if wealthy people and corporate customers played a lot.

However, the game of golf does not appeal as much to younger Japanese, who seem to prefer spending their money and time off on other activities. Conducting business on the golf course is no longer as common in Japan, and the number of rounds played on Japanese courses has fallen by 40% since the 1990s. More than 120 golf courses have shut down, with many converted to solar power plants or farmland. Golf industry experts expect another 500 or more will have to close within ten years.

The example of Japanese golf is important to think about because many condotel projects are developing similar projects that suit the current tastes of Vietnamese and Chinese vacationers. Potential investors should beware that tastes can change.

Potential environmental issues

In America, one of the most famous places for seaside real estate is Miami and the surrounding counties of Southern Florida. According to Harvard University real estate professor Jesse Keenan, this region is an example of how the changing natural environment can affect the market.

His recent study compared two groups of homes that were very similar in most respects, such as size, build quality and distance from the beach. However, the first group of homes had a higher elevation above sea level. Despite their similarities in the criteria that most people care about, market prices for the second group have been rising at a significantly slower rate. They have not been easier to sell despite being less expensive. Mr Keenam believes reports about rising sea levels is leading to greater concern about flooding. International agencies say ocean levels could rise by 0.5 meters by 2050 as a result of global warming. This could impact a lot of seaside property in Florida and elsewhere in a way people did not anticipate.

This example should encourage investors in seaside property to their due diligence on all aspects the property they are considering. Focusing only on the obvious aspects or the brand name of the project could lead to disappointment. 

*The article reflects the view of the author. Michael Modler is Business Development Manager at Global Integration Business Consultants in Ho Chi Minh City.