Cocobay's dishonor of commitment casts shadow on condotel market

The developer of Cocobay condotel project in Danang has announced that they are not able to honor their commitment to pay annual returns on their investment from next year.

This is a warning for developers and investors of condotel projects which have no official legal framework in Vietnam. 

More than 1,700 customers have bought condotels, boutique hotels and villas at the 51-hectare Cocobay, with the developer committing to pay them an annual return of 10 -12,5 per cent during the first eight years. However, The Empire Group has blamed on a lack of legal framework for condotels and difficulties in operation management to stop payment.

Condotel - good or bad?

Director of Savills Hotels APAC Mauro Gasparotti says that condotel is good for individuals to own and is attractive to developers. However, both buyers and developers should have a full understanding of this product, which is more complicated in comparison to other real estate assets.

Condotels contain residential characteristics to ensure that buyers will identify it as a “second home” product, therefore enriching their comfort when they use it for themselves. They also have “hospitality” features which need to be designed following Hotel models and standards, in order to ensure profitability. 

Complications occur when a developer is not well prepared to enter the hospitality industry and they are not fully aware of the cash flow implications which stem from the long-term management of condotels. 

Gasparotti says that when hotel facilities are not properly planned, the product is incorrectly positioned in respect to the market conditions, or if there is a lack of interest by the developer for future management, they could lead to difficulties operating the project in a profitable way.

For projects that offer guaranteed return or targeting buyers who are looking for higher profit (and therefore not second home use), the condotel should look very much like a hotel. 

"The developer and buyers should understand that they are entering a new business which is no longer real estate but in fact hospitality. This industry could be very profitable if the right product is planned in the right market - not all projects are designed properly with a long-term mindset that is necessary for success," says Gasparotti.

In some cases, the developer relies on management companies to ensure the operational cashflow without considering that hospitality is a volatile market, whilst hotel operators are not in the position to guarantee the promises from the developers to the buyers, especially for products that have been poorly planned from the beginning. 

Hotel operators are extremely valuable to the product, but they are not investors and do not take the risk of low profit or losses, which remains with business owners.

That said, there are numerous examples of well conceptualized and executed condotel projects in Vietnam. Projects by reputable and cautious developers with good management structure and positioning have had a good value for the buyers and should not be affected by negative cases.

Suggestions to the buyers

Gasparotti advises that the buyers should firstly identify their purpose of purchasing a condotel- buying a holiday home or purchasing only for investment. 

Holiday home which does not mean lower overall returns, and may, in fact, result in a much higher capital appreciation in the long term, resulting from better maintenance and less crowded facilities. On the flip side, holiday home products are usually less profitable than those targeting the rental income since they are less “squeezed” to produce income daily. 

"Holiday home buyers should choose what they personally like first, as a primary residential product. They might buy luxury or larger units and should consider the rules and regulations to see if the value is properly preserved and avoiding overuse for the daily rental", he says. 

Investment-oriented condotel units are usually bought purely for a rental return and capital appreciation. For buyers seeking a rental yield, Gasparotti suggest looking at the position of the property and the design. The more profitable products on rental bases are the one designed like a hotel. 

In the majority of the case, the more profitable ones are not the luxury properties but the midscale offering smaller rooms, efficient operations, limited use by owners and limited facilities. Products with a clear management structure is also an advantage. The number of rooms should in line with market conditions; larger properties require different sources to perform constantly well.

A clear cash flow and management mechanisms

Savills Hotels APAC director says that the developers should study carefully this model and define clear cash flow and management mechanisms in the initial planning stages. These steps should be processed carefully considering the developer’s strategies and financial ability either an internal team or expert advisors. A business model including market conditions, condotel type, cashflow projection as well as the management structure will affect the project design. 

For developers that choose to offer high guarantee returns, it is necessary to plan other revenue sources within the project like restaurants or additional room inventory retained by the developer to support the guarantee returns offered to buyers, this method will facilitate the repayments. 

On the recent concerns of the guaranteed returns, Gasparotti claims that 4 to 6 per cent yields are the right expectations for a sustainable rental return, given that the buyer still enjoys free usage and a potential chance for capital gain in the mid- to long-term, especially for beach frontage or sea view properties. 

There are many criteria for buyers to consider when purchasing a condotel product. I would personally investigate the overall quality of the product to see if it matches the price, the market conditions, brand and positioning. A well- balanced product of consistent, clear identity and purpose usually works well, whilst the “try to be everything” products experience difficulties. 

"A quality condotel does not need to be a five-star product, especially considering that five-star hotels in coastal destinations are usually more difficult to be profitable, but it has to be built with attention to details, considering the right market positioning and good management", says Gasparotti.

In case of a default on guaranteed return, if the product is operational, there is still a good chance that with proper management (sometimes from a third-party operators or brand), the condotel will perform well. Also, a better maintenance program (often forgotten under guaranteed returns) might ensure future disposal value is protected.”

Savills Hotels director expects that the new criteria for approving and developing condotel projects and future legal framework will encourage better quality products, with more emphasis on operation, design, facilities, landscaping and greenery rather than high volumes and density.