Reversing trend of offering profit commitments for resort real estate

By Giang Son - Apr 25, 2018 | 04:34 PM GMT+7

TheLEADERSome resort projects have started to abolish fixed profit commitments to buyers.

Reversing trend of offering profit commitments for resort real estate
InterContinental Phu Quoc, developed by BIM Group, pioneered in offering a nine-per-cent profit commitment in nine years for buyers.

“Without profit commitments, we cannot sell resort projects”. This confirmation was made two years ago by Nguyen Quoc Khanh, General Director and President of DTJ Investment and Distribution JSC when he spoke about the liquidity of resort projects.

Indeed, at that time, profit commitments were considered the selling point of resort real estate. It not only is the luxury property for moneybags but also has apartments and villas that attract large amounts of capital from secondary investors.

As it was a new investment model, to reassure buyers about the profitability, some big investors offered profit commitments.

Initially, the profit margin was only eight per cent a year for ten years, and it was even secured in US dollars. The first projects that made this commitment were sold well, although their price ranged from $660,000 to $1.76 million per unit.

As this strategy worked, most real estate projects launched in the last two years started to adopt it, which increased the profit margin to 12.5 percent per year to attract customers.

Therefore, what Khanh confirmed two years ago is still true. Profit commitment is still a selling point that makes the investment in resort real estate, especially condotels, continue to boom.

However, some projects have started to go against this trend. A notable example is Novotel Villas in Phu Quoc, developed by CEO Group. Previously, CEO Group also offered a nine-per-cent profit margin in nine years for buyers.

Besides, CEO Group also gave customers another option. The profit was not committed in a specific number. Instead, it depended on how much sellers had earned in reality after deducting all costs.

Only 20 clients participated in the rental program with a fixed profit commitment, while the remainders accepted to share the profits based on actual revenues, in which buyers received 85 per cent of the profits.

Surprisingly, according to Doan Van Binh, Chairman of CEO Group, the liquidity of the project had increased dramatically since the end of last year. CEO Group has sold almost all of 96 Novotel villas. Most of the deals completed in the first half of 2018.

Kevin Beauvais, InVision Hospitality CEO, said that in countries having a developed tourism industry, investors rarely made profit commitments as they knew if the business flourished, real estate prices would increase.

"However, in countries having a developing tourism industry like Vietnam, many projects are offering appealing profit commitment, which resembles Thailand’s resort market decades ago,” said Kevin Beauvais.

This strategy was nowhere to be seen in Thailand nowadays, he added, because investors focused more on long-term, sustainable values of the product, such as high quality of services or professional management team. Buyers also did not pay much attention to profit commitments; they aim at the added value of the property.