What will happen if law and customers 'turn away' from condotel?

By An Chi - May 05, 2018 | 06:13 AM GMT+7

TheLEADERJLL Vietnam's Le Thi Huyen Trang said that in case condotel projects canot be sold due to legal risks and profit commitments, it will return to the original nature of hotels.

What will happen if law and customers 'turn away' from condotel?
Perspective of a condotel project in Quang Binh

Data from the Vietnam Association of Realtors (VARs) showed that the liquidity of condotel on the market is showing signs of slowing down in recent months. According to VARs, the condotel segment declined in trade due to excessive supply resulting in strong competition among investors, lack of clear legal status and many risks in profit commitment.

It is warned that if the condotel's legality is not clarified causing customers to turn away and not to invest money, it may make bubble burst and pose high risk for the market.

Le Thi Huyen Trang, Head of Market Research and Consultancy of Jones Lang LaSalle Vietnam (JLL), said that, condotel is built to operate as a hotel for commercial purposes, not for sale as a residential apartment.

Therefore, in case condotel projects cannot be sold or its legality is not clarified by management agency, it will return to the original nature of hotels.

There is high profit margin in Vietnam's condotel project that is from eight to 12 per cent while this figure of Thailand is only seven per cent, China's is only five per cent. Do you think this is potentially risky for investors?

Le Thi Huyen Trang: When selling condotel projects, most investors commits high profit margin from eight to 12 per cent per year and particularly, it is pushed up to 15 - 20 per cent in some projects. It is confirmed that this is a part of the very wise sales strategy of the owner.

In fact, there are few investment channels that can give investors such a high return for the next 10 years. Even in the hot tourist market, although investors can bring in high profit up to 12 per cent per year for their customers, this only can be made in short term instead of ten year due to the unstable development of these markets.

In the world's resort real estate having sustainable development, it is more unlikely to gain high profit.

In the Vietnam's resort real estate, investors expect to earn great profit because of the emerging nature of this sector. In the coming time, when the market develops stably, profit from condotel investment will be only five to six per cent per year that is safe for customers.

However, it will make condotel naturally lose its attractiveness and as a result, customers will choose to invest in other markets such as real estate, gold or stock.

Condotel investors obviously understand this so they push up the price of condotel to raise their profit commitment. In fact, a part of the profit paid to the customer has been charged to the sale price.

With a commitment period up to eight to ten years, it is unable to predict the future as well as the risks of this market.

In addition to the risk of profit margins, there are a lot of arguments around the legal issue of condotel. In your opinion, condotel should be considered as residential land or commercial land?

Le Thi Huyen Trang: Most of resort real estate are built on the land planned for commercial and service purpose. For this type of land, localities only can allow short-stay and lease for 50 to 70 years.

However, the investors have built condotels and sold to customers as apartments, so it raises the problem of legality and red book. If this type of housing is not recognized and put into management, it will be very risky for home buyers but recognizing this type of real estate will also lead to a lot of inadequacies.

Recognizing the land for trading and services as residential land and issuing long-term land use rights certificates (red book) to condotels will overload infrastructure and disrupt the general planning of the area.

It is commented that Vietnam real estate market is so hot so if the law does not recognize this type of property for management or people do not invest in condotel due to legal uncertainty, bubble of this market maybe burst. Do you agree with this view?

Le Thi Huyen Trang: In fact, most condotels are built on commercial land and are in operation as a hotel for commercial purposes, not for sale as a residential apartment.

In this case, the investors were very smart and quick in creating a "hybrid" real estate product when turning condotel into apartments for sale in order to mobilize money earlier and then, they still have the right to operate the project as a conventional hotel.

In case condotel projects cannot be sold or its legality is not clarified by management agency, it will return to the original nature of hotels. That means condotel is a type of hotel which is for tourist to have accommodation, not for sale.

What advice do you have for customers who intend to invest in condotel?

Le Thi Huyen Trang: The owners often tell customers that just 70 per cent in the project's occupancy rate will guarantee profit for customers. That means in a 1,000-room project, it needs an average of 700 rooms in rent per day to meet this standard.

That is not to mention other projects. It is assumed that in a resort having ten such projects, it must welcome seven thousand people every day to stay in order to ensure the profit of customers. Of course, occupancy rate can still be achieved if the project is truly quality.

Because the nature of condotel is a tourist hotel, the most important thing is project investors have experience in operating and managing hotel or they can hire foreign hotel brands to ensure the quality of service and stable source of customers in long term.

Thank you very much!