A territorial dispute between Hanoi and Beijing is denting Chinese investors' demand for Vietnam's luxury homes.
Under Vietnamese law, foreign buyers are required to submit their passports to secure a document from the government to grant them ownership of a flat. Since Chinese passports depict the disputed Paracel Islands " known as Xisha in Chinese, and Hoang Sa in Vietnamese " as Chinese territory, buyers from mainland China typically encounter difficulties in securing ownership.
"It's not that the mainland Chinese are not interested in Vietnam's property market, but there are issues between Vietnam and China," said Andy Han, group chief executive officer at SonKim Land, a luxury property developer with five residential projects in Ho Chi Minh City (HCMC).
"It impacted about 10 per cent of [our sales]. Many Hongkongers bought apartments ranging from US$200,000 to US$500,000 from us because Hong Kong is really expensive."
Buyers from Hong Kong and mainland China are SonKim's third-biggest group of foreign customers, making up 20 per cent of the developer's sales.
China claims sovereignty over most of the resource-rich South China Sea, claims which had been contested by half a dozen neighbouring countries including Vietnam, the Philippines, Malaysia, Indonesia and Brunei.
Although relations between Hanoi and Beijing considerably improved since the end of the cold war, the maritime dispute between the two countries has intermittently flared since 2011.
While Vietnam has become less attractive for people from mainland China, Hongkongers and other Asian buyers are picking up the slack.
"We think this (territorial dispute) is a relatively minor issue and we're still seeing a lot of interest from Hong Kong buyers," said Cathy Huang, executive director at EXS Capital, a private equity fund that invested in SonKim.
Vietnam's high-rise apartments are cheap compared with Hong Kong, the world's most expensive market, which explains why foreigners are flocking to the upscale districts in HCMC.
"High-end residential options located in the centre of major cities could be priced at around half the cost of equivalent properties in Bangkok, and less than 10 per cent of those in Hong Kong," said Kenneth Kent, general manager " Hong Kong of REA Group, which operates property portal Squarefoot.com.hk.
The impact of the friction between Hanoi and Beijing is a hiccup to an otherwise booming property market in Vietnam, spurred by Hanoi's relaxed rules allowing foreigners to own a portion of flats offered by developers, prompting foreign investors and fund managers to snap up opportunities in one of Southeast Asia's fastest growing economies.
Aerial view of a new residential area in District 2, centre of Ho Chi Minh City. Photo: Shutterstock
In 2015, real estate companies began offering 30 per cent of their stock to foreigners, opening up a new market and a new set of buyers for developers.
"Congress passed a law which allowed foreigners to buy an apartment, up to 30 per cent of all the total number of units. This led developers to ramp up their projects because if foreigners can come in and buy an apartment, this could become an opportunity," Han said.
SonKim is benefiting from the relaxed ownership as it was able to hold three rounds of funding worth US$204 million, attracting the likes of Credit Suisse, EXS Capital, and Japan's private fund manager ACA Investments.
"The regulatory change was a big one, and for the Japanese and most Asian investors, it played a big role [in our investment decision] as the Japanese are always looking for some other places to invest," said Hiroyuki Ono, partner at ACA, which invested half of its US$100 million Vietnam investments in SonKim.
Foreign investors are also drawn to Vietnam owing to its stellar economic growth, which averaged 6.55 per cent over the past five years, young population and reputation as China's top manufacturing rival in the region, benefiting from the US-China trade war as manufacturers avoid higher tariffs imposed by Washington to China-made goods.
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