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VIETNAMESE GERMAN UNIVERSITY UDP_2010 Subject: Urban planning and Real estate markets ------------------------------------------------------ Lecturer: Dr. Karl Kluegel Student: Phan Thanh Binh August 31th, 2011

REAL ESTATE MARKETS AND DEVELOPMENTS (Case study: SJC Tower – District 1, Ho Chi Minh city)

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Abstracts

In the last decade, with the bubble growth of land and apartment price, real estate market was a fertile land for capital investors and individual speculators. SJC Tower project is concerned as whether investment of speculation when the project has been started since 2004. After 7 years, this project is still under procedure and there is no construction activity is implemented. This paper will use criteria which is related to real estate market to evaluate the project of SJC Tower in role of investors. Through the evaluation in this paper, the final conclusion will be given to decide whether this project should be continued or stop investment. In conclusion part, the final advice will be given to investors of the project.

INTRODUCTION

From the years of 1990s, Vietnam experienced significant increase of economy with high rate of economic growth and urbanization tempo. There was hot increase of real estate market in Vietnamese cities. Vietnam became a attractive destination of international property corporations, which come from more advanced countries. In the last decade, real estate was highly profitable industry, which brought huge profit to property corporations.

However, the development of real estate market in Vietnam was uncertain and unstable such as land price and property price in Hanoi and Ho Chi Minh city, which rapidly increased in the end of 1990s and beginning of 2000s. Especially, there was rocketed increase of estate price in the years of 1997/98 and 2005 to 2007. The growth of the real estate sector has been signed the presence of speculation. More building projects have been approved which were not based on actual demands. Simultaneously, there have been discrepancies between the growth of the real estate market and the urban development policies. Additionally, since 2008, real estate market in Hanoi and Ho Chi Minh city has faced to challenges under economic crisis and the two digits inflation in Vietnam. There have been signs of decreasing attraction of real estate factor in these cities.

This paper will try to analyse the change of property market in the relation with urban development through a specific case study, which is SJC tower in District 1 – Ho Chi Minh city and also concern about the impacts of real estate factor to the macro economics and vice versa. With this study, the paper would like to emphasize the importance of macro economic orientations and issuing of urban development policies through real estate industry.

CASE OVERVIEW

SJC tower is planned to be built at the plot, which is covered by Le Loi – Nguyen Trung Truc – Nam Ky Khoi Nghia – Le Thanh Ton streets, those are in Ben Nghe ward, District 1, Ho Chi Minh city. Total land area is 3,792 sq.metres. Saigon Jewelry Corporation was adopted as the investor of the project. This project was approved in principle in 2004. In 2007, Ho Chi Minh city people’s committee regulated this project will be mixed functions tower, those are office for rent, apartment, hotel, and shopping mall.

The initial scale of this project, which was given in 2007, was 45 levels and not included 6 basements. Since October of 2010, the scale have been proposed to justify up to 54 levels and 6 basement levels. Funding for the SJC tower is calculated up to US$137 million. At the current time, the project is still under procedure for renting land.

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Main indicators of SJC tower 1:

- Commercial /Retail area: 17,150 sq.metres (including 2 basements) - Hotel area: 8,575 sq.metres - Living apartments area: 19,722 sq.metres - Renting apartments area: 20,760 sq.metres - Total building area: 65,563 sq.metres - Land area: 3,792 sq.metres - Coefficient of land use: 16.5.

METHOD OF EVALUATION

In order to draw consequences and impacts on economy that resulted by real estate market, this paper try to look into and analyse factors that directly and indirectly influence to construction and building market. Thus, the relative interactions between real estate and other aspects of urban areas would be identified. Finally, on the standing of investors, should the project be invested? Whether could the project bring profit?

To determine the efficiency of a invested project, the analysis of this paper will be based on criteria, which will be given below. The criteria include internal indicators, which were constituted from the design of the building, and external factors, which are brought from the city and external impacts of the project to society. The data, which gave basic information about functions and design of the building is collected from legal documents in Department of Planning and Architecture. In the assessment of real estate market to determine social demands and supply capacity of the project, the view of this paper will be based on research and reports of CB Richard Ellis (Vietnam) Company (CBRE – Vietnam) about Ho Chi Minh city’s real estate market.

Economic efficiency of this project will be calculated based on research data of CBRE and some of assumption, which information can not collected accurately and adequately.

Table 1: List of criteria No. Criteria Notes on method Applied 1 Design Social harmony

Social status

2 Infrastructure Drainage Water supply Electricity supply

3 Parking Capacity Motorbikes Cars

4 Traffic Accessibility Mobility

5 Market analysis 6 Internal Return Rate?? (IRR)

*NPV () Calculation Rent cost/total cost

7 Social impact Analyze at 500m radius 8 Environmental friendly 1 Document No 25/ CV – SGKC, June 15th, 2011 of Saigon Jewelry Corporation.

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EVALUATION

1. Design

The initial design of SJC tower was 45 level and 6 basements building, in the 4th quarter of 2010, Saigon Jewelry Corporation gave justified design with 54 levels and 6 basements. Along Le Loi street, there are several projects, which are proposing as high rise building with similar architecture style with SJC tower. Therefore, in general observation, the architectural harmony along Le Loi street is relatively achieved. However, there is no green or open spaces arranged between skyscrapers. It may reduce landscape value of this area. In another aspect with wider view in District 1, where is considered harmonious landscape with old architectural style. There are many historically valuable building around District 1 and modern skyscrapers have been breaking the architectural and landscape harmony.

Figure 1: Panorama front view along Le Loi street

Source: Investor’s report of justified planning of SJC Tower

Independently, this building is still under procedure and the final design is unknown, so it is really difficult to evaluate aesthetic and architectural value of this tower. Nevertheless, according to subjective assessment, the idea of this paper is that the style of SJC tower is not relevant to the style of other buildings around it and it is not really beautiful as expected.

Figure 2: Latest design of SJC Tower

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Source: Investor’s report of justified planning of SJC Tower

2. Infrastructure

This project is in District 1, therefore supply capacity of infrastructure such as water supply, electricity, and drainage could be provided sufficiently. However, there is no adequate information about infrastructure system around site of project, but, according to the current transport system, which was set up decades ago, high rise buildings inside the centre will put high pressure on old road network. The more skyscrapers are built, the more space needs for transportation, but there is no space to widen streets, traffic system will suffer more trips, which will be brought by skyscrapers, especially in the research area, the density of skyscrapers will be relatively high.

3. Parking capacity

According to latest concept design, parking capacity inside the building was given including three basements, with total number of seats for parking is equivalent to 272 seats for car, otherwise, there is no spaces for parking around the building site.

There are 163 apartments, 5 floors for hotel with 150 rooms, and 9 floors for retail and commercial purpose in the building2. By preliminary calculation, if the building is full rented, there might be equivalent one seat of carpark for each apartment and about 1 seat for every 5 hotel rooms. There might be hopefully sufficient spaces for parking which serve for SJC independently.

2 According to the design of KENT LUI TACTICS Limited, the date of 28th, September, 2010

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4. Traffic

Traffic criterion should be measured by the two main indicators, those are accessibility and mobility. The building is covered by the four streets as mentioned, in which Nam Ky Khoi Nghia and Le Thanh Ton is one-way streets, therefore accessibility from these two sides is a little limited and not very convenient. The front of the building at Le Loi street is narrow, so access from this side also inconvenient. Only from the side of Nguyen Trung Truc street, accessibility is relatively easy. However, this street is too narrow to serve a very big building like SJC tower.

Traffic flow around this area is assessed rather well. Though, density of transportation means at peak time is relatively high, particularly on Nam Ky Khoi Nghia street, but there is no serious congestion within the radius of 500m. However, the situation might be worse when this tower be built and full rented.

Figure 3: Location of SJC Tower

5. Market Analysis

According to the report of investor, SJC tower will bring apartments and shopping center into real estate market. This project concerns about residential and retail market and ignores office market in CBD. Market analysis in this paper will focus on residential, hotel, and retail market, which was drawn from research and analysis of CBRE (Vietnam).

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Table 2: Change of classified residential segments

Source: CB Richard Ellis Vietnam – Market review Ho Chi Minh city, July 2011

There is a clear decrease of accommodation market in Ho Chi Minh city, while all grade of apartment went down. The most significant grade, which went down more than a quarter, is luxurious group compared to the same period of 2010. From the table above, residential market in 2011 almost stay standing with only small units of mid-end accommodation were brought into the market. The apartments price has almost unchanged during a year with price slightly decreased.

Figure 4: Asking price on residential market

Source: CB Richard Ellis Vietnam – Market review Ho Chi Minh city, July 2011

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According to the chart, after dramatically increasing price in secondary market in the period 2005 - 2007, residential market still stayed and was not as a good field as before to invest of real individual speculators.

Table 3: Change of retail market

Source: CB Richard Ellis Vietnam – Market review Ho Chi Minh city, July 2011

In retail market segment, the table 3 indicates that the real demands on department stores is still available with vacancy rate at 0%. The growth of renting price compared to the same period of 2010 with more than 13% can show that investment into shopping center, especially retail stores is still feasible.

Table 4: Occupancy rate of exist building in District 1

Source: CB Richard Ellis Vietnam –Ho Chi Minh city tenants, June 2011

From table 4, except Bitexco Tower, which has just opened in October 2010, Vincom, Green Power, and Maritime Bank Tower, other high rise building were occupied with dramatic rate (more than 90%). It shows clearly that District 1, Ho Chi Minh city is a really good place for investors in real estate business.

Hotel business in the last two years is shown on figure 5 based on CBRE research. The chart shows an optimistic trend on hotel business with from more 55% to almost 70% of occupancy

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rate in first quarter. Especially, at upper grade in march of 2010, the occupancy rate went over 80%.

Figure 5: Asking price on residential market

Source: CB Richard Ellis Vietnam – HCMC hotel market, 2010

From the market research of CB Richard Ellis Vietnam, particularly focus on District 1, the project are going on right way of investment.

6. Internal Return Rate – Economic Feasibility

Economic calculation for this project should be based on basic information, which was given in Document No 25/ CV – SGKC, June 15th, 2011 of Saigon Jewelry Corporation. Otherwise, the price of this calculation is based on the market research of CBRE. According to information on internet, funding for SJC Tower project is around $137 millions. There is no information about which grade of apartment this project concentrate, this paper will make an assumption which is grade B apartments to calculate.

Table 5: Criteria for economic calculation Type of business Units Price Total Occupancy

rate (%) Retail area US$/sm/month 124.96 17,150 (sm) 95 Hotel US$/room/night 130.00 150 (rooms) 60 Renting Apartments US$/sm/month 12.00* 20,760 (sm) 95 Living Apartments US$/sm 1,016 19,722 (sm) 100 (*): This price is assumption.

Calculation do not include living apartment, which will be sold and have its operation fee.

- Thus, funding for commercial purpose in the SJC tower: 137,000,000 – (1,016 * 19,722) = 116,962,448 (US$)

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- Total annual revenue of commercial with 100% occupancy rate: [(124.96 * 17,150) + (130 * 150 *30) + (12 * 20,760)] *12 = 35,726,208 (US$)

- Operation cost: 35% total annual revenue: 35% * 35,726,208 = 12,504,173 (US$). - Net income with occupancy rate, which is given above: [(124.96*17,150*95%) + (130*150*30*60%) + (12*20,760*95%)] *12 – 12,504,173 = 18,978,725 (US$)

- Break even ROR: 18,978,725 / 116,962,448 = 0.1622

The project will be feasible if ROR ≤ 16.22 %

Sustainable profit at 16% is: 18,978,725/16% - 116,962,448 = 1,654,582 (US$)

7. Social Impacts

The criteria social impacts should look at architectural style, congestion situation in the future, and occupation.

The appearance of District 1 has been changing, with many financial and construction projects are under investment. Modern architecture style is bringing new appearance to CBD in Ho Chi Minh city. However, there are many old valuable building in District 1, many valuable historic building are threatened by new skyscraper projects such as Vincom, Bitexco Financial Tower etc.

In other aspect, skyscrapers like the SJC Tower with very high coefficient of land use (which go up to 16.5) will put very high pressure on old network of streets in CBD. Number of transportation means will significantly rise when more than 20 new projects within the radius of 1000 metres around the SJC Tower. However, in the aspect of occupation generating, these projects will generate thousands jobs inner District 1.

8. Environmental friendly

This criteria would like to evaluate the construction solutions, energy, and material which will affect to micro climate around the building. There is no report and information about construction solution will be implemented to construct this project. According to a forecast, this building will not use materials which transfer solar energy in order to reduce energy consumption. In addition, the building will use massive glass to cover the building, this will trap the heat inside area. The micro climate in this are will be affected by environmental unfriendly buildings like SJC Tower.

CONCLUSION

The SJC Tower is a big project with the funding go up to $137 millions. After seven years since the project has started, it still under final procedure (according to the report of Saigon Jewelry Corporation). Under economic crisis, this project has been delayed and there was a transition of investors. Kinh Do Corporation drawn and transferred its shares to Saigon Jewelry Corporation in 2010, which has affected to the process of the project.

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With this project as well as more than twenty other projects with in the radius of 1000 metres, social problems such as traffic congestion, increase of energy consumption, and urban landscape will be significantly affected. Additionally, strategies of Ho Chi Minh city, that is to develop Thu Thiem to modern financial center of Ho Chi Minh city as well as Vietnam will go inaccurately.

However, in the standing of investors, according to the assessment of CB Richard Ellis – Vietnam and the orientation of Saigon Jewelry Corporation into real estate segments, there are opportunities for investor to get profit from this project. With investor’s view, this project should keep continue and speed up process of investment.

References

CB Richard Ellis (CBRE) Vietnam, (2011), Market View Ho Chi Minh city

CBRE Vietnam, (2011), Ho Chi Minh city Tenants Evening Q2

CBRE Vietnam, (2011), Inflation, Interest, and Investment Midyear review

CBRE Vietnam, (2010), Ho Chi Minh city Hotel Market – Past, Present, and Future

Saigon Jewelry Corporation (2010), Document No 103/CV-SGKC, 25 Oct, 2010

HCMc Department of Planning and Architecture (2011), Document No 479/SQHKT-QHKTT, 23 Feb, 2011

Saigon Jewelry Corporation (2011), Document No 25/CV-SGKC, 15 June, 2011

Drawing Design of Kent Lui Tactics Limited (2010)

Saigon Jewelry Corporation (2010), Report of Justified Planning of SJC Tower