What do the recent double devaluations of the Vietnamese dong mean for the Vietnamese property and real estate sector?
On August 12 and August 19 the State Bank of Vietnam (SBV) raised its VND/US$ reference rate by 1% and widened the trading band initially from +/-1% to +/-2% on August 12 and then to +/-3% on August 19. For the year to date, the dong has lost 5 percent of its value against the US$ which is the largest devaluation per annum since 2011.
The VND’s recent devaluation occurred shortly after the recent Chinese yuan devaluation against the US$. Before the recent devaluation the VND was relatively stable, depreciating by less than 2% per annum against the US$ between 2012 and 2014, and that’s with the backdrop of low inflation and a trade surplus.
Real estate firm CBRE Vietnam said that In its view, the reasons for the recent VND devaluation include the SBV’s efforts to support trade balance, neighbouring countries devaluation of their currencies, China’s devaluation that worsened concerns of Vietnam losing export competitiveness, and the US$ strength against other major currencies with Fed plans to increase interest rates this year.
Impact on Vietnam’s property market
Will there by pressure on residential selling prices? CBRE said that Vietnam residential property market is dominated by domestic supply, with supply by foreign developers only accounting for less than 10 percent, hence the impact of currency movements to prices will be limited. Prices will be affected when currency devaluation creates pressure on inflation.
Historically, property prices have been affected by property supply and demand more than currency movement. The VND has depreciated between -0.9% to 5.8% per annum during the past five years while residential prices in Hanoi have moved between -11% to 13% per annum.
Selling prices might increase at developments with imported materials
Any impact might be limited on undergoing developments with historical costs of imported materials. However for future projects with imported material, there will be pressure to selling prices as costs will potentially be higher, especially if costs are denominated in US$.
CBRE noted that for foreign developers who need to ensure their target profit in US$ is met, there might be pressure to increase selling prices in VND, although risks of exchange rate fluctuations are usually accounted for in financial planning. However, this would have limited impact on the market overall given the limited supply of property by foreign developers in the market.
Increase in domestic demand?
CBRE said that tumbling stocks and gold prices may cause investors to turn to real estate. Properties is traditionally a favourite channel for investment value holding in Vietnam when compared to gold, stocks, currency or bank savings, especially amidst market uncertainty. Speculation on the U.S. increasing interest rate has boosted US$ appreciation and created pressure on gold prices, recently pushing gold price down to a five-year low.
Local investors with cash savings in dong would be moved by selected property investment opportunities, especially those with immediate rental income or guaranteed yields, in order to retain their net worth in the context of probable persisting currency fluctuation.
Foreign buyers may not be drawn by a cheaper dong
Overseas property buyers and investors might be less affected by a cheaper VND, as Vietnam’s properties, even before the recent devaluation, were considered attractive for relatively lower prices and higher yields compared with neighbouring markets such as Thailand, Singapore and Hong Kong. Foreign buyers at this stage are more interested in what and how they can buy, rather than prices, two months after the revised Law on Real Estate Business and Housing Law took effect.
What if China’s yuan is further devalued?
China is currently Vietnam’s largest trade partner, so the yuan devaluation will no doubt affect bilateral trade between the two countries, which has been at Vietnam’s deficit. On international markets, Vietnam exports might lose their competitiveness against China, especially for major products like textiles, garments and seafood. The local market might also suffer as Vietnamese firms were already struggling to compete with cheaper Chinese goods. Now with cheaper imports from China, local products will be even less competitive.
Tourism may see certain impacts as a weaker local currency will discourage the Chinese to travel and spend abroad.
On the real estate front, however, CBRE Vietnam expects to only see limited impact. China has registered around US$ 8 billion of investment in Vietnam but mostly in manufacturing, mining and infrastructure.