10 Things to Know Before Investing in a Ho Chi Minh City New Launch Apartment Project

1) Not all investors make money from investing in new launch projects

The prices of housing in HCMC have increased every year since 2013, even during the recent years affected by the Covid-19 pandemic. In such a bullish marketing, many property investors can be forgiven for thinking that buying a property in a new launch project is a sure-win way to make money from the real estate market. However, be aware that this has not always been the case. Let us take some examples from the not too distant past.

During 2009, Hoang Anh River View a mid-end apartment project in District 2 Thao Dien was launched for an average of USD 1,220 psm on its net floor area inclusive of VAT. Subsequently, few months after the launch, the developer lowered prices because sales were struggling. After which, primary prices for Hoang Anh River View remained relatively stagnant.

Taking another example from Thao Dien neighbourhood, but this time from the premium project segment. We see Xi Riverview Palace being launched for USD 2,170 psm in 2010. However, in 2015 Gateway Thao Dien was launched for USD 1,980. Marking a decrease in the price of new launch projects in the neighbourhood. If you bought Xi Riverview Palace, you would not have been able to sell your unit at a much higher price from what you purchased it for. Simply because potential buyers would have opted for Gateway Thao Dien, which is cheaper and newer for the same standard of project as Xi Riverview Palace.

There are actually more examples of projects in different parts of HCMC that faced a similar situation as Hoang Anh River View and Xi Riverview Palace. Thus, it is not a given that in investing in a new launch property, you will be buying-in at the lowest price nor will you make money. There are of case many profitable new launch projects, but you need to be aware and not make the mistake in investing in unprofitable ones.

2) Investing at different points in a real estate cycle determines profit or loss

Every real estate market moves in cycles; from phase 1 recovery to phase 2 expansion to phase 3 hyper supply to phase 4 recession. This boom to bust progression of the housing market is certain. The only uncertainty is how long each cycle lasts.  

Knowing about real estate cycles can help investors estimate the potential income and capital appreciation of a new launch property. It gives you an insight on the right time to buy. Upon understanding HCMC’s housing market cycle, property investors will be able to deploy the appropriate strategies to maximise returns on investment or reduce losses.

A good example will be the previous HCMC housing market cycle that lasted from 2007 to 2013. If you bought a new launch property at the peak of the market in 2008-2009, you would probably have paid a very high price only to find developers cutting prices soon after. Just look at Diamond Island Phase 1 launch at USD 3,300 psm in 2009. Only for the developer to slash prices to USD 2,960 psm in 2013.

Developers were struggling to sell their new launch projects’ inventory. In such a situation, prices remain stagnant or depressed until HCMC’s housing market bottom-out and recovered in 2013. Prices were estimated to fall on average up to 30% from the period 2010 to 2013. If you had bought when prices were at its lowest in 2012-2013 you would have made very good income as new launch property prices increased in tandem with the recovery of the housing market.

Although it is difficult to exactly time the real estate market, you can at least know where things stand in the current real estate cycles, and this will help you greatly to make informed decisions in property investing. At different phases of the real estate cycle, you should be making the right decision and taking the right actions; being cautious or bullish at different points of the market.

3) Not all new launch project prices appreciate equally

Not all new launch projects register the same percentages of capital appreciation. The prices of some projects remain stagnant or experience very little growths, while others enjoy rapid price growths. As a property investor and for the same investment amount, you would probably choose the new launch property that brings you 25% capital appreciation after 3 years versus one that yields you 5% for the same period.

Taking for example some premium apartment projects in Thanh My Loi Neighbourhood in District 2 at the end of 2014 and beginning of 2015. You will have notice that the developer’s inventory for Diamond Island Phase 1 was selling for about USD 2,700 psm. Around the same time Vista Verde was launched at an average of USD 1,350 psm and The Sun Avenue for 1,550 psm. However, after about 7 years thereabouts forward to 2021, the price of Diamond Island Phase 1 appreciated by only an approximate 7%, while Vista Verde and The Sun Avenue registered 88% and 90% increases respectively.

Using another example, this time mid-end apartments in Thao Dien Neighbourhood in District 2 during the same time period as the above example. You will see that Masteri Thao Dien and The Ascent was both launched for USD 1,420 and USD 1,630 respectively. However, forward 7 years to 2021 the average price of Masteri Thao Dien has risen by 103%, but The Ascent only registered a 51% price increase. As a property investor, if you were able to predict such price movements, which new launch property would you have chosen to invest in back then?

4) Cheaper projects do not always mean a better deal 

Many property investors make the common mistake assuming that cheaper new launch projects tend to appreciate more to catch up with price of more expensive neighbouring projects. However, you need to understand that cheaper projects do not always mean a better deal. In fact, here are many case studies to prove the opposite.

Let us go back to Thao Dien Neighbourhood in District 2. Taking for example Gateway Thao Dien and The Nassim that were launched in 2015. Both projects are walking distance to each other and located close by to An Phu Metro Station on the Metro Line 1. Gateway Thao Dien was launched for approximately USD 1,980 psm on average, while The Nassim was launched for USD 2,980 psm. Most property investors would have thought that Gateway Thao Dien presented a better deal. However, fast forward to 2021, Gateway Thao Dien price appreciated by 65%. But The Nassim despite being more expensive at launch registered a 72% price increase, a larger difference of 7% versus Gateway Thao Dien.

The above was not an isolated case, in the same neighbourhood, both Masteri An Phu and Q2 Thao Dien were launched in the same month in 2018. Masteri An Phu significantly cheaper at USD 2,145 psm, while Q2 Thao Dien was priced at USD 3,260 psm on average. However, it reflected the same trend as the earlier case study. Masteri An Phu saw its price rise by about 36%, while Q2 Thao Dien showed a strong price growth of 43%. A similar 7% difference compared to Masteri An Phu, despite having Q2 Thao Dien having a much higher launch price of over USD 1,000 psm. 

5) Profits are determined at the time of purchase not sale

Movements in the housing market can influence the selling price of a property. In a buyers’ market, there will be downward pressures on property prices. Moreover, as HCMC’s housing market gets more competitive, there is a greater call for transparency regarding transactions. This will ensure selling prices to gravitate towards the market average.

For new launch projects, developers are very good at evoking homebuyers’ emotions to accept future prices. Therefore, in buying new launch properties, determining if the developer’s selling price has margin for future price appreciation within your intended holding period is critical. The right choice in evaluating the prices of new launch properties will improve your internal rate of return of for easier understanding return on investment.

In 2016, two projects were launched in Thanh My Loi Neighbourhood, Feliz En Vista for about USD 2,050 psm and Diamond Island Phase 2 for USD 1,910 psm. In the same neighbourhood in 2018, One Verandah was launched for about USD 2,990 psm. Subsequently, by 2021 the average resale asking price for Feliz En Vista is USD 3,094, Diamond Island is USD 3,085 and One Verandah is USD 3,190. The market price for all three projects is relatively the same.  

However, the rate of increase annually for Feliz En Vista is 10%, Diamond Island Phase 2 at 12% and One Verandah at only 2.2%. This shows that a lower acquisition price of new launch properties, capital appreciation is stronger. Therefore, the potential for a larger profit margin is higher.

Another simpler example would be the 2021 launch of The 9 Stellars project in District 9. The developer implemented at early-bird discount whereby buyers who made a refundable booking early was entitled to a 3 to 5% off the launch price plus interest on the booking amount. This meant that for those buyers who were decisive enough, their purchase price would have been already been significantly lower than their neighbours who were not entitled to the early-bird discount.

6) Buy-to-let helps you pay for your property and save more

Most investors focus on capital gains but neglect the rentability of a property. When buying a new launch property in a developing neighbourhood, it is hard to determine future rental prices. Luckily it is easier for mature neighbourhoods. While it is always exciting to make a large sum of money one shot, during good times speculators (short-term investing) can earn up to 10% within a year. This was witnessed by some projects in District 2 HCMC such as Vinhomes Central Park, Estella Heights, Empire City, Feliz and Vista and d’Edge during 2017 to 2019.

However, rentability of your property is an important safety net when the market cools. For whatever reasons beyond your control that you cannot dispossess your property at a decent profit, and need to hold on to it, you will need to it to be producing income that will help you to progressively recover your investment cost. Especially, if you paid for your new launch property using a bank mortgage loan, the property rental income can in a best situation be equivalent to your monthly financial liabilities to the bank. Or at least, help you to pay-off part of your monthly bank repayment amounts. After all an asset is only as valuable as the income it generates, and every rental payment you collect goes into helping you build equity and more savings for you.

As a matter of fact, even real estate developers switch to leasing out their residential properties when they are not able to sell-out their inventory. Xi Riverview Palace (District 2) completed back in 2012 and RichLane Residences completed in 2018 (District 7) are a couple of such examples.    

7) Be prepared for long vacancy periods and conservative rents after property handover

Nobody can predict what can happen to the general economy and housing market in 3 to 4 years’ time. The typical time period a new launch project is constructed and handed over. Just as how Covid-19 appeared in Vietnam in 2020 and caused a pandemic affecting its real estate markets.

In order to be prudent, property investors should always have the financial reserves for keeping the property vacant for 3 to 6 months by having the funds to pay for building management fees and mortgage payments for those on a bank loan. Large scale projects such as Vinhomes Grand Park (District 9) tend to have a longer vacancy period after handover.

As for investors’ expectation on rental prices, you should always do a conservative estimate that provides for a worst-case scenario where rents have to be cheaper than expected. This helps you plan ahead to have enough cash reserves to make up the difference if you have to repay a bank loan monthly. At least for the short-term, newly handed over projects rental transactions are often at conservative prices. there will be owners who agree to rent out their properties at lower rental prices to stay on top of the competition and reduce vacancy period.

How competitive the rental market affects the vacancy periods and rental prices. And in turn, competition is largely dependent on the location of the project, type of property and how much supply is on the market for lease.

8) Not all units in a new launch project have the same buying demand 

Property investors should note that every apartment project will have many different unit types. From studios to 4-bedrooms, loft, duplexes, penthouses, dual-key units and more. Moreover, every unit will have a different layouts and view of the surroundings. Good views, higher floor levels and perceived strong demand will lead to price premiums. Buying as a new launch, property investors will not be able to do an actual site inspection and will have to rely on their ability to visualise site plans, floorplans and views from different floor levels of the apartment building. This is not an easy task for inexperienced buyers.

Developers being human as well have the tendency to make the wrong assumptions on buying demand of the different unit types. This in turn affects the developer’s pricing strategy. A significant price difference among units can affect a property investor’s decision. If a comparatively unpopular unit is priced closely to an in-demand unit, this will see buyers’ avoiding that unit (unless the project sells-out). In turn, if an in-demand unit is priced too optimistically at a wide price gap from unpopular unit types, it too will be avoided. The same can be said with the price premium on an apartment building’s floor levels.

A recent example would be a new launch luxury project called Thao Dien Green in District 2. Launched in 2021, this apartment project had 2 distinct views. The first towards the Saigon River, and the second overlooking the Thao Dien Neighbourhood. Of cause the river view will come at a price premium. But it was only priced on average 5.6% premium over the neighbourhood view units. This led to high demand for river view and nearly no demand for the neighbourhood view units.

9) Investing in HCMC’s apartment market needs a mid to long-term horizon 

Investing in Ho Chi Minh City’s new launch apartment market needs a mid to long-term horizon. Here if the time period taken from acquisition to disposition is from launch to property handover (over a span of 3 years or so), we regard it as short-term. Any time frame from 5 to 10 years is regarded as mid-term and long-term is anywhere upwards of 10 years. Property investors should be very clear on the difference between speculation and sustainable investing and its associated impacts.

Short-term investing is another word for speculation or flipping the new launch property for a quick profit. By have a short-term mindset, you will be working on a fine margin with limited buffer for a downturn in the housing market. This can possibly lead to panic selling, if the market suddenly takes a downturn.

If you bought a new launch property sometime between 2008 to 2011, you will realise that soon after you bought the property, prices continued to fall. At that time if you wanted the flip the property in the short-term hoping prices will pick up and did not have the finances to hold onto the property, you would have likely had sold for a loss. Property investors with a mid to long-term horizon would have fulfilled all the instalment and hold on to the property until the housing market recovers to earn back their investment amount.

Let us relate to current times. Prices of new launch projects have been increasing since 2013 until 2021. While demand is still strong, there is a lingering feeling among property investors that the HCMC housing market’s price peak will be hit just about any time soon. And after which, new launch prices will gradually decline. Due to Covid-19, the market is experiencing price increases but at a declining rate. Short-term property investors should take extra caution when buying during this period as their 3-years or so investment time frame will not see prices recover in time if the market suddenly tanks. Inversely, mid and long-term property investors have a safety net since they are prepared to hold the property for up to 10 years or more. By that time HCMC’s housing market will have probably recovered.

10) Always spend time to do your due diligence on the new launch project

In as semi-transparent real estate market such as Vietnam. Property investors should spend time to do due diligence to identify the proper party with whom a new launch property’s Sale and Purchase Agreement (SPA) should be executed. The last thing you want is to find out that you have no claim over your property as you did not enter into a contract with the rightful owner of the project. Due to the cost intensive nature of the development of new launch projects, it is not unusual for such properties to have been mortgaged to financiers.

Note that only the legal owner of a project can sell you products built on its land. To be clear cut, entering into a SPA with a developer who has no ownership title to the land and a recognised land use right to develop the land may have serious consequences for buyers. Conduct thorough due diligence on your own on the specific new launch project shortlisted. In addition, property investors should not leave the purchase process to chance. Always find time to visit the project site to ascertain that indeed it truly exists and that construction have begun. 

Last but not least, the fact that the developer marketing the sale of the project is reputable and renowned is not a reason for you to skip the process of conducting a detailed due diligence. In Vietnam, especially in Ho Chi Minh City, many new launch projects are stuck in various stages of execution due to legal issues, severely delaying its completion and affecting investment prospects of property investors.