Massive hotel and resort construction in Vietnam can easily elicit disbelief, and the ensuing dubiety or distrust.

The view from Halong Bay until recently was still pristine. Today it’s a huge building site. The new image of Vietnam rolls through its resort destinations.

It all seems too much too soon. Can all those new hotels, resorts and blocks of condotels be filled, even as recent openings throughout Vietnam’s popular tourist spots are being absorbed by the market? Is it sustainable or will ghost buildings be a major tourist attraction one day? Could it all really be tourism driven ?

For some, the pace is so unreal that the possibility of money laundering by rich Chinese or Americans have even been murmured to Skift. An owner operating a small hotel in Phu Quoc went down that route in trying to come to terms with calculations he said that didn’t make sense — the kind of room rate and revenue per available room (RevPAR) that would be needed to get a return, the critical labor shortage which is shooting up costs faster than you can say “high rise,” the investment needed to ensure a quality product long after it’s been built, he could go on.

But consultants and legal advisors to hotels Skift spoke to all say there is a method to the madness, with the exception of the condotels phenomenon. The hybrid of hotels and condominiums is the only “crazy” thing about the boom currently and could indeed get ugly for small retail investors, say consultants.

“One must be careful not to apply Western logic to issues and situations in Vietnam, especially where real estate is concerned,” Kenneth Atkinson, executive chairman of Grant Thornton Vietnam, told Skift.

More amazing than Thailand

Vietnam is actually more amazing than Thailand, at least in arrivals growth history.

It took Thailand 15 years to get from six million to 15 million arrivals. Vietnam? Only seven years, said Atkinson.

Last year’s 15.5 million international visitors also shows that Vietnam doubled its number of arrivals in just three years. A third of arrivals are from China. South Korea, Japan and Taiwan and the US are others on Vietnam’s top five list.

“The visitor arrival numbers are off the charts, crazy but true, there’s no ignoring or denying that,” said Eric Levy, managing director, Tourism Solutions International.

Why are arrivals so strong? For one, it’s a great place to visit and/or do work, said hospitality advisors.

“Vietnam is a very attractive destination both for tourists and businessmen,” said Michael Evanoff, chairman of Marlborough Hospitality Services. “For tourists, there is a diverse, lively and deep culture, plus many historic attractions and lovely beaches. For businessmen, the country is rich in natural resources, needs infrastructure investment, and has a population of almost 100 million people with a rising standard of living and consequently a rising demand for goods and services.”

A big driver of corporate travel is a manufacturing boom, as multinationals diversify their operations across developing Asia in a so-called “China + 1” strategy, according to JLL Hotels and Hospitality.

In the leisure segment, Vietnam’s resort destinations such as Danang, Nha Trang, and Phu Quoc are already taking business off Thailand, according to Bill Barnett, managing director, C9 Hotelworks Thailand.

“During the Boracay closure, a lot of regional leisure travel business moved to Vietnam,” observed Barnett.

“In the end, Vietnam has figured out what Thailand’s mojo is, and its geography and easy door-to-door flying time makes it a player in the long term.”

A virtuous, not vicious, cycle

As the Vietnamese economy gained confidence, the government not only started investing in infrastructure that supports travel and tourism, such as airports and roads, but facilitated growth through other measures, such as visa exemptions, said STR’s area director Asia-Pacific Jesper Palmqvist.

As of January, regular passport holders from 24 countries do not need a tourist visa.

Vietnam also relaxed real estate ownership laws for foreign entities and individuals in 2015. This, according to consultants, was the catalyst for the hotel and residential boom, coinciding as it did with interest rates that were at historic lows.

“There is a lot of money sloshing around looking for a place to land, as it makes little sense to keep it in a bank or to buy bonds, or to lend it out. This is one reason for increased foreign hotel investment in Vietnam, along with (a) a demonstrable demand for more hotels, and (b) a much more favorable regulatory climate for foreign investment,” said Evanoff.

There is pent-up demand as well. “I have been involved with hotel deals in Vietnam that took years to mature, and with many that never matured, due to issues like government restrictions on foreign investment and ownership, and land title issues. With some of these hurdles becoming lower, it is no surprise that more hotels are getting built,” Evanoff added.

According to STR, Vietnam has 781 hotels with 93,261 rooms currently and 124 hotels with 38,683 rooms in the pipeline.

Grant Thornton’s Atkinson added that it is the main resort areas such as Nha Trang, Cam Ranh, Phu Quoc, Danang/Hoi An and Sapa that have seen massive development, much less in the key cities of Hanoi and Ho Chi Minh City, the latter of which is now under supplied.

But with a 42 percent increase in the number of rooms to come, everyone expects the days of homogeneous growth performance throughout key spots to be over.

Palmqvist said it would be more diverse and volatile, depending on location. Vietnam, however, remains attractive, he said, a view shared by others interviewed for this article.

Said Palmqvist: “It’s fair to say that all this new supply will create some tightening in performance in the next two years, but it does not take away the fact that Vietnam is still an attractive market for investors. We continue to see interest in various projects, both from domestic and foreign investors, in resorts and city hotels and in various hotel classes.”

Winners and losers

Markets that win will be those that have good airport capacity and international arrivals, believed Atkinson.

He gave the example of Phu Quoc, which has about 17,500 three-star to five-star rooms (including pipeline) and an airport with a capacity for 2.5 million passengers per annum, already exceeded.

“If the average stay is three days and occupancy is 1.8 per room, then 2.7 million visitors will be needed to attain an average 70 percent occupancy for the three-star to five-star segments. Currently 90 percent of the 2.8 million visitors are domestic travelers, many staying at low end/budget hotels. The maths I think are self explanatory.”

Agreeing, David Keen, CEO of Quo Global, said: “Phu Quoc and Danang are most exposed as destinations that are being massively over-built. There is a lot of high-end products going into both, without a lot of high-end footfall. Both are already a buyers market, where exceptionally high-end product is available at significantly reduced rates.”

What appears to distort Vietnam’s hotel boom as being off the rails are the condotel developments in these resort destinations, and in Cam Ranh, Nha Trang and Ha Long, that offer local retail investors insane guarantees of nine to 10 percent returns from rentals, for nine to 10 years.

Built largely by local developers, these projects are funded through pre-sales, thus limiting the developer’s risk as it will have zero capital exposure at the end of the development period other than the guaranteed returns to buyers, said Atkinson.

“However, with the potential of a looming oversupply in many resort areas, then there is the risk of having to fund losses on projects during the early years of operation and whether the developers have adequate financial resources for this potential scenario,” warned Atkinson.

Added Levy, “Well-located and conceived urban commercial properties and resorts in areas that are building in a sane, sustainable fashion will do well. The disasters are the condotels. The music will stop for some and we will see projects that are suspended or abandoned, a game of musical chairs that will end ugly for some retail investors.”

So ghost buildings tours are a possibility after all.

But one never knows. The condotel supply is currently less than 10 percent of the pipeline, according to STR. Vietnam is eyeing some 20 million international visitors by 2020 and there are bright spots such as the entry of new carriers AirAsia Vietnam and Bamboo Airways, and new international brands, which are expected to boost marketing and promotion.

Among them are Mandarin Oriental, Movenpick, Melia, Ramada, Best Western Premier, Holiday Inn, Doubletree by Hilton, Courtyard by Marriott and Hyatt Place.

If the government continues to invest in infrastructure to improve access and ease of entry for tourists, the bubble may not burst.

Why money launderers would stay away

As for the money laundering murmurs by rich Chinese and Americans, the general view is if there was, it’s “not the overriding development boom/trend,” as Robert Hecker, managing director, Pacific Asia Horwath HTL, said.

Added Levy, “I do imagine that significant funds from China were seeking a home outside the PRC and why not in a neighbor in an industry that is showing a seriously good, solid and sane macro-economic story.”

Evanoff said it would take a stupid bandit to do so. “Upmarket hotels take three years to develop, and then three years to start producing a return normally. Someone wanting to launder money would not have the patience for this, plus with a new hotel, there is absolutely no guarantee of success.

“Also, as to China and the United States, it is very difficult these days for Chinese individuals and companies to get money out of the PRC, while US individuals and companies are increasingly hemmed in by anti-corruption laws, bank regulation, international treaties relating to information-sharing, and technology. Fund transfers are increasingly easy to track. I just do not see black money as a source for hotel investment in Vietnam, or almost anywhere else.

“Oh sometimes a construction contract is grossly inflated to facilitate money laundering, but this normally involves local or government investment, and a local contractor.”

By Raini Hamdi - Skift - January 15, 2019