Looking for the hottest residential real estate in Asia? Go to Ho Chi Minh City.

Ever since Vietnam allowed foreigners to own apartments in July 2015, its luxury housing sector has been on a tear. Three years ago, when local developer Dai Quang Minh launched the first residential complex in the Thu Thiem area – a 657 hectare grassy plot across the Saigon River from the central business district – the going rate was $2,000 to $2,800 per square meter. The Metropole, a nearby project slated for June, will likely cost more than twice as much, between $4,500 to $6,500 per square meter.

Last year, luxury home prices soared 17 percent, while the rest of the residential market stayed largely flat, says Dung Duong, a research analyst at CBRE Group Inc., a real estate services firm.

It’s no surprise, then, that most Vietnamese are priced out. In 2018, only 23 percent of luxury homes were sold to locals, outpaced by mainland Chinese, CBRE estimates. South Koreans and Hong Kong residents followed closely behind.

Priced Out

Last year, Chinese were the biggest buyers of Ho Chi Minh City's luxury condos

To the Chinese, Ho Chi Minh City is irresistible. As early as 2016, marketing brochures touted the city as Vietnam’s Shanghai, and Thu Thiem as a newer Pudong, the glitzy central business district that rose from abandoned farm land. As they see it, Vietnam now is China a decade ago – a politically stable Communist country that can reap riches through exports and a friendly relationship with the U.S.

And for Chinese investors used to sky-high prices at home, Vietnam's luxury apartments seem like a good deal. Earlier this year, China Vanke Co., the third largest developer on the mainland, launched a riverside project in Shanghai’s Pudong with units priced at more than $15,000 per square meter, more than double the Metropole project.

Ride the Wave

Since 2009, home prices in Shanghai have risen 270 percent

There’s a major pitfall to that logic, however. Vietnam today looks nothing like China did 10 years ago.

There’s little point to a luxury condo without nearby infrastructure to support it. Keppel Land Ltd.’s Estella Heights is a case in point. Advertized for its family friendly location – across a busy highway is a residential area full of international schools and small cafes – the apartment complex has beautiful rooftop swimming pools and a children’s play area. Yet, right now, there’s no overhead bridge to walk to the school district. Plans to start one are hazy at best.

As for that metro every real estate agent is talking about: It’s being delayed – again. The city broke ground on its first subway line in 2012, but financial problems, such as ballooning costs and unpaid bills to Japanese contractors, keep coming. The finish date was pushed to 2020 from 2017, and even this deadline may not be met. Shanghai, in contrast, finished its first metro line on schedule in 1995. It’s built a dozen more since.

From a fiscal viewpoint, the comparison is equally stark. At 61 percent of GDP, public debt is edging close to its legal cap of 65 percent, giving Hanoi limited means to spend on infrastructure. Ten years ago, China had much more flexibility. To insulate its economy from the fallout of the financial crisis, Beijing launched a 4 trillion yuan ($586 billion) fiscal stimulus, building roads, metros and railways that transformed Chinese cities into efficient transportation hubs.

Even if Vietnam decided to lift its public debt ceiling, there’s very little wiggle room. A dwindling global trade pie puts the nation’s current account surplus at only 2.7 percent of GDP. China, on the other hand, had a surplus of more than 10 percent a decade ago. At that point, Shanghai looked like a big construction site; Ho Chi Minh City feels alarmingly quiet right now.

Back in 2006, apartments at riverfront locations in Shanghai’s Pudong district went for roughly $1,800 per square meter. In Ho Chi Minh city, you’re paying more for 20-year-old infrastructure. This market is getting too heated – and yet 80 percent of all buyers last year said they purchased for investment purposes. What gives?

Meanwhile, all of this is bad news for the Vietnamese. At this pace of foreign buying, Ho Chi Minh City is looking like it’s being colonized all over again.

By Shuli Ren - Bloomberg - April 9, 2019