What Does the Dong Devaluation Mean for Vietnamese Real Estate?
August 26, 2015.
- What happened to the VND
On 12 & 19 August, the State Bank of Vietnam (SBV) raised its VND/USD reference rate by 1% to 21,890 (19 August), and at the same time, widened trading band from +/-1% to +/-2% (12 August) and to +/-3% (19 August). Year to date, the dong has lost 5% value against the USD, largest devaluation per annum since 2011.
The VND’s recent devaluation occurred shortly after the recent Chinese yuan devaluation against the USD for three days running from 11 to 13 August. Before the recent devaluation, the VND was relatively stable, depreciating less than 2% per annum against the USD in the period of 2012-2014, with the backdrop of low inflation and trade surplus.
In our view, reasons for the recent VND devaluation include:
- The SBV’s effort to support trade balance which currently records a deficit at USD3.52 billion.
- Neighboring countries have devalued their currencies strongly last 12 months (up to 28%).
- China’s yuan devaluation has worsened concern of Vietnam losing export competitiveness.
- The USD has strengthened against other major currencies while Fed plans to increase interest rate this year.
- Impact on Vietnam’s property market – Pressure on residential selling price?
- Limited impact on residential selling price
Vietnam residential property market is dominated by domestic supply, with supply by foreign developers only accounting for less than 10% hence impact of currency movement to prices would be limited. Prices would be affected however when currency devaluation creates pressure on inflation.
Historically, it is observed that property prices have been affected by property supply and demand more than currency movement. The VND has depreciated between -0.9% to 5.8% p.a. past 5 years, while residential prices (in Hanoi) have moved between -11% to 13% p.a.
- Selling price might increase at property developments with imported material
Impact might be limited on undergoing developments with historical cost of imported material. 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 USD.
To foreign developers who need to ensure their target profit in USD is met, there might be pressure to increase selling prices in VND, although risk of exchange rate fluctuation is usually accounted for in financial planning. However, this would have limited impact on the market overall, given the limited supply of property products by foreign developers in the market.
Increase in domestic demand?
- Tumbling stocks and gold prices may cause investors to turn to real estate
Properties is traditionally a favorite channel in investment value holding in Vietnam, as compared to gold, stocks, currency, or bank savings, especially amidst market uncertainty. Speculation on the U.S. increasing interest rate has boosted USD appreciation and created pressure on gold price, 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 yield, in order to retain their net worth in the context of probable persisting currency fluctuation.
- Foreign buyers may not be too much drawn by a cheaper dong
Foreign buyers 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 yield, compared with neighboring 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 happens 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 its competitiveness against China especially for major products like textile and garments and seafood. 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 impact as a weaker local currency would discourage Chinese to travel/spend abroad. On the real estate front, however, we only see limited impact. China has registered around US$8 billion of investment in Vietnam but mostly in manufacturing, mining and infrastructure.
Dung Duong MRICS
Director, Head of Research and Consulting, Vietnam
dung.duong@cbre.com
An Nguyen
Associate Director, Research and Consulting, Vietnam
an.nguyen@cbre.com
Hanh Nguyen
Manager, Research and Consulting, Vietnam
hanh.h.nguyen@cbre.com
