Condotels boom but concerns emerge

Mr. Rudolf Hever, Director of Hotels at Savills Asia Pacific, casts his eye over Vietnam’s condotel market.
by Rudolf Hever, Director of Hotels, Savills Asia Pacific
The growth curve of tourist arrivals to Vietnam continues ever upward. In seven years, international arrivals by air doubled to 10 million in 2016 and domestic tourist numbers jumped from 28 million to 62 million. Such figures are driving remarkable growth in the second, or holiday, home segment, with condotels taking center stage.
Nha Trang, Da Nang and Phu Quoc: Stealing the spotlight
Vietnam’s key coastal tourism destinations – Nha Trang, Da Nang and Phu Quoc Island – have all benefited from this surge in visitors. Tourists to Nha Trang rose 23 per cent in 2016 compared to 2015, with 1.2 million international visitors, a trend improved upon in Da Nang, which welcomed 33 per cent more visitors, including 1.7 million international arrivals.
The government is playing an important supporting role in the country’s tourism sector. Vietnam now has nine international airports that all seem to be constantly being upgraded with new terminals opening and runways extended. The country’s visa policy has been streamlined and improved upon, making it easier and cheaper than ever before to visit the country.
Although inbound numbers are impressive and the performance of hotels and resorts in sub-markets have generally improved, it has not been at the pace arrival numbers would suggest. The last few years have seen robust activity in resort real estate development and this year we are starting to see the implications of all this new supply. Resort and hotel competition is intensifying and as it is still in its early stages we anticipate it only getting hotter. For local and international guests this will mean an ever-increasing choice of options across the budget spectrum as resorts compete with fresh appeals. With exciting new and established brands to experience and an abundance of new properties to choose from, at no doubt often heavily discounted rates during start-up periods, the next couple of years will be a great time to discover or rediscover Vietnam.
This is particularly true in Nha Trang, Cam Ranh, and Phu Quoc Island. Growth in these markets has been in the double digits, and with an abundance of new resort and hotel properties in the pipeline will no doubt, at some point, have to overcome a case of supply “indigestion”, just as Da Nang coped with a few years ago. Owners may need to curb their expectations for future performance and perhaps even prepare for leaner years ahead.
Second homes and condotels: Market sweethearts
Another segment that has grabbed and held market attention is second, or holiday, homes. Products include branded and non-branded villas, second home condominiums, and condotels (a blend of hotel and condominium: resort hotel levels of service with the independence of a condo). There are approximately 36 second home properties in Vietnam, with over 7,000 affordable to luxury units. Khanh Hoa, Da Nang, Phu Quoc, Ho Tram, Ha Long and Quang Nam are set to see second home supply of more than 17,000 units over the next three years. It will take time for inventory as significant as that to be absorbed by the market, with perhaps another case of “indigestion” to overcome. Supply in main coastal destinations will account for 65 per cent of stock by 2019.
The standout, mainly in coastal locations, is the profusion of condotel developments. The fervor developers are showing for building these units is starting to raise concerns about future oversupply but the market is so far accommodating them and, with that, more are planned. We are seeing more and more projects announced, all seemingly trying to outdo one another in terms of scale, appeal, and often outlandish promised returns. The guaranteed rental return in Vietnam can be as high as 12 per cent, guaranteed for eight years.
Developers are quick to name projects located in or close to a destination as condotels but the concern is the “tel” part of condotel. In many cases, we see little regard for the hotel part of the project and the long-term management implication this entails. The concern is that to have any chance of matching promised returns, projects need an impressively performing hotel component. But in most cases this seems to be missing or, at best, incomplete.
Guaranteed return products become riskier for buyers when less experienced developers enter into large-scale projects with insufficient equity or by not being fully supported by banks. Buyer risk tends to appear after completion and mainly in operation. If the guaranteed return is higher than achieved cash flow, the developer is then required to underwrite additional funding, potentially for the entire period of operation. In several cases, guaranteed return is being incorporated into the planning stage and reflected by higher selling prices in order to manage the long-term return commitment. This structure could be attractive both for buyers and for developers but needs to be very well planned, requiring careful analysis before being implemented.

Source: Vietnam Economic Times.