With a solid equity background, there appears to be little default or delay to schedules of payments for Apartments. However with low consumer confidence and launches delayed, let’s see how the secondary market performs...
Bears
Primary stock was down -42% YoY and with low inventory and limited launches, was at its lowest for the last five years. Three new entries had started bookings before Tet and officially launched before the shutdown. Before sales stopped D’lusso and Citigrand in District 2 and the West Gate in Binh Chanh achieved an average 79% absorption.
Sales dropped -32% YoY to over 4,700 units. With the majority of 2020 sales prior to the pandemic in Jan and Feb, then absorption was positive at over 50%.
Yields Decline
Social distancing and tourism restrictions decelerated rental demand in HCMC. By end Q1/2020, all Grades suffered drops; -0.7ppts YoY saw Grade A average yields down to 4% and Grade B down to 5.2 percent.
In the coming quarters, with national borders closed, timelines uncertain and more cautious buyers, then rental demand and investor purchasers will be affected. Yields will continue to be pressured in the near term. From 2021, indicators suggest improvements in Grades A and B, with low buy-to-let stock levels and rental demand expected to recover with Covid-19 under greater control.
Under Pressure
Over the short-term the secondary market may come under pressure from outstanding debt. A Savills study of 40 Grade A & B projects showed levels of outstanding purchase contract payments* will increase and peak in Q1/2021. The impact on personal incomes has resulted in increasing numbers of ‘property-flippers’ unable to meet their instalments, in turn pressuring secondary prices.
However in reviews of specific high end developments virtually all schedule of payments have been maintained, with so far, no defaults or extensions required. For cash rich investors however, lower prices and illiquidity present long-term opportunities
Outlook
Social distancing is affecting developer sales strategies, but the biggest effect is on buyer behaviour. Having healthcare, essential services and education nearby and minimising travel has become increasingly relevant High-end buyers will favour smaller, less densely built and more private developments with good amenities. Most major developers have postponed launches or ramped up online sales efforts. Anticipated stock until 2022 is over 147,800 units, of which Grade C with 60% will continue to dominate.
The Government led stimulus, including an emergency interest rate cut, and willingness of mortgage lenders will help mitigate the effects of Covid-19. Developers may increasingly use their balance sheets to provide extended terms or debt, to maintain competitive marketing. Decreasing household sizes and steady 2% pa** HCMC population growth will also help boost longer term recovery.
* Total instalments value within one quarter. All selected projects have standard payment schemes.
** Population Census 2019