Middle-Income Market Drives Investment

General News 19th February, 2011

Saigon Times- More real estate developers and investors have adjusted their targets to middle income consumers whose increasing demand now looks more practical, while the market for high-end projects are saturated. The Weekly had a talk with Louis Nguyen, CEO of Saigon Asset Management (SAM) over the issue, after SAM’s Vietnam Property Holding recently announced a US$5 million investment in Century 21 Joint Stock Company (C21). Excerpts:

Q: The real estate market did not have a good performance in 2010. How did Vietnam Property Holding VPH perform in that gloomy market?

A: Although 2010 was a challenging year for the real estate market, VPH managed to make a decent return of investment at around 10%. Real estate investment is usually long term and valuations of real estate are not as volatile as the stock market. We were pleased the fund was able to stay positive in an ugly market.

What is your view for 2011?

It depends on what sector of real estate you are in. For residential, affordable housing (US$800-US$1200 per square meter) and the villa segment look promising. However, the condo business continues to experience oversupply, as there are over 40,000 new units available as well as over 10,000 units unsold from last year. The office segment also sees oversupply as rent of many grade A and B buildings continue to soften, which will be good for the tenants. Retail may see a better year with more choices and lower rents in HCM City and Hanoi. Overall, we like affordable housing and retail.

VPH is not big, so how do allocate your investment capital?

We manage two funds, Vietnam Equity Holding (VEH) at US$75 million and Vietnam Property Holding (VPH) at US$50 million. Being smaller can be challenging, but at the same time has its advantages. A US$50 million fund usually invests in about 8 to 12 companies or projects at about US$6 million to US$4 million each, while a larger US$500 million fund normally invests in about the same amount of targets but at larger investment size. This has to be done in order for fund managers to properly allocated resources and effectively manage their portfolio. Therefore, the fund size often dictates how much you want to invest in each target, or what the people in the industry calls “bite size”. As a result, we invest into mid to small size companies like C21, BB, Savimex, CNT and D2D, to get larger equity percentage and gain board seats, while larger funds would invest in the big players like HAG, VIC, QCG and TDS. We prefer listed real estate companies over projects as liquidity is important to our investors. Larger funds are not as likely to be interested in our targets as the “bite size” would be too small for their taste. However, research has shown that small and mid-size companies normally outperform the market during rallies. The companies we invested in are also aligned with our strategy of investments into affordable housing for middle-income earners.

In Vietnam, the middle income accounts for the majority of consum­ers. Whv does SAM start to focus on it just now?

Actually, we have been focusing on this segment since 2008 and executed our strategy into actual investments in 2009. Over the past years, investors and developers paid too much attention to the high-end market with demand driven by speculators and false hope that foreigners and fast rising domestic income would absorb the supply of high-priced villas, luxury apartments, 4-star and above hotels and resorts, etc. As a result, the high-end market today appears saturated. This strategy of targeting middle-income earners is certainly not unique as most other funds and investors in Vietnam also realize the same. The difference will be in execution: how to raise capital, how to find the attractive targets without compensation and regulatory issues, and how to profit.

Why did VPH invest into C21? What was the terms?

C21 has a very experienced management team who are committed to the company through equity interest. Most of the senior management team has been together for over 16 years, since the inception of the company. The company has healthy and steady revenue from commercial buildings and resorts such as the Yoco building in HCM City and the Thap Ba resort in Nha Trang. Most attractive of all, C21 controls over 200 hectares of land in attractive locations, in which 23 hectares in HCM City are fully compensated. C21 plans to list on the Ho Chi Minh City Stock Exchange by the end of second quarter this year. VPH invested over $5 million to purchase approximately 19% of C21.

Will SAM be a board member? How does it help C21?

Under our agreement with C21, SAM will have one representative in the board of directors. Our value adds will be to assist the board with financing options including capital raising for real estate projects as well as preparing for a successful listing by Q2 of this year. SAM will also seek to improve corporate governance, enhancing revenue and profit margins, as well as assisting C21 in working with foreign investors and strategic partners.

With your successful investment of C21 at the beginning of the New Year 2011, could you please share your resolution for the whole year?

Working in the investment management industry, one of the resolutions which stays the same every year will be performance. Returning capital and profit to our investors is always a priority. As we are listed funds, the net asset value (NAV) needs to rise through our investment performance, and our funds’ share price discount to NAV needs to continue to narrow, which we have done this year. On top of that, our funds need to measure well against approximately 30 other funds in Vietnam as well as the Vietnam Index. One of the key criteria for performance is deal sourcing, how to find that superstar, the diamond in the rough that will be the icon investment. Picking a winning horse is not easy, as it’s a science as well as an art, but we have high confidence that our investment team will continue to work hard to find these great deals.

Outside of performance, we focus on building a great management team and a healthy work environment, which our employees can maximize, their potentials. Employee retention, training and advancement programs are all very important at SAM as we invest heavily in the people behind our performance.

Lastly, immortality only applies to fund management companies that are able to raise new, fresh funds. We must launch new fund products and overcome challenges such as the global financial crisis recovery, investors’ sentiment, fierce competition from larger, more powerful funds that are also raising capital, and foreign investors’ allocations into other ASEAN countries. Although these are no small matters, we believe the prospects for the Vietnam growth story continue to be attractive and compelling and we would rather invest here than most other places in the world.