Duong Duong

Is there hope for Vietnam’s messy condotel market?

A wave of condotel investments began in early 2015, when real estate developers launched numerous condotel projects. Similar to hotel apartments, these condominiums are primarily aimed at rental business. Back then, condotel projects were alluring for several reasons, including prime locations in cities with growing tourism potential, and strong marketing activities by developers. Developers boasted of high-end facilities and designs, flexible business models, and especially, guarantees on lucrative rental profit returns (in the form of business partnerships with the developers), with attractive rates of 8-12% per annum. These factors convinced investors to open their wallets. However, this business model has revealed various shortcomings, particularly the inability to yield the promised returns.

 Condotel – A ‘honeymoon’ cut short

According to the Ministry of Construction, the condotel investment trend reached its peak in 2016 – 2017 and began to slow in 2018 – 2019. Statistics from Vietnam Association of Realtors (VARs) showed that from 2015 to 2018, approximately 30,000 condotel projects were sold in Nha Trang, Danang, Phu Quoc, and Ha Long. Since the third quarter of 2018, condotel transactions plummeted dramatically. Throughout the first six months of 2019, there were 11,855 condotels nationwide; yet, secondary investors were only able to trade 3,000 units, barely one quarter of the total amount of condotels in Vietnam. In 2019, the number of newly appraised condotel projects fell 80% compared to the market’s “golden time”.

The condotel fever has ended. Many secondary investors say they feel “hung out to dry”, since the new business model has failed to meet original expectations and promises.

All things considered, with thousands of condotel projects booming in major cities and tourism centers, all strategically located at the best locations with strong support from local authorities and specialised management agencies, secondary investors can’t be blamed for turning away. Moreover, developers were always searching for new models to promote business growth, regardless of the legality of condotel’s title deeds. At present, there is no regulation in the existing Land Law for the condotel’s “pink book”, as such certifications are only issued to apartments and houses with stable, long-term ownerships, which form residential units. Meanwhile, condotels are tourist apartments located within commercial accommodation projects with limited lease terms (according to Article 48 of the Tourism Law). Despite this fact, many regions arbitrarily issued limited-term title deeds for condotel projects, thus “bending” the existing regulations. In the Central region, which is considered a tourism centre, in 2018, up to 50 land areas were licensed by local authorities for non-residential developments of resorts, tourism villas, and condotels, indicating that the condotel market was somehow “given the green light” albeit in grey areas of legality.

Falling for developers’ promises of lucrative profits, secondary investors hurried into condotel investments, despite the unresolved legal challenges that dragged on for five years. Investors believed that the condotel model, like Airbnb business models, were facets of the growing sharing economy with thriving potential if properly promoted by e-commerce models integrated with Facebook, Luxstay, Agoda, etc.

However, the guaranteed 8% – 12% return per annum, as stated in profit-sharing partnership agreements between project owners and individual investors, couldn’t be sustained. First of all, “profit sharing” meant only a small piece of the cake, after developers had cut corners with secondary investors. Most developers even calculated the guaranteed profit returns into the selling price, which individual investors then mistook for actual profits. However, these guarantees couldn’t last long in various projects, with some only surviving months to a year. Many projects failed to meet delivery timelines, or made empty promises on profit sharing.

Self-sufficiency in the face of adversity

Thousands of condotels nationwide still exist on loose legal grounds while developers continue to push sales, even though the number of projects have dropped over time due to secondary investors’ trial-and-error learning curve.

Investors have realised it is hard for condotels to yield high returns, since this type of business requires extensive utilities and management capabilities similar to a hotel or resort in order to survive and compete. Meanwhile, post-sale, developers often fail to fully operate as a hotel. Even if the projects can be fully operational, it is challenging to reach the committed profit margins.

The ‘honeymoon’ phase between developers and condotel buyers has ended on a bitter note, sometimes with resentment. The percentage of buyers reclaiming their rights to self-management and to termination of partnerships and profit sharing with developers is growing. However, this self-management business model isn’t smooth-sailing. With individual investors working on their own, it is quite challenging to build a complete operating model that can be evenly profitable. At MT condotel (in Nha Trang, Khanh Hoa), the buyers’ separate operations have created chaotic scenes throughout the entire building.

Even without the impacts of Covid-19, the condotels’ self-management businesses have become extremely difficult due to oversupply. This situation is expected to worsen in the future with declining trust in condotels.

Yet, “in chaos lies opportunities”! When the condotel partnership models perish, the real estate market’s competitive nature will give momentum to new business models, especially if individual investors can carefully strategize their own forms of operation. As long as e-commerce platforms thrive, individual investors still have a marketing playground to attract customers, riding on the wave of the post-pandemic recovery of the tourism and aviation industries.

Another good news for existing and new condotel investors: the Ministry of Natural Resources and Environment has confirmed that there is a clear and transparent legal corridor for issuing the certificate of ownership for qualified condotels and villas. Document no. 703/BTNMT-TCQLĐĐ dated 14th February, 2020 is the legislation providing detailed guidelines for the investors to proceed.