Update: 13:48:36 28-06-2018Date Submitted : 10:11:32 27-06-2018
If you are thinking about putting your money into investing into a newly launched (either pre-construction or off-plan) premium apartment, top of your consideration will be the potential upsides of the property and what will the market value of the premium apartment be 5 years from now; how much will the price appreciate and what is the profit you stand to earn.
I have seen too many investors and their real estate agents get caught up making assumptions trying to predict future prices of newly launched premium apartments. The hard truth is that there is absolutely no one in this world that can know for certain what will happen to property prices and values in the future, be it 2, 5 or 10 years. And not even as recent as 12 months later.
A betting man is a person that typically focus on the capital appreciation of new launch premium apartments. Vietnamese being Asians tend to have a predisposition to gamble, and that is why a lot of so called local investors way of investing is to speculate on the prices of premium apartments. You might occasionally win but the possibility to get burnt badly is also very high given Ho Chi Minh City’s short property market cycle (link to another article). Over the years (especially in Ho Chi Minh City’s recent 2006-2008 property bubble) I have seen many investors’ judgement get clouded by the greed of large capital appreciation to their premium apartment investments that they lose focus on what really matters the most: cashflow.
CASHFLOW IS KING
The one single most important rule of investing in all kinds of real estate is that cashflow is king. If it is a pre-construction or off-plan property, there will be no existing cashflow as the property is being constructed, so the figure to look at will be future positive cashflow based on prevailing market income projection from rental after deducting your liabilities such as loan repayment, maintenance and the likes. You should always look at the cashflow potential of a pre-construction premium apartment first, before looking at appreciation, or for a matter of fact anything else about the property. If a pre-construction apartment does not potentially yield a positive monthly cashflow, it is not worth considering. With that being said, here are a few of my insights on capital appreciation.
1. Property acquisition price is more important than the price of disposition
Savvy investors understand the fact that money is made when you buy not sell properties. Let us first look at the point of sale. Assuming that the secondary (resale and sub-sale) market is generally well informed and has professional assistance in the form of real estate professionals, then naturally well priced off-plan properties for sale tend to sell first and overpriced offerings will not sell until the average market price has moved up. A practical expectation of a seller must be to obtain fair market value for his premium apartment. Exceptions are hard to come by and are regarded as flukes, such price extremities should not be relied on.
Next, looking at the point of purchase, there are possibilities that sellers will be misinformed about the market value of the premium apartment or that he might be facing special circumstances that motivates the sale at below market value. Even in the primary market, property developers for whatever unforeseen reasons can also price or give discounts on new launch premium apartment projects to clear inventory. Thus, you will find yourself in a beneficial position as a buyer to capitalise on the opportunity. When buying a new launch premium apartment, you are competing with other buyers for a good deal, but you can always stay on top of the market by being the first to access available property listings and knowing how to identify the best premium apartment projects and type of apartment units.
As you can see, it is at the time of buying when you set yourself up for future profits, and the potential profit margin that is within your control is fully related to your buying decision. Not only in terms of the price of your purchase but also in regards to all other variable factors like location, quality of construction, so on and so forth. Therefore, when buying your next newly launched premium apartment keep in mind that it is the key to your successful investment. Disposition is simply the end game of a property investment cycle and completion of a wise buying decision. When you acquire a premium apartment below its market value, it generates positive income even if you dispose it at the prevailing market price.
2. Past performance is no guarantee for future results
Just because a new launch premium apartment project, an apartment type or a neighbourhood location has perform well by appreciating in value in the past does not mean it will continue to do so in the future. The crazy days of 2006 to 2008 saw primary prices of premium apartments appreciate over 100%, that is a whopping 33% per year. In the years from 2009 leading to 2014 prices corrected by 30% to reflect actual market values. Now in 2016 for the past couple of years we are seeing primary prices of premium apartments increasing at a more sustainable 8% per year.
There are just too many macro and micro factors that can affect appreciation rates that to look at the past and expect history to repeat itself is simply not feasible. However, this is a common mistake I see property investors keep repeating, illustrating perfectly on how blind reliance on appreciation clouds your judgement and lead to a series of bad decision making. As Ho Chi Minh City’s historical price movement of new launch premium apartments prove, market trends can change in a flash.
Performance is useful in calculating the value of a property only as far as providing a future indication in relation to the investor’s earnings. The secret to avoid mistaking past performance for future results is knowing that property investments mostly comes down to cashflows. In relation to property investments, understanding how cashflows are generated, what generates them, how quickly they can expand in the future, and the investment quantum it takes to generate them, you should be able to figure out the rest.
3. Generalised statistics are not representative
Remember to be careful when looking at historical statistics of new launch premium apartment appreciation rates. It is best to keep in mind that statistics can be manipulated in multiple ways to paint a story according to what the user wants them to reflect. The real estate industry is notorious for this.
Additionally, statistics such as average market price has little significance when you are considering a specific premium apartment project to invest in. The real estate industry is filled with many sub-markets each not necessarily following the general trend reflected by average market price. For example, the landed residential housing sub-market might not share the same price trends as the premium apartment market and market price performance of premium apartments in Ho Chi Minh City’s central districts might vary from the City’s suburban regions.
There are so many factors that can affect average prices, and existence of sub-markets can cause the generalisation of average statistics. You should not be caring about the average of the entire market, only using it as an indication of the general economic situation of Ho Chi Minh City’s real estate market. Critically, what you must care about is how that one single property is going to do by drawing comparative analysis with other similar property projects on paradigms such as price positioning, location, amenities, etc.
4. Absolutely no one can predict the future accurately
Finally, I would like to repeat the fact that no one can accurately predict the future value of a property when you are talking about 2, 5 or 10 years from now. Trying foresee the future is pretty much a waste of time and energy. More importantly, it distracts you as an investor on all the most important considerations in new launch premium apartment investing. So, it is advisable to not be overly obsessed on forecasting appreciation values of property when making investment decisions. Anyone who says they know for sure what a property will be worth in the future is lying and should not be regarded as a true real estate professional.
If so how much than will your premium apartment appreciate in value over 5 years?
If you follow my advice stated above, your invested new launch premium apartment will most likely be worth a lot more in 5 years’ time then what you originally purchased it for. As the premium apartment market in Ho Chi Minh City is relatively young, instable, and still lack transparency in transactions, there is no long term (more than 20 years) mean on price appreciation values that we can use as reference.
Therefore, when I need to make an assumption for future appreciation I like to take a considerably conservative approach. Calculating an approximate yearly primary market price increases for premium apartments over the last 10 years, you are looking on average at a 10.4% price increase per annum for new launch premium apartments. So, taking into account mean regression (any price increase or decrease wide off the mean value will always correct itself in the long run), I would suggest you ground your financial projections based on half the prevailing average of primary price increases in new launch premium apartment at 5.2% per annum.
(In Market News by Huttons.vn)
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