Real estate mergers, acquisitions heat up

Monday, Jun 10, 2013 10:24

Vincom A Trade Centre in HCM City was sold at $470 million. — Photo

(Biz Hub) —  The real estate community was all at witter last week after learning that Vingroup (VIC) had transferred its upscale Vincom A Trade Centre in HCM City for VND 9.823 triillion (US$470 million).

Vingroup transferred the entire capital of one of its member companies, Future Company, to the Viet Nam Infrastructure and Property Development Group (VIPD), a domestic company that operates in many areas, including real estate investment and development.

VIPD now owns 1.1 million square metres of land in prime locations throughout Viet Nam, including HCM City and Da Nang.

As part of the transfer, Vingroup sold 100 per cent of Future Company's equity share in one-member limited services as well as commerce and investment units.

The Vincom A shopping centre, located in the heart of HCM City's downtown area, is bordered by Le Thanh Ton, Dong Khoi, Le Loi and Nguyen Hue streets in District 1's Ben Nghe Ward.

Vingroup's transfer of Vincom Centre A is considered to be one of HCM City's biggest Mergers & Acquisition-related transactions in recent years, with after-tax profits of nearly VND3.9 trillion (US$187.3 million).

Prior to this transaction, Vingroup had transferred all of its VND2.32 trillion worth of capital previously invested in VinCom Ba Trieu to the Bank for Investment Development of Viet Nam in 2006. It then sold VinCom Trade Center B to the Technological and Commercial Bank (Techcombank) in 2012.

Vingroup's recent transactions are having a ripple effect on other property investors. That is, they are learning from Vingroup to be more flexible in selling their valuable assets, particularly when they can get a good price. By doing this, they can accrue more capital resources for future projects.

Although the domestic property market remains inactive, particularly in the retail-property segment, real-estate transactions under the Mergers & Acquisition (M&A) form are thriving.

Many projects are changing hands as companies restructure their investment portfolios.

In the first quarter of the year, the Dat Xanh Real Estate Construction and Service Joint-Stock Company, for example, spent VND1.2 trillion to buy a 3.2-ha property project with 2,000 apartments from the Sai Gon General Service Joint-Stock Company.

Meanwhile, in the north, the Thu Duc Housing Development Corp pulled out of the Dong Mai-Ha Dong project in Ha Noi's Ha Dong District after selling its stake in the project for VND80 billion ($3.84 million).

VinaLand, a real estate fund managed by VinaCapital, sold its stake in an office building project at 30 Nguyen Du Street in Ha Noi, after four years of investment, for US$3.3 million.

The number of property projects changing hands this year is expected to increase by the year-end, meaning that the supply and demand of M&A transactions in the real estate sector would rise even further.

However, the legal status of property projects as well as accurate assessments will be important factors that decide the success of transactions made under the M&A form.

Credit growth

According to the State Bank of Viet Nam's Monetary Policy Department, as of May 22 this year, the banking sector had achieved credit growth of 2.29 per cent compared to the figure recorded in late 2012.

With such growth, the banking sector's credit growth would have to rise to at least 1.25 per cent per month in the eight remaining months of the year to reach its target of 12 per cent for the entire year.

However, to do so, the banking sector would need growth of over 1 per cent monthly, as the property market is still sluggish and most enterprises continue to be cautious about capital usage. Besides, aggregate demand in the economy remains weak.

To spur credit growth, new reductions in the lending interest rate should be taken so that it is hovers around 10 per cent.

This would encourage enterprises to borrow capital to invest in production and business activities.

But many Vietnamese enterprises, due to the recession, cannot absorb money even at a lending interest rate of zero.

For many of them, interest rates are not their biggest problem. Instead, the biggest obstacles are the rising volumes of inventory and the slump in the consumption market.

But the fact remains that the majority of domestic enterprises need capital support from the banking system. Bank loans still make up a major part, up to 70 per cent, of enterprises' capital structure.

Thus, if the lending interest rates were cut, it would offer an opportunity for many enterprises.

Since 2012, the central bank has taken several measures to improve the economy and encourage domestic production and business activities. It is considering capping the lending interest rate to stimulate credit demand.

However, to ensure the central bank's efforts are worthwhile and enterprises can access low-cost loans, it is necessary to set up closer cooperation between all banks and enterprises as well as the government's support.

It is also important to recognise that banks are also businesses. Although they want to give capital support to enterprises, they also have to keep their capital intact.

To ensure that their investments are secure, banks have been applying strict conditions to borrowers. As a result, only 30 per cent of all enterprises that need to borrow money can qualify for a loan.

To help both sides, the Government should offer credit guarantees for enterprises, particularly those that have highly feasible projects or development and investment strategies in thriving industries.

On the enterprise side, they need to show that their projects can be successful and that their production and business activities can generate a stable source of revenue.

Market supply and demand has to become more balanced, which would help companies settle their inventories. To do this, consumer confidence must be improved as well.

Local, foreign retailers

With a growth rate of 14.8 per cent from 2007 to 2012, the country's purchasing power rose to a value of US$89.7 billion early this year. Such growth has set the stage for an expected surge in retail property investment.

Retail revenue is expected to grow 8.5 per cent a year on average from now to 2015.

Currently, Viet Nam has 130 trade centres, 717 modern retail outlets, more than 1,000 convenience shops and 8,600 traditional markets.

However, the percentage of such retail stores in the country remains below 20 per cent, much lower than the figure in other countries in the region, such as Indonesia, Thailand, Malaysia and China.

Still, opportunities for growth abound, for both foreign and domestic retailers.

However, there will be competitive pressure, especially from major international retailers eyeing the local market and trying to establish a foothold here.

In recent years, foreign and domestic retailers have responded by taking several measures, including opening more supermarkets.

One local company, Saigon Co.op (Saigon Union of Trading Co-operatives Limited), has been especially active.

Since its opening in 1996, it has become one of the biggest retailers in the country, with 61 supermarkets nationwide.

This year, it plans to open 10 more supermarkets in HCM City and neighbouring provinces this year.

Another major domestic retailer, Vinatex Fashion Co. Ltd, under the Viet Nam National Textile and Garment Group, has taken advantage of sharply reduced rental prices (of 40-50 per cent) to open 200 Vinatex Mart stores by 2015. The current number is around 100.

While domestic retailers are expanding, foreign companies are also gobbling up retail market space.

This year, Malaysia's Big C intends to open two new supermarkets in northern Ninh Binh province and Viet Tri City.

And, South Korean-based Lotte Mart plans to set up two supermarkets in Phan Thiet City and southern Binh Duong Province, as well as three or four supermarkets in Ha Noi and several provinces in 2014. By 2020, it expects 56 new outlets.

Another South Korea company, Emart, decided to open its first supermarket in the country this year, after conducting extensive market research. It plans 17 more retail outlets by 2017.

Aeon, a leading Japanese retail and financial services corporation, has also announced a huge investment.

It will pour US$1.5 billion into building 20 shopping malls in Viet Nam by 2020. The first two, in HCM City and Binh Duong Province, are expected to open next year.

All of this activity shows that the retail sector is an attractive one right now for investors. And it is expected to remain so.

But many domestic companies are at risk of being taken over by stronger foreign retail investors.

With 21 fully-invested foreign retailers already on the scene, local enterprises are in danger of becoming satellites for foreign companies.

Domestic companies have a number of shortcomings, including a lack of warehouses, ineffective operations, limited reserves of commodities and distributors with poor professional skills.

In such a competitive retail environment, Vietnamese companies will lose the battle if they do not surmount their limitations, change their business mindset, and improve their management skills.

In addition, the Government should also step in and offer active support to domestic retailers by ensuring that the business environment operates in a fair manner. — VNS

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