Condotels: risky yet promising property segment
Investment in condotels remains appealing despite defaults in profit commitments by property developers, but a clear legal framework is needed to protect investors’ rights, according to experts.
Investment in condotels remains appealing despite defaults in profit commitments by property developers, but a clear legal framework is needed to protect investors’ rights, according to experts.
Speaking at a seminar yesterday in HCM City, Luong Hoai Nam, member of the Tourism Advisory Council, said that condotel investment would continue to be attractive because of fast-paced development in tourism infrastructure.
However, investment remains risky because of the “lack of a legal framework, limited ownership period (often 50 years), and lack of management capacity of the developers”, according to Nam.
No condotel project in Viet Nam has been granted an ownership certificate, which has caused problems for investors and state management agencies.
Le Hoang Chau, president of the HCM City Real Estate Association (HoREA), said it was important to protect the rights of investors. “We think that an ownership certificate should be issued for each condotel.”
He said there was no need for a new law, but current laws need new content to ensure the rights of investors.
The law should clearly stipulate the conditions for raising capital for future condotel projects. These would include construction permits and complete infrastructure systems before the sale of the units.
The condotel projects must also be guaranteed by a bank, Chau said.
In Viet Nam, developers often pre-sell condotels and then use the money from buyers to complete project construction.
Mai Van Phan, deputy head of Land Administration under the Ministry of Natural Resources and Environment, said that under the Tourism Law, a condotel means a hotel condo operating as a hotel which is a service business and does not have a residential purpose.
“Land for building condotels is categorised as land for lease for production and business within a period of only 50 years, not for residential purpose (which is longer term), so it’s impossible to grant long-term ownership certificates for such condotels,” he said.
Controversy
The developer of condotel complex Cocobay Da Nang recently announced that buyers would no longer be paid the annual returns the company had promised because it was facing financial difficulties.
The Empire Group blamed the lack of a legal framework for its problems.
As a result, investors are concerned about a possible domino effect that could cause the condotel market to collapse in Viet Nam.
Huynh Phuoc Nghia, deputy head of the International Business and Marketing Department at HCM City University of Economics, said that several disruptions had occurred in condotel profit commitments, forcing investors to be more careful.
The segment was riskier than others because of limited ownership, a lack of a clear legal framework for the sector, and lack of management capacity, he said.
However, Mauro Gasparotti, director of Savills Hotels Asia Pacific, said that “condotels are good for individuals to own and are attractive to developers”.
“Yields of 4-6 per cent are the right expectations for a sustainable rental return,” he said.
But he noted that both buyers and developers should have a full understanding of condotels.
Condotels contain residential characteristics to ensure that buyers will identify it as a “second home” product. They also have “hospitality” features, which need to be designed following hotel models and standards to ensure profitability, according to the director.
Complications occur when a developer is not well prepared to enter the hospitality industry and are not fully aware of the cash flow implications stemming from the long-term management of condotels.
The term condotel refers to a combined condominium and hotel building that is owned like a condo but operates like a hotel.
In the first half of the year, 11,855 condotel units came on the market led by the coastal markets of Nha Trang, Da Nang, Phu Quoc and Quang Binh, but only 25 per cent of them have been bought, according to the Viet Nam Association of Realtors.
Condotels appeared in Miami, Florida in the US in 1980 when old hotels built in the 1950s were converted into condotels to meet the demand for tourism and more efficient investment.
In 2009, the Nha Trang Plaza tower was the first condotel in Viet Nam, with 40 floors and 240 units with five-star standards. — VNS
