If affordable housing is the equivalent to seven years of a household’s income, then in Ho Chi Minh City, with an average household income of approximately US$595 per month, an affordable apartment, at 65 square meters, should ideally cost about US$50,000.
However, currently, new apartments are going for US$4,974 per square meter, or just over US$323,000 for a 65-square-meter dwelling, according to the latest data from real estate firm Savills Vietnam.
This is far from affordable and makes entering the housing market a big challenge for Vietnam’s growing middle class.
That said, the Vietnamese government is keen on expanding the affordable housing supply. Specifically, the Deputy Prime Minister signed a decision last year that targets building 1 million social housing apartments between 2021 and 2030. As of April this year, however, only 38,128 social housing apartments have been completed, just 3.81 percent of said goal.
In this light, this article looks at why there is an affordable housing problem, the role FDI might be able to play in addressing this problem, and also the challenges foreign firms face investing in these projects in Vietnam.
Why is there a shortage of affordable housing?
Vietnam’s affordable housing problem has developed as a result of a number of factors. These include complex land scarcity, bureaucratic procedures, tighter credit controls, and rising land and construction costs.
Land scarcity
Investors typically seek land free from encumbrances. This includes completed site clearance and clear land use rights. However, such properties for social housing projects are limited in Vietnam’s real estate market.
Notably, many localities have neglected to prioritise social and worker housing, partly due to the belief that social housing development is not economically viable or it is not a priority compared to other development goals.
Complex bureaucratic procedures
Social housing projects may be entitled to exemptions from things like land use fees and land rent stipulated in Article 58 of the 2014 Housing Law. However, this adds additional steps to the standard real estate development process with land valuations necessary to calculate the aforementioned exemptions and causing delays.
Rising land and construction costs
From 2018 to 2023, land values in southern Vietnam and northern Vietnam increased by 71 percent and 54 percent, respectively. Additionally, construction materials have also experienced sharp increases of about 21 percent by March 2024 compared to 2019.
Tighter credit conditions
Many real estate projects have had to put projects on hold with the Vietnamese construction industry as a whole facing headwinds–notably, developers are struggling against tighter credit conditions and a slowdown in the real estate market more broadly.
Where does FDI fit?
Foreign investors have capital and this is in high demand in Vietnam’s current economic climate.
Domestic real estate companies have faced significant hurdles due to tightening lending criteria from local banks. This has seen FDI touted as a viable alternative and has seen a number of foreign firms grow their presence in Vietnam.
Singaporean companies like CapitaLand, Mapletree Investments, and Keppel Land have all developed large-scale projects, including residential, commercial, and retail complexes in Vietnam.
FDI in social housing, however, is most visible in Binh Duong province. A manufacturing hub near HCMC, it has a population that is growing by over 100,000 people annually, mostly fueled by migrant workers who need homes but on manufacturing wages (about VND 8.3 million or US$328.26 a month)
This has seen Binh Duong attract significant foreign investment in affordable housing projects. This includes Vietnam’s Bcons Group and Thai enterprise A Asset’s 11 apartment complexes with nearly 9,000, and CapitaLand’s 19-hectare, 3,500-unit project in the province, one of the largest affordable housing developments in its portfolio.
But there are challenges
FDI in Vietnam’s real estate industry increased 61 percent year-on-year, reaching US$2.47 billion by June, however, these funds were mostly focused on Vietnam’s high-end and luxury segments. There are a number of reasons for this, however, two of the most prominent are profitability concerns and protracted legal procedures.
Profitability concerns
Affordable housing projects often have lower profit margins compared to luxury or commercial real estate. A report by JLL, a real estate and investment management firm, found that HCMC developers achieved margins of 25 to 30 percent on prime and mid-end residential projects. In terms of social housing, however, Vietnamese regulations cap profits at a maximum of 10 percent of the total construction investment cost.
Protracted legal procedures
Protracted legal processes also increase investment risks, deterring foreign developers. Notably, many investors would accept lower profit margins in cases in which projects were approved swiftly and land was readily available, according to Khuong Su, Senior Director of Investment at Savills Vietnam.
Trang Bui, real estate services firm Cushman & Wakefield Vietnam’s country head supports this argument telling Vn Express that lengthy, five-to-six-year approval processes have driven away numerous foreign investors from Vietnam in the past.
Administrative reforms, therefore, may be key to seeing greater FDI in social housing projects.
What’s next?
FDI can aid Vietnam’s affordable housing challenge, but complex factors like bureaucracy, land scarcity, and credit constraints hinder progress for both domestic and foreign developers.
Vietnam’s rapidly evolving economic landscape necessitates close monitoring of policy changes. With this in mind, firms and individuals with an interest in Vietnam’s affordable housing can best keep track of the latest developments by subscribing to the-shiv.