Real estate investments in Vietnam - the case of Keppel
/This is actually from a few weeks ago, but Keppel, a Singaporean conglomerate, is making another big investment in Vietnam, purchasing a large (6.2 hectares or about 670,000 sqft). On it, they will build 2,400 premium apartments and about 160,000 of commercial space. This makes Keppel’s pipeline in Vietnam around 20,000 homes.
SOURCE: VIETECON.COM, COMPANY DATA
The article linked here actually has a fair amount of information on costs, so I thought it would be fun to try to NPV this investment. Of course, this entails a lot of assumptions, but let’s just assume that the figures are pretty much in the ball park.
First, we know the land cost (VND1.3tr) and the construction cost (VND6.1tr), as well as the apartment info and commercial space. Let’s assume that the sales price per sqft is around $230 (VND5.4m). That fits in with this article on pricing in HCMC.
These are supposed to be premium apartments, but let’s assume that the sizes are not too large at around 750 sqft on average, in order to keep the average price low at around $175,000 (VND4bn).
Then assume that the shops are sold (which is probably not the most realistic, but I didn’t want to model out a long-term rental, because…I’m lazy). I assume relatively small profit from the shops of VND189bn in total (or $8.2m).
COC = COST OF CAPITAL. SOURCE: VIETECON.COM
Based on this, we get an NPV (at a cost of capital of 10%) for the project of VND643bn, or $28m and an IRR of 20%. (The full details are at the bottom of the post).
I would assume that this is fairly conservative, mainly given the size of the apartments are very low. If they were 1,000 sqft each, that would increase the NPV to more than $100m and IRR to 31%.
If separately, we lower the cost per sqft to $200 on average, the NPV actually turns negative (-$6m), but the IRR is still 13%.
If we combine both of those (lower cost per sqft but larger units), the NPV is above our base case at $62m and the IRR is 25%
We also assumed a cost of capital of 10%, which is quite high. I bet it is lower than this. If it is 1pp higher, NPV falls to $21m, but at 1pp lower, it increasesto $35m. Subtracting 2pp from the cost of capital gets us to $44m.
(See the table to the right for the sensitivity).
This is a pretty good deal for Keppel, as long as prices and demand hold up. The crackdown on corruption in Vietnam has made people nervous about selling land. That’s hurt supply as developers don’t have land to build on. After this deal Keppel has lots of land and a big pipeline of homes. Plus, they expect to start construction pretty soon (1Q2020) so they might be able to deliver why there is still limited inventory.
One more point, in our analysis, we assumed that Keppel doesn’t do any off-plan sales, meaning selling units and taking deposits well before units are delivered. If they can sell in advance and also pay their contractors on a delay, the cash returns just get better. That’s what all of the companies that I looked at in the Middle East did. It is a good way to juice returns on a smaller capital base.
ALL NUMBERS IN VNDBN, UNLESS OTHERWISE NOTED. SOURCE: VIETECON.COM