The Great Reflation
“When you see that trading is done, not by consent, but by compulsion — when you see that in order to produce, you need to obtain permission from men who produce nothing — when you see that money is flowing to those who deal, not in goods, but in favors — when you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you — when you see corruption being rewarded and honesty becoming a self-sacrifice — you may know that your society is doomed.”
Ayn Rand, Atlas Shrugged (Francisco’s “Money Speech”)

The April 2010 Gloom, Boom & Doom Report will be sent out on April 5, so subscribers may expect to receive it around the middle of the month. Also, I need once again to remind our subscribers that the Gloom, Boom & Doom Report is copyright by Marc Faber Limited, and that it is a violation of US federal and international copyright laws to reproduce all or part of this publication by email, xerography, facsimile, or any other means. The Copyright Act imposes liability of $100,000 per issue for such infringement. The Gloom, Boom & Doom Report is provided to subscribers on a paid subscription basis. If you are not a paid subscriber of the Gloom, Boom & Doom Report sent out by Marc Faber Limited and receive emailed, faxed, or copied versions of the repor ts from a source other than or Marc Faber Limited, you are violating the Copyright Act. This document is not for attribution in any publication, and you should not disseminate, distribute, or copy this report without the explicit written consent of Marc Faber Limited.

DISCLAIMER: The information, tools and material presented herein are provided for informational purposes only and are not to be used or considered as an offer or a solicitation to sell or an offer or solicitation to buy or subscribe for securities, investment products or other financial instruments, nor to constitute any advice or recommendation with respect to such securities, investment products or other financial instruments. This research report is prepared for general circulation. It does not have regard to the specific investment objectives, financial situation and particular needs of any specific person who may receive this report. You should independently evaluate particular investments and consult an independent financial adviser before making any investments or entering into any transaction in relation to any securities mentioned in this report.

I apologise for boring my readers with this nonsense, but it has come to my attention that certain asset management companies that subscribe to one copy of the Gloom, Boom & Doom Report are photocopying and distributing the report — in some cases, to up to 35 different individuals. In other cases, the report is being copied and sent to friends, relatives, etc. Often this is done without any devious intent to breach copyright. A client of a financial advisory firm or bank may simply ask his portfolio manager to send him the GBD report, and the portfolio manager complies with the request in order to please the client. However, these are usually people who can perfectly well afford to subscribe to a report like the Gloom, Boom & Doom Report and, therefore, they should be required to pay for it.

While mushrooming brand awareness has fueled a rise in modern retail.25% between 2000 and 2009) driven by rising export turnover. as global trade recovers and domestic consumption continues to expand. has emerged as Southeast Asia’s greatest economic success story. the most salient fundamentals supporting The Gloom. closed-ended funds with US$460 million of equity.0% in the Year of the Tiger. we highlighted opportunities in the residential. consistently positive macroeconomic growth. and emerging service-based industries. following China and India. as the country’s growth trajectory has demonstrated its resilience in the aftermath of the global financial crisis. Floor 10. the rise in domestic consumption is palpable. peeking occasionally at Cambodia and Laos.5% in Q2. on the back of strong domestic demand and the government’s stimulus program. producing a trade deficit of US$12. (We focus exclusively on Vietnam. Additionally. retail. THE TIGER CUB CONTINUES TO GROW In the past decade. and it is clear that policy changes are already underway with the State Bank of Vietnam increasing interest rates by 100 bps in November 2009 and consecutively devaluing the currency. Heading into 2010. Five years on. This demand is primarily driven by a rise in domestic consumption and is the impetus behind Asia’s sharp economic recovery. Faber’s journal in August 2004. and hospitality sectors and noted the country’s comparable position vis-àvis more mature property markets around Asia.Vietnam’s “Residential Plus” Market Peter Ryder and Rick Mayo-Smith. compelling demographics.6% in 2009. private sector wealth creation and sociopolitical stability.indochinaland. the government’s agenda has focused on stabilizing macroeconomic pressures by utilizing more preventative the timely implementation of monetary policies is necessary for avoiding boom and bust cycles. and/or resorts. The headline figure for growth in retail sales of consumer goods and services alone illustrates this trend. Indochina Land manages three private. evolving socio-cultural preferences related to housing.9% in Q4.3%. Accompanying the economic turnaround. which steadily increased throughout 2009. office.88% by year end in 2009. Vietnam’s first real estate fund. the annualized inflation rate returned as a macroeconomic concern. Asia is projected to generate more new demand in 2010 (and onwards) than the United States — and new demand is the very measure of economic growth. the March 2010 country’s emerging middle-class is approaching the size necessary to generate self-sustaining internal growth and demand in the property market.0% and most recently by 3. amounting to US$64. Vietnam’s GDP growth rate accelerated further to 6.5–8.3% in February 2010. Today. the country has performed exceptionally well considering the global context and. Average GDP growth for the year of 2009 was 5. In the past year. growth in Vietnam’s retail sales rose in excess of 20% per annum. It also enables us to limit fund equity injections and enhance our returns on equity through the optimal use of proceeds from the offplan sale of residences (what we like to call “equity financing”). the world’s 13th-largest country by population with nearly 90 million.2 billion. and steady tightening of the monetary policy and careful control of the foreign exchange regime will ultimately rebalance risks. as evidenced by repeatedly strong GDP growth (average annual growth of 7. Accounting for inflation. In Vietnam. including tourism. and the expanding domestic economy created an uptick in import growth. Rising from 3. Boom & Doom Report 15 . which translates into approximately US$2 billion of projects in operations or under development in Vietnam. Vietnam’s residential market is underpinned by rapid urbanization. hotels. District 1. robust domestic consumption. economic momentum will escalate to 6.) Our core strategy is “residential plus” where we develop stand-alone for-sale residential projects or combine for-sale residential with other property types such as retail. we were raising funds for Indochina Land Holdings. the jump was still in the double-digits at 11% year-over-year. and according to prognosticators. Between 2005 and 2008. Vietnam. a rapidly expanding private sector. Ho Chi Minh City. expounding the merits of Vietnam as an attractive investment destination. Vietnam Tel: (848) 3910-4855. with a year-over-year increase of 18. 6 Thai Van Lung Street. has outperformed all other Asian nations in terms of economic growth. Vietnam’s retail sector is buoyed by the country’s young population with increasing disposable incomes and evolving consumer preferences favoring luxury items. DOMESTIC CONSUMPTION GROWTH WAVE: VIETNAM RIDES THE CREST Collectively. rising to 6.7 billion. Indochina Capital/Indochina Land Capital Place. E-mail: peter@indcohinacapital. first in November 2009 by 5. Website: www. or rick@indochinacapital. which launched the following year. As learned in previous bouts.0% in Q3 and finally to When we first wrote in Dr.1% in Q1 to 4. investment opportunities in Vietnam’s real estate market continue to appear and are even more appealing. This strategy allows us to capitalize on the significant imbalance between quality supply and demand in Vietnam’s housing market. particularly the residential and retail sectors. At that time.

pave the way for opportunities in real estate. We say official because these figures don’t take into account the cash that is carried in for relatives and real estate investments on a regular basis. We cannot stress enough Vietnam’s demographic phenomenon. Boom & Doom Report Figure 1 Population Age Structure (% of Total Population) Sources: GeoHive. Compared to other Asian nations. Based on information from quantitative census reports. However. and the country’s high literacy rate — in excess of 90%. Vietnam has the youngest demographic profile. and the rising number of Mercedes. Official per capita GDP in major urban areas is far higher than the national average: approximately US$2. one of the highest in the world — and entrepreneurial. the region’s most industrialized economy (see Figure 1). with approximately 80% of the populace under the age of 40 and 72% of this majority under the age of 24 (and 40% of the population is 15 years old or younger). particularly the residential sector. Confucian work-ethic create a highly capable workforce and foundation for a dynamic and sizeable middle-class. rising alongside the expanding economy.500 in Ho Chi Minh City (HCM City) and US$1. the age structure of Vietnam’s population is a perfect pyramid.growth in domestic consumption are Vietnam’s compelling demographics and emerging consumer class. VIETNAM’S RESIDENTIAL MARKET Vietnam’s urban communities continue to benefit from the country’s positive economic fundamentals.) On the back of strong income growth. compounded by the country’s resilient economy. incomes are augmented by remittances from overseas Vietnamese living and working abroad. the official total in 2009 was US$6–6. Bolstering domestic consumption. household incomes in HCM City have doubled in the last four years and increased fivefold in Hanoi since 2004 (see Figure 2). the process of wealth creation has gained momentum in recent years. in contrast to the “middle-age” population of China (very similar in profile to that of the United States) and the aging population of Japan. The lost generation caused by the conflicts of the 20th century has resulted in a thin layer of citizens over the age of 60. Nomura Research Institute Figure 2 Vietnam Monthly Household Income Growth Source: TNS Vietnam do official figures for GDP and per capita income take into account the under-reported informal economy. Vietnam’s young population forms a very attractive real estate consumer base. Additionally. evolving cultural March 2010 .700 in the capital city of Hanoi. which represents only 8% of Vietnam’s total population. Beamers. official incomes are hard to pin down in an opaque market such as Vietnam. For a country of nearly 90 million people. (Nor 16 The Gloom. compelling demographics. whereas in 2007–2008 the annual figure was more than US$8 billion. These factors.8 billion. and Rolls-Royces cruising the streets demonstrates that an upper-crust of consumers has emerged. Bentleys.

as we estimate that 95% of the nearly 90 million Vietnamese still live in sub-standard accommodations.5% 6.6% 6. with a combined population of approximately 15 million people and an average household size of five persons. and concomitant tight monetary policy and high interest rates).6% 6.7% 6. which will result in more demand for individual accommodation. (Government figures indicated that 20% of the population lived in cities in 1992. In its report on global cities. Additionally.6% 6. In comparison. the remainder equates to approximately 300.000 in Hanoi. rising inflation. Given the rising level of wealth in Vietnam. However. socio-cultural preferences are transforming the extended family housing format. The Gloom. Alongside Vietnam. and while average asking prices in Hanoi’s and HCM City’s residential sector recalibrated in late 2007 (a result of domestic economic overheating. as actualizing investments in Vietnam remains a challenging endeavor. a large percentage — more than 50% — will likely not materialize or will be delayed well beyond 2012. only 60. In terms of future supply.pdf urbanization steams forward à la China. CB Richard Ellis Vietnam estimates that in the next three years.000 potential buyers of quality residences in the near term — a sizeable market that will keep developers like Indochina Land busy for a long time as the youthful population matures and March 2010 Table 1 Top 20 Urban Agglomerations by Projected Average Real GDP Growth in 2008–25 (using UN population definitions and projections) Average Real GDP Growth in 2008–25 (% per annum) 7.000 units will be released in HCM City and 30. we estimate that there are roughly three million families. With a lack of sound investment alternatives. we perceive residential real estate as the most favorable asset class and believe that newly created wealth in Vietnam will continue to flow into quality housing developments.6% 6. with an average real GDP growth of 7% per annum for that rapid urbanization.6% 6.5% in 2009 to 45% by and an expanding middle-class.8% 6. particularly in Hanoi and HCM City.6% 6.7% 6. If we then income disqualify 90% of these families. China’s average housing area per capita in urban cities is approximately 25 m2. there is a trend to move away from the extended family and towards the nuclear family. we believe that Vietnam’s residential market offers lucrative investment opportunities. particularly as demand from end-users outpaces the available supply — an imbalance illustrated by a paltry level of urban housing area per capita. which is projected to grow from 30. While some property sectors such as the office market are softening due to over-supply.8% 6. according to the Ministry of Construction. Concentrating on Hanoi and HCM City. PwC ranked seven cities in India and nine cities within China in the top 20 (see Table 1). PwC ranked Hanoi and HCM City as first and second in a list of the top 20 fastest-growing while climbing all the way back to and above pre-crisis levels in Hanoi (see Figures 3 and 4). and rapid urbanization. its long-term potential looks considerably promising.7% 6.5% Source: www. With the backdrop of strong economic growth. which is estimated to be only 15 m2 on average as of 2009. where multiple generations and other relatives live under one low-end markets. Boom & Doom Report 17 . when we first set up shop in Vietnam.7% 6.preferences.) As Vietnam emerges from the global economic downturn.6% 6. prices stabilized in early 2009 and then increased in HCM City’s mid. We perceive persistent demand for quality housing for the next decade.5% 6.6% 6. of these future projections.9% 6. which PricewaterhouseCoopers (PwC) projects to be the top two fastestgrowing urban economies in the world between 2008 and 2025. Capital values in Vietnam’s residential market are fairly insulated from global pressures.0% Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 City Hanoi Ho Chi Min Cit Changchun Guangzhou Addis Ababa Xian Surat Beijing Jaipur Lucknow Chengdu Shenyang Kanpur Shanghai Tianjin Pune Chongqing Ahmedabad Kabul Bangalore Country Vietnam ietnam China China Ethiopia China India China India India China China India China China India China India Afghanistan India 6.

In both cases. Since launching.700 per m2. This development includes a 200-room Hyatt resort plus 174 condominiums. more than 90% of our buyers are Vietnamese nationals. In November 2009. and the Central Coast. generating approximately US$54 million in sales proceeds. 27 villas. with the remaining portions of project financing consisting of residential presales and equity from the fund. we have sold approximately 75% of the west tower and selective units in the east tower. we sold 70% of the inventory. if not the world.a. Going forward in our third fund (Indochina Land Holdings 3). and we believe that total residential sales of US$54 million is the high-water mark for any comparable resortrelated project in Asia. we expect the ramping-up of the embryonic mortgage market will further boost demand and stimulate residential sales. generating more than US$50 million in sales proceeds with prices averaging US$2. TWO RECENT INDOCHINA LAND “RESIDENTIAL PLUS” DEVELOPMENTS Last year on April 30th. a US$158 million mixed-use complex (residential. and lending rates are comparatively high (approximately 12–14% p. our gearing ratio is approximately 30% of total project costs. and 20 maisonettes (the 18 The Gloom. more than 95% of the buyers are local Vietnamese. 1975 end of the “American War”). we initiated sales at Indochina Plaza Hanoi. office. and leisure (resort and golf course) sectors. As mortgage products are still new to Vietnam. more dramatic is the contrast in leveraging trends among Vietnamese buyers of residential real estate. retail. the common practice is for buyers to make home purchases with cash savings or raise the money through unofficial lending channels (family and friends). coinciding with Vietnam’s celebration of Victory Day (commemorating the April 30.). In Vietnam. and therein our focus will be standMarch 2010 . we launched the sale of the residences associated with our Hyatt Regency Danang Resort and Spa on renowned China Beach. Boom & Doom Report latter to be built in a subsequent phase) and is scheduled for completion in July 2011. we will concentrate exclusively on the mega-urban areas of Hanoi and HCM City (aka Saigon). While this gearing ratio is comparably low. But going forward. HCM City. with unofficial estimates indicating that less than 15% of home purchases are made with bank debt financing. Here. For both of these projects. retail. US$44 million for Indochina Plaza Hanoi and US$39 million for Hyatt Regency Danang. Of note. and office) scheduled for completion in December 2011 with an inventory of 390 luxury condominiums located in twin towers in the capital city’s My Dinh new urban area. Through year-end 2009. in 2009. we secured debt financing in 2009. INDOCHINA LAND Across Indochina Land’s first two real estate specific funds (Indochina Land Holdings and Indochina Land Holdings 2). primarily Danang and Quang Nam provinces.Figure 3 Condominiums in HCM City: Average Asking Price per m2 (USD) Source: CB Richard Ellis Vietnam Figure 4 Condominiums in Hanoi: Average Asking Price per m2 (USD) Source: CB Richard Ellis Vietnam Vietnam’s residential market in both a stand-alone and mixed-use (“residential plus”) context will remain a highly attractive asset class because of the country’s long-term fundamentals. with investments in the residential. the mortgage market is still a nascent industry. our investment strategy has focused on the three primary markets of Hanoi.

Achieving quality delivery of property in Vietnam is difficult. raising US$152. they will stretch to pay higher prices to ensure that they are getting the best available product (widening our margins). Vietnam’s residential property market has demonstrated attractive domestic demand dynamics and resiliency.alone residential — condominiums and single family homes — as well as mixed-use retail/commercial projects with dominant residential components. covering a broad range of disciplines from deal sourcing and underwriting to project costing and construction management. Local buyers have become increasingly sophisticated and prudent in their evaluation of property investments. With the recent improvements in Vietnam’s market fundamentals and the identification of attractive investment prospects. compelling demographics. However. In July or contact us directly. engineers. our management team includes some of the most distinguished professionals in the industry. Indochina Land has built a vertically integrated team of professionals. We are now targeting to raise an additional US$100–150 million by the end of Q2 2010 and have extended the final closing date to July of this year. and accountants complements our team. and we are seeing a shift in preferences and more mature consumers. March 2010 The Gloom. there is a limited supply of quality developments. and this presents an excellent opportunity for Indochina Land as we focus on delivering properties of world-class standards and have developed a brand name in the marketplace that is synonymous with quality.5 million from a group of prestigious institutional investors. Despite the challenging investment climate. many of whom have more than ten years’ experience in Vietnam (and multiple decades in the business of developing and financing property internationally). wealth creation. OPPORTUNITIES WITH INDOCHINA LAND In the context of global real estate investment. rapid urbanization. please visit our website at www. we’re more than happy to discuss the attractive “residential plus” deals and prospects that exist in Vietnam today. Specifically for Indochina Land Holdings 3. lawyers. we held the first closing of our third real estate fund. To meet this challenge. An extensive network of external consultants including architects.indochinaland. Boom & Doom Report 19 . who recognize the importance of quality as it concerns investing into and living in residential real estate. Indochina Land Holdings 3. and an emerging middle-class. our core base of global institutional investors continues to recognize the potential of Vietnam’s real estate market. As buyers seek high-quality projects. we have resumed our fundraising activities to allow new investors to capitalize on these opportunities. With approximately 50 investment professionals and 150 project-specific expatriates and local Vietnamese to implement our projects. For more information regarding fund subscriptions or other investment opportunities. bellied by the longterm fundamentals of consistently positive economic growth. our focus will be the residential markets in Hanoi and HCM City. designers.

THE GLOOM.gloomboomdoom. You should independently evaluate particular investments and consult an independent financial adviser before making any investments or entering into any transaction in relation to any securities mentioned in this 8 Finance Street. financial situation and the particular needs of any specific person who may receive this report. E-mail: pollyu@netvigator. Author & Publisher DR MARC FABER Research Editor & Subscription LUCIE WANG Copyeditor ROBYN FLEMMING www. tools and material presented herein are provided for informational purposes only and are not to be used or considered as an offer or a solicitation to sell or an offer or solicitation to buy or subscribe for securities. Fax: (852) 2845 9192. Website: www. Fax: (852) 2526 0378. 2010 DISCLAIMER: The information. investment products or other financial instruments. 33/F Two International Finance Centre.robynflemming. It does not have regard to the specific investment Design/Layout/Production POLLY YU PRODUCTION LTD Tel: (852) 2526 0206. investment products or other financial instruments. Central. BOOM & DOOM REPORT © Marc Faber. This research report is prepared for general circulation. Hong Kong Tel: (852) 2801 5410 / 2801 . E-mail: markus_fab@pacific. nor to constitute any advice or recommendation with respect to such Subscriptions and enquiries MARC FABER LTD Unit 3311–3313.

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