Experienced investors that pay attention to markets outside the U.S. know there’s recently been ample chatter about the strength (or weakness) in real estate markets in other major global economies, including China.
That’s enough to scare investors of all stripes from accessing real estate assets in foreign markets, but there are opportunities. It’s just a matter of knowing where to look, and Vietnam is one such destination. Enter the VanEck Vectors Vietnam ETF (VNM ).
Indeed, Vietnamese stocks are slumping this year, but the long-term outlook for real estate, including hospitality and residential, in the Southeast Asian economy is attractive.
“Strong demand will support the contracted sales and revenue of developers in Vietnam (Ba3 positive) through 2023. Favorable demographics and strong economic growth combined with a rebound in the tourism sector will underpin demand at a time of limited supply, supporting prices,” according to a recent report from Moody’s Investors Service.
The research firm notes that rising prices can damp the effects of soaring materials costs, indicating that Vietnamese real estate equities, like their U.S. counterparts, have some avenues for buffering against inflation. For the uninitiated, these are relevant facts regarding VNM because the oldest U.S.-listed Vietnam exchange traded fund allocates 27.5% of its weight to real estate stocks — by far its largest sector weight — according to issuer data.
Additionally, Vietnam’s central bank is taking steps to tighten lending requirements, which could limit defaults. That’s a potential positive in the frontier market.
“The State Bank of Vietnam’s move to tighten lending in the real estate sector has brought about tougher borrowing requirements for developers, homebuyers and investors. As a result, lenders will become more selective in funding new projects and approving mortgage loans. Still, we expect developers with sufficient land bank, diverse sources of funding and an established track record of developing and delivering projects,” added Moody’s.
Central bank moves to keep the country’s property market from overheating while limiting defaults is relevant to VNM investors for another reason. The ETF allocates 14.2% of its weight to financial services stocks, many of which are banks that are lenders to real estate developers and related borrowers. That’s VNM’s third-largest sector exposure. Adding to the allure of VNM is that its real estate holdings have pricing power.
“Still, most developers have pricing power and can pass on some of the cost increase to customers. This will lessen the severity of margin erosion and the impact on earnings. Fewer property launches means that demand will continue to outpace supply,” concluded Moody’s.
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