The Serviced Apartment sector is feeling pressure, particularly as their main occupants are foreigners, the majority of which have returned to their home countries. Buy to let investors will also compete for the same tenant pool. Once borders reopen then this asset class will recover quickly.
Performance Serviced
Apartment average occupancy fell to 74% decreasing -8 ppts QoQ and -11 ppts YoY. Grade A was hit hardest, down -13 ppts QoQ and YoY. A Grade A project opened in January at 14% absorption, the lowest entry performance in five years. Total supply was up 2% QoQ to approximately 4,700 units, from 52 projects.
Despite short-term issues, average long-term rents had slight adjustments 1% QoQ and 6% YoY. While the West and Secondary areas were stable, or up 1% to 3%; the CBD and remaining areas eased -1% to -4 percent. In March with Covid-19 taking hold, some operators reduced offers by -10% and provided free service vouchers.
Struggling Industrials
In March 2020, The General Statistics Office of Vietnam (GSO) reported the Index of Industrial Production (IIP) rose 5.4% YoY, following 23.7% YoY in February and -5.5% YoY in January. Of the IIP criteria, water supply output and waste treatment increased most at 9.5% YoY. The Purchasing Managers' Index (PMI) of Vietnam plunged from 49 points in February to 41.9 points in March, its lowest level since 2012. This was attributed mostly to China supply chain delays, purchasing decreases and tightened inventories.
Expatriates working in IPs are a major long-term Serviced Apartment demand source. With labor-intensive operations and multiple shared common spaces, industrial parks (IP) in Ha Noi and surrounding provinces Bac Ninh, Bac Giang and Hung Yen have been vulnerable to Covid-19. Despite being authorized to operate during the lockdown, manufacturers face operational issues once an infection is discovered.
Larger Units: Longer Terms and Better
Leases Larger units, from 3-bedroom and above, had good occupancy. There are no 5- or 6-bedroom units available; 3-bedroom are at 88% absorption and 4-bedroom, 86 percent. Increasing 1-bedroom supply responds to the preference over studios. In 52 active projects, 1-bedroom units are 45% larger than studios, being 22% higher in rent and generate 44% higher RevPAR for operators.
Grade A occupancy was affected the most after travel restrictions are imposed. Daily bookings had -20 ppts QoQ drops in leases over Q4/2019. Before the pandemic, 90% of Grade A operators accepted monthly leases and 35% of occupants stayed short term. When the situation eases, operators may change business strategies to focus on traditional lease terms. According to ‘The Global Serviced Apartments Industry Report 2020-2021’, the sharing economy (e.g. Airbnb), presents less challenges. Implemented since 2018/2019, Economic and Regulatory/Planning Controls, have negatively affected Serviced Apartment operators.
Optimistic Investment Environment
Proactive national leadership will bolster business post crisis and accommodation demand will recover. A Dalia Research GmbH survey in late March has 62% of respondents believing the government is responding the “right amount”. Swift, decisive and effective Covid-19 measures have Vietnam outperforming all 45 surveyed countries.
In Q1, Ha Noi received US$448 million of registered FDI, equivalent to 12% of the Q1/2019 total. Newly registered FDI of US$113 million showed a 71% YoY increase. Korea contributed the most with US$67 million, representing 59% of the total. Next was Japan with 31%, China, 3% and Taiwan, 2 percent. Asian expats remain the key target group for Serviced Apartments.
Outlook
Six projects with approximately 700 units are approaching fit-out and were scheduled to come online in 2020. From 2022 on, four major players will open over 200 units each, mostly in Tay Ho District. In projects managed by non-branded operators, mixed-used development will dominate over single-purpose serviced apartment buildings.
In March, Ministry of Labour, Invalids and Social Affairs (MOLISA) summed that approximately 25,500 foreign labours are yet to re-enter, accounting for 37% of total licensed expatriates nationwide. Temporarily stopping issuing all visas to Viet Nam directly affects demand. In Q1/2020, Hanoi Serviced Apartment performance is underpinned by long-term contracts, if the pandemic continues these may fall away.
Alongside lower pricing, operators are looking to enhance tenant protections, and boost home-alike functions to capture more long-term future leases.