The Great White Whale

The market has been stuck in a dive. Question is, can it pull out?

The declines have been persistent and unforgiving, with each rally seen as an opportunity for speculators to sell and take money out.

Many factors have been feeding this bear.

Global recession fears and credit troubles have made international investors adopt a more cautious posture on Vietnam, even though most analysts still profess to like the long term prospects for the Vietnam "story."

Meanwhile local investors and speculators have been whipsawed by the market's change in direction and many are just looking to cash out their chips and save what they can. Bank credit has dried up and share issues have flooded the market and local investors cannot or WILL NOT soak up the excess. The bloom is off the rose and they just want OFF of this crazy downtown train.

Meanwhile tales of easy money abound in apartments and real estate.

What a difference a year makes!

Remember last Tet, when all the talk was about the easy money to be made in the local stock market and everyone was madly opening accounts and piling into stocks...

[Flashback! A few favorite posts from this period:

Celebrating Tet with a BANG

A Tale of Two Markets ]

Now that we seem to have hit bottom and found some support around 800, we are seeing that movie in reverse as investors cash out and race to buy (overpriced) apartments with their life savings.

A word of advice to those caught up in this latest bubble. (and make no mistake it IS a bubble!) If you want to flip (and flip and flip) apartments you better flip fast and you better know just when to stop, because when the music stops someone WILL get stuck holding the bag!

I hear the same nonsense this Tet that I heard last year, the only difference is the asset class in question.

No FPT was NOT worth 500,000 per share last year and no your apartment in Saigon (which isn't even built yet!) is NOT worth $6,000 per square meter. I don't care what the building is or where it is located. (Unless it happens to be in Tokyo or New York, but that is another story...)

Think about it. Who is going to live there? Who is going to occupy all these high end apartments that are being built? Vietnamese? Nope.

Everyone is dreaming of renting these babies to rich foreign investors. Ah, the Great White Whale! But remember not all foreigners are rich and not all are in the market for luxury apartments. Many have a fixed budget from their companies for housing.

Not to mention there are not enough of them to go around for all these apartment units. So in one to two year's time, when the supply suddenly doubles or triples, we will suddenly swing from a seller's market to a buyer's market and look out below!

So do yourself a favor, if you want to flip then flip fast because this bubble has a definite expiration date. (Say the end of this year when capital gains taxes come in or when prices become too INSANE for people to even contemplate.)

If you are making an investment (long-term) as opposed to speculating (short-term flipping) do a little reality check.

What will this (soon to be built) apartment realistically rent for?

A simple rule of thumb is to calculate the yield, which in the US should usually be about 10%, though in Vietnam it seems closer to 5% and falling (not such a good deal when you consider bank interest rates and other options...)

So take this hypothetical apartment you bought for $6000 / sqm (at the top of the market of course) Figure it is 100 sqm, so $600,000. To make your 10% yield you will need to rent it for $60,000 per year or $5,000 per month.

Hmmm... Sounds a bit rich no?

Assuming this is not a penthouse unit with a private pool and terrace, how many White Whale execs do you suppose have a budget of $5000 a month and are willing to settle for 100 sqm.?

How does this value compare to say a villa in An Phu that is 3 times the size with a private pool renting for half the price?

When the market comes crashing down (and it will, mark my words) don't you think these Whales will have other, better options?

Remember what happened to Ahab before you go hunting White Whales.

And perform a little reality check with a some basic math to save yourself a whole ocean of trouble.

Thar she blows!

PS In my view, the smart money will be cashing out of apartments soon and getting into stocks around 800 here. But heck, what do I know...