This is a guest post by Mark Gwyther of MGT Management covered in 5 separate posts – Introduction (1/5), The South Coast (2/5), The Central Coast (3/5), The South Central Coast (4/5) and When to Invest & Conclusion (5/5). It’s a must read if you’re new to coastal Vietnam.
“Vietnam’s Coastal Resort Locations: Competitive Advantages and Disadvantages” is just Part II of a three-part series entitled “Vietnam’s Coastal Tourism Growth is Inevitable: Why, Where and When to Enter the Market”. The entire series looks at the future of Vietnam’s coastal tourism market for investors outside of Vietnam.
The other two parts are:
When to Invest
In Part III of this series, we discuss when to invest in Vietnam’s coast resort business in more detail. Obviously Vietnam’s coastal tourism is in the early stages of development. Mexico’s resort market went through three phases , and if that model matches, then Vietnam is predominantly in the 1st phase (south and south central) and Danang is just entering into the 2nd Phase . New resorts are opening every month but many more are waiting for more demand. Some investors fear supply is increasing too fast. In addition, economic difficulties the last two years have added to the unease. Inflation has been a problem that the central banks are fighting by tightening credit, especially to real estate developers. The result is a high cost of capital inside of Vietnam.
With risk comes reward. Investors with lower cost of capital can enter the Vietnam market earlier in the tourism development cycle than Vietnamese competitors; understanding that initial returns will be low but should increase rapidly as China’s economy grows in the next ten years.
We believe that artificial, non-market constraints on capital inside of Vietnam have created an arbitrage opportunity for outside investors . The difference in cost of capital between Vietnamese firms and outside investors is greater than the associated risk premium, especially in the tourism industry. The high-end tourism business in Vietnam is very dependent on economic conditions outside the country rather than from within. We argue that China’s economy will be a significant growth driver in the next 5 to 10 years . In addition, inflation risk is overstated because it is standard practice for four and five star hotels to list prices in U.S. Dollars, rather than Vietnamese currency. Therefore, internal factors are driving down the cost to enter the Vietnam coastal tourism market for outside investor which increases the discounted cash flow value of their investment.
Over 20 million Americans visited Mexico in 2010, despite a deadly drug war being waged in the country. That accounted for nearly 60% of all international travel by Americans. As China’s middle class grows, it is inevitable that Vietnam will be one of their first international destinations.
When deciding on a location in Vietnam, investors must weigh the cost of initial soft demand against the benefit of lower land prices. In addition, each of the three clusters of coastal tourism has key advantages and disadvantages that need to be considered.