When Indochina Capital introduced their newest villa project in Ho Chi Minh City (HCMC) in late 2011 amidst a property market downturn, I began to think the landed housing sector in the city might appear on the radar of institutional investors. Over the past few months, I have found out that investors are indeed viewing this sector favourably due to its limited supply pipeline and niche target market.

Apparently, it is not just landed housing that is on investors’ radar. In fact, it is not just real estate, as numerous opportunities may arise in times of economic downturns when valuations become attractive. This has probably been the case in the equity market, for example. As a matter of fact, M&A deals in Vietnam in 1Q12 totalled USD 1.5 billion, the eighth highest in Asia Pacific ex-Japan, according to Thomson Reuters.

So how has real estate (and landed housing in particular) performed compared with equities? This question prompted me to take a quick look at comparing risk adjusted returns among these types of investments.

I started with proprietary Jones Lang LaSalle quarterly data on average prime condominium and villa prices, together with quarter-end closing price levels of the VN-Index – Vietnam’s benchmark stock index comprising companies listed on the Ho Chi Minh City Stock Exchange. The time period chosen starts from 4Q06 (when Vietnam’s accession into the WTO was approved) to 1Q12. This set of raw data is then used to calculate time-series data of annual returns that could have hypothetically been realised at quarterly intervals. “Returns” in this context refers purely to capital gains in local currency terms and ignores dividends and rental income.

Figure 1 below shows that the VN-Index during the stock market’s heyday yielded the highest rate of annual return, but also yielded the lowest return seen in the time period studied. On average, returns on villas were the highest at over 20.0% per annum.

Figure 2 below further shows that annual returns in the villa sector have the lowest standard deviation – a measure of risk. Combined with the previous findings, the villa sector is found to have the highest Sharpe ratio – a measure of risk-adjusted performance.

While there are lots of caveats to this mini study (e.g. returns only incorporate capital gains, transaction costs are not accounted for, the Sharpe ratio in its simplified form assumes a constant risk free rate, etc), I am hopeful this is a good starting point to further examine this topic. We may also extend this to include returns on commercial real estate when capital value data in this sector become more readily available.

For now, we know that Indochina Capital did their homework.

Login

Label

Name*

Email*

Website

Company

Label

Name*

Email*

Website

0 Comments

Inline Feedbacks

View all comments