Government reforms are beginning to reshape the country into a land of opportunity - for the careful investor. Chan Chee Kian reports

When investing in an emerging market, an investor must weigh up the risks against the potentially huge gains that timely investment can deliver. Knowing what drives these markets and selecting strong local partners who understand the culture and the legal system will often be the difference between success and failure.

Investing in Vietnam real estate is no different. In recent months the country has been on the receiving end of its fair share of economic turmoil, with high inflation and the weak Vietnamese dong creating significant challenges. Despite these headwinds, there are three fundamental factors driving the real estate industry which, when combined with a well-researched strategy, make a compelling investment case.

The first factor is that Vietnam has the third-largest population in South-East Asia of approximately 86m people, 67% of whom are under the age of 35. Around 70% of the population live in rural areas, which will fuel rural-to-urban migration at an exponential rate. Added to this, the already burgeoning middle class continues to grow, along with its appetite for consumer goods and property ownership.

Second, the rate of foreign direct investment pouring into the country - which was already high - has accelerated since Vietnam joined the World Trade Organisation in early 2007. Overseas companies, attracted to Vietnam by its large, young and highly literate workforce, are currently exporting around $12bn (€9bn) of clothing and textiles annually for international brands such as Nike, Adidas and Abercrombie & Fitch. In addition, tech companies, like Intel, which opened a $1bn microchip assembly and testing facility in Ho Chi Minh City in 2010, are making sizeable investments in the country.

Third, since the introduction of land leases in 1993, Vietnam has made rapid improvements to its land law. As a socialist country where all land is owned by the people and administered by the state, the relative scarcity of land for development had led the government to take a measured approach towards property and land ownership. This stance, however, is changing. For example, under current rules foreign developers and investors are now permitted to own a 100% equity stake, usually on leases of 50 years and in some cases up to 70 years, for projects which are deemed to be of benefit to the country.

In recent years, Vietnam has also opened up property ownership for foreigners with long-term work permits, as well as for expatriate Vietnamese who left the country at the time of the Vietnam war, a group of around 3.7m people.

The government has also made significant headway in addressing the country's economic problems. In 2011, it started implementing a set of short to medium-term measures known as Resolution 11, a move which has since received endorsement from the World Bank. These measures include reducing government and state-owned enterprises' spending in non-core investment activities, clamping down on illegal currency trading activities and reducing credit growth or bank lending to ‘non-productive' sectors.

In addition, the State Bank of Vietnam has depreciated the dong by 25% against the US dollar in an attempt to close the trade deficit and to bring into line the official and unofficial dong-dollar exchange rate. These successive devaluations over the years have sought to encourage local savers to move their US dollar holdings into the dong.

The nature of this movement of currency from the dong to the US dollar was a key factor that set Vietnam apart from Indonesia and Thailand in the pre-1997 days, when the flight of capital from the domestic currency led to an Asian economic crisis.

In Vietnam, money leaves the currency but tends not to leave the country. Estimates indicate that there is close to $40bn-50bn in US dollars and gold within Vietnam. A precise figure is not easy to verify, but on visiting its commercial capital of Ho Chi Minh City, it is obvious that the level of economic activity on the ground does not reflect the city's officially recorded $2,900 GDP per capita.

Once a foreign investor has decided to venture into Vietnam, it is crucial to maintain a flexible approach to land selection and acquisition.

Locating appropriate sites for development can be a drawn out and complicated process, despite proactive government policies, such as the introduction of Decree 69, which clarifies the roles and responsibilities between the developers, the land dwellers and the state. Furthermore, decades of economic growth and concentration of commercial activity have made acquiring most prime, city-centre land uncertain and unwieldy, as it frequently involves re-location or resettlement of existing dwellers. Investment strategies should, therefore, be broad enough to include sites located outside of city centres, which are less encumbered by regulation.

The ability to form strong relationships with local business partners is also an essential ingredient of success, not least because the business language is Vietnamese - all liaisons with the various government authorities is conducted in Vietnamese.

While keen to learn and partner with overseas investors, Vietnamese business people are sceptical of foreigners, in large part due to their experiences in the 1990s and the past two years, when many foreigners abandoned the country as the going got tough. Arguably, CapitaLand and Keppel Land, two companies that have put local partnerships at the heart of their strategy and demonstrated a long-term commitment to the country, appear to have reaped some of the best rewards from entering Vietnam's real estate market.

Finally, understanding Vietnam's legal system is critical. Regulations on land leases were only introduced in 1993, with subsequent refinement in 2004, providing plenty of scope for complex and inconsistent interpretation as we move from the laws, to the various decrees and regulations. Do not assume that the precedence in previous projects will apply in another project. Obviously, a good set of lawyers and good partners will go a long way to helping investors navigate the legal system.

In conclusion, providing investors enter Vietnam with their eyes wide open, engage with strong local partners and select suitable development sites, the fundamentals driving the real estate sector should ensure a positive long-term outcome.

Chan Chee Kian is CIO at Ireka Development Management, the development manager for Aseana Properties