Analysts urge caution as real estate shares buck market trends

December 12, 2007

Shares in real estate development companies have enjoyed sustainable growth during recent stock market doldrums, but analysts are warning investors to be cautious.

Refrigeration and Electrical Engineering Corporation (REE), Vincom (VIC), Thu Duc Housing Development Corporation (TDH) and Song Da Urban & Industrial Zone Co (SJS), for example, all saw their share prices rise in November, bucking the overall market standstill.Stock investors have been optimistic about real estate shares as they saw a number of foreign investment funds pouring capital into real estate projects, in part due to a perceived shortage nationwide of offices for lease and high-end apartments. Indochina Capital alone has invested roughly US$1 billion in real estate projects in Viet Nam.

The director of one real estate trading company who asked to remain anonymous revealed that construction and sale of high-end buildings can earn profit margins of 50 – 60 per cent. The business was expected to be even more profitable over the next few years when foreign investment flows to the country were likely to rise further, he said.

Real estate projects have also become an increasingly prominent part in the business strategies of companies, e.g., REE, for which such projects are not the leading line of business. According to a survey by the State Securities Commission, development strategies of up to 80 per cent of listed firms now include investment in real estate, at levels of hundreds of billions of dong on average.Although investment in real estate development can be perceived as high-risk in other countries, domestic investors believe see real estate is a relatively stable asset.

But analysts have urged investors to be more cautious and avoid herd mentality. Shares in real estate development companies pose many of the same risks as shares in other industries.They also warn of a link between real estate markets and financial markets. Once the real estate market cools and becomes more stable, investment funds will look elsewhere for high returns on capital. The real estate market will stagnate and, in a domino effect, the industry’s shares will fall.Government plans to tax real estate transactions in the near future were also expected to have a cooling impact on the real estate market.

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