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Leaping Vietnamese markets spark bubble worries

HANOI -- Vietnam's stock and real estate markets are riding high on an optimistic economic outlook as Trans-Pacific Partnership trade negotiations get closer to the finish line and the country mends fences with the U.S. Some fear, however, that hot investment could be a sign that a bubble is looming.

Property on the rise

Ordinary citizens are turning to the high-end real estate market as an attractive investment target. One buyer -- an  office worker -- at Estella Heights, a luxury condominium development in the heart of Ho Chi Minh City, estimates that a unit there could be sold at a markup of at least 30% after completion. The buyer has also invested in three properties in Hanoi.     

     Sale prices per sq. meter on core properties in Hanoi and Ho Chi Minh City during the April-June quarter were 30-40% higher than those seen in October-December of last year, says the Vietnam unit of CBRE, a U.S.-based real estate services company. Real estate demand is outpacing even the 20-30% jump in supply the market has seen since the beginning of the year.

     Newly loosened regulations on foreign landholding are only feeding the fire. Foreign entities can hold property for up to 100 years under new policies effective July 1. The change is revolutionary for the communist country, which previously kept foreign property holdings to a minimum.

Mending fences, making friends

The change comes at a time when Vietnam is drawing closer to the U.S. This year marks both the 40th anniversary of the end of the war and the 20th year of normalized relations between the two nations. Nguyen Phu Trong, secretary-general of Vietnam's ruling Communist Party, became the first in his position to set foot in the U.S. when he met with President Barack Obama in July to discuss progress on the TPP agreement. Broadly expanding opportunities for foreign property ownership was seen as an essential step for drawing in U.S. investment.

     Vietnamese citizens reacted quickly to the change. Middle-class and wealthy citizens are snapping up real estate alongside foreign investors in anticipation of capital inflows and an economic boom when the TPP is settled. Construction Minister Trinh Dinh Dung sought to calm fears of a bubble on July 12, appearing on television to insist that "the real estate market's recovery is supported by sound housing demand, not speculation." Still, the ease with which developers can find buyers for their wares bears a fair resemblance to the pre-bubble Japanese market.

Spiking shares

Stocks are also showing some signs of froth. The VN-Index of all companies listed on the Ho Chi Minh Stock Exchange rocketed at the beginning of the month on news of Trong's visit to the U.S., hitting a year-to-date high of 605.7 on July 2. The index hit 638.69 on July 14, nearing the 640.75 from Sept. 3, 2014 -- the highest level since the global financial crisis.

     State-owned enterprises loom large on Vietnam's stock market, and trading value is typically low. Large jumps like the current rise are rare. Shares in real estate giant Vingroup have jumped 20% since the start of the year. Dairy producer Vinamilk's stock has done the same.

     "I can't speak to whether we will see a bubble or not, but buying is going strong. The VN Index will probably cross the 700 mark sooner or later," said Koichi Takeuchi, senior strategist at Vietnam-based Japan Securities.

     Vietnam's government will throw the stock market wide open to foreign investment on Sept. 1, allowing foreign ownership in all but banks and other entities requiring government involvement to exceed the current 49% cap. The decision to abolish the cap comes in anticipation of drastically freer trade between Vietnam and its partners through the TPP, which Vietnam could sign on to as early as August, and the ASEAN Economic Community to be established at the end of the year. A strong desire to protect its state-owned enterprises previously kept the country from slashing restrictions, despite the heavy weight they put on the stock market.

     High inflation that has long plagued the country is settling down. Vietnam's gross domestic product could grow upwards of 6.5% this year, edging out growth in the Philippines to emerge as the highest in Southeast Asia. The country's economy, however, is still brittle. A bursting asset bubble could spell disaster. As it throws open its markets to the world, the government cannot forget to rein in runaway speculation.

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