Property transactions must factor in liquidity amid higher inflation: Savills

Inflation would drive property prices up, but investors should exercise great caution due to a lack of market liquidity, consultancy Savills said.

Given global economic and political uncertainty, high inflation, and restricted supply, the real estate market in Vietnam is expected to grow rapidly and serve as an investment channel to mitigate the risks associated with inflation, according to Savills World Research.

“However, in such a complicated context, investors should use financial leverage with caution to avoid repeating the “dead on assets” situation that occurred in the past,” noted Su Ngoc Khuong, senior director of Savills Vietnam.

Despite the rise in property prices caused by inflation, the market might be devoid of liquidity. At the same time, many investors use financial leverage to invest in real estate, making low-liquid assets a significant burden and placing strain on the banking system, he warned.

“Due to the pressure from financial assistance tools, some investors may be forced to liquidate assets in the next nine to 12 months. However, as the speculation level of this group is modest in size, selling pressure from them can rarely manipulate the market and affect the price level.”

Moreover, since property availability in Vietnam is still limited, a drop in real estate prices is unlikely, Khuong added in the report.

Savills research shows that since the world’s first economic crisis in 1917, originated in the US, there has practically been only one crisis that caused real estate prices to plummet, down 30-40%, in 2007-2008.

The Vietnamese economy went through the 1997-1998, 2007-2008, 2011-2012 and 2020-2021 turbulences. But real estate prices only experienced a fall of 30% in the 2011-2012 crisis due to financial leverage abuse. “In fact, data shows that real estate prices climbed higher after each economic crisis.”

Therefore, Khuong advised investors to pay close attention to the pricing and legality of properties before purchasing them, and calculate where to invest next after selling them. “It would be reasonable if this money is invested in more effective channels, given the Covid-19 pandemic and global political uncertainty.”

Khuong said surging property prices will also have a negative impact on foreign investment as it discourages capital inflows or expansion. “Due to inflation, the commercial real estate sector must raise service charges, while firms’ payment ability remains limited due to the pandemic.”

Some other analysts, however, hold a different view. They predicted that growing inflation would raise interest rates and constrict cash flows, causing real estate prices to plummet and liquidity to freeze.

Therefore, investors should take bank interest rates and market liquidity into account when investing in real estate during an inflationary period, they cautioned.

Data from the General Statistics Office (GSO) shows CPI in February increased by more than 1% from last month and 1.42% year-on-year. Economists believed the government's target of keeping inflation at 4% in 2022 would confront numerous hurdles.

Three main causes of inflation include a spike in demand during the economic recovery, the national economy’s reliance on imported raw materials, and disruptions in global supply chains.