A growing economy and diversified tourism base in Vietnam are drawing increased interest from investors the world over.

Mövenpick already has two hotels in the country, including this Mövenpick Hotel Saigon in Ho Chi Minh City. (Photo: Mövenpick Hotels & Resorts)

Vietnam is growing into a much larger blip on the radar that’s drawing hotel investors and developers from around the world.

In the past three years, hotel occupancy across Vietnam has been strengthening, according to global real estate company CBRE. Occupancy rates in the country’s main hubs, Ho Chi Minh City and Hanoi, now are inching closer to major Asian cities like Jakarta and Kuala Lumpur.

According to STR Global, sister company of Hotel News Now, occupancy in Hanoi increased 2.4% to 68% during 2014. Occupancy for Ho Chi Minh City, however, decreased 1.7% to 66.4%.

Hotel supply in Ho Chi Minh City and Hanoi is forecast to grow over the next three years by approximately 8%. The extra rooms will be needed to satisfy increasing tourist arrivals. Though growth rates have slowed from 19.1% in 2011 to 11% in 2013, the first five months of 2014 showed an increase in arrivals of more than 26%, according to CBRE.

Data from STR Global paints a slightly more tempered look at industry performance in Vietnam. During 2014, occupancy in the country was down 2.2% to 62.3%; average daily rate increased 1.8% to 2.7 million Vietnamese Dong ($125.57); and revenue per available room was virtually flat, dropping 0.4% to 1.7 million Dong ($78.18).

It’s not just tourists that are increasingly opting to visit Vietnam.

“Business demand for hotels is driven by Vietnam’s position as a low-cost manufacturing base, as industrial business seeks alternatives to China,” said Adam Bury, VP of investment sales for Jones Lang LaSalle Asia Pacific.

Add to this the fact that Vietnam is, according to CBRE Hotels executive managing director Art Buser, one of the world’s “high frontier growth markets,” with an average gross-domestic-product increase of 6.8% from 2003 through 2013, as well as a more affordable option than nearby countries like Hong Kong, Singapore and Tokyo, and it’s little wonder that there has been growing investor interest in the country.

“Eighteen months ago there was nascent interest,” he said. “Now it is being considered by the majority of investors.”

Hot markets and market segments

So where is most of the investment happening—both in terms of region and market segment?

According to Bury, the mix is changing on both fronts.

“Historically, investment (particularly foreign) has typically been centered upon high-end, 5-star properties, both in the commercial hubs of Ho Chi Minh City and Hanoi, along with the major coastal destinations such as Da Nang and Nha Trang. But as the market has slowly matured, we have seen increased activity in the mid- and lower-end sectors, as investors aim to cater to the range of the demand that is increasingly evident.

“We have also seen great strides made in the coastal destinations where investors are aiming to capitalize on the growth that has been witnessed in regional markets such as Phuket and Koh Samui in Thailand and Bali in Indonesia.”

Accor, which entered the Vietnam market in 1991 and is now the largest hotel operator in the country with 17 hotels and more than 3,300 rooms, has responded to the increasing range of visitor demand.

“We have the full spectrum of hotel brands in the country, from luxury Sofitel, upscale Pullman and MGallery, midscale Novotel and Mercure, to economy Ibis,” explained Paul Stevens, VP of operations for Accor Thailand, Vietnam, Cambodia, Laos, Myanmar and the Philippines. “Our plan for Vietnam includes making sure that we have a hotel present for each market segment in the major cities, such as Hanoi, Ho Chi Minh City and Da Nang, to be able to offer a variety of options for travelers to choose from.

“As of today, we have a total of 12 hotels, 2,500 rooms in the pipeline, spread throughout the major cities and also in leisure destinations such as Phu Quoc, Nha Trang, Vung Tau, Hoi An and Sapa in the north.”

Accor isn’t the only group moving into new destinations. Minor Hotel Group, which first entered the Vietnam hotel market in 1998 through a joint venture in Harbour View Hotel, Hai Phong, followed by the launch of Anantara Mui Ne Resort & Spa in 2011, acquired two additional hotels in 2013, one in Hanoi and one in up-and-coming Quy Nhon.

“It’s a destination which is relatively new to international travelers and offers a great beach location alternative to guests. MHG saw a great opportunity to be the first international hotel operator in the area and pave the way to open up this amazingly unique destination,” said Roger Baldwin, area director of sales and marketing for Minor Hotel Group in Vietnam.

Mövenpick, which already has two hotels in the country, in Ho Chi Minh City and Hanoi, also will open a new property in Quy Nhon in 2017. “Quy Nhon is one of the future destinations in Vietnam–very much on the corporate side,” said Bruno Huber, Mövenpick’s VP of operations in Asia.

Other increasingly popular destinations for investors and developers include Da Nang, Phu Quoc and Nha Trang. According to Buser, with plans for infrastructure and transportation improvement well underway, the investment outlook is positive for all three markets.

Challenges for investors

Investing in Vietnam, though, is far from a straightforward exercise.

“The regulatory and legal environment is often perceived as being the biggest hurdle, particularly for foreign investors seeking exposure to Vietnam,” Bury said.

“Limited deal opportunities in Vietnam continue to pose a problem for investors,” Buser said. “The dominance of off-market deals will also pose difficulties for foreign buyers in gaining access to investment opportunities.”

Moreover, infrastructure, while it is improving, is far from where it needs to be.

“Lack of infrastructure in tourism is the main issue for hotel operators in Vietnam,” Baldwin said. “But this can often be overcome by partnering with local organizations and the government to help develop and guide future development programs such as the trialling of visa waivers for certain countries, and the development of new airline routes such as Da Nang—Hong Kong, to name a few.”

In summary, Bury concluded: “Savvy investors must continue to focus on infrastructure development with air and road access across the urban and resort destinations. There is great hotel demand for Vietnam from across the region, as well that from domestic guests also.

“We expect to see continued investment into the country and for the range of hotel supply to increase,” he said.