Vietnam Property Fund Net Asset Value and September 2012 Update (3775O)

TIDMVPF

RNS Number : 3775O

Vietnam Property Fund

10 October 2012

Vietnam Property Fund Limited

"VPF" or "the Company"

NAV and September 2012 Update

Fund NAV Performance

The NAV per share closed at US$ 0.744 on 28 September 2012.

Investment Climate

In September, the consumer price index ("CPI") came in at 2.2% month-on-month ("m/m"), the highest monthly increase since May 2011 and higher than the historical monthly average inflation in September. As a result CPI year-on-yea ("y/y") rose from 5% in August to 6.5% in September. The increase was mainly driven by a spike in healthcare and education while food and foodstuffs modestly increased by only 0.1%. Healthcare (5.6% of the CPI basket) rose 17% as the Ministry of Health approved price increases for healthcare services and medicine in early August. Education (5.7% of the CPI basket) rose 10.5% partially due to the liberalisation of educational fees and partially due to the seasonal effect. Excluding the impact of these two categories, CPI m/m would have increased by 0.6% m/m in September. With the exception of the gasoline price hike, which pushed the transportation category up by 3.8%, all other categories continued to decelerate, suggesting that aggregate demand remains weak. In the coming months the biggest risks to inflation are anticipated to come from healthcare and food and we therefore decided to raise our 2012 inflation forecast from 6.1% to 7.6% to reflect this risk.

In Q3 quarterly GDP growth increased to 5.35% y/y, up from 4.0% in Q1 and 4.7% in Q2. The increase was lower than expected, resulting in a nine month GDP growth of 4.73%, which was well below the revised Government target of 5.2%-5.5% and lower than the 5.8% during the same period last year. The key reason was the construction and manufacturing sector which slowed from 5.9% y/y to 4.4% y/y, which is in line with our expectation as Vietnam is still at the beginning of its deleveraging and restructuring process. Effective interest rates are expected to stay high and continue to impede consumption and investment demand unless meaningful progress is made in the restructuring of the banking system and bad debts. The fiscal deficit for the first none months has already reached 87% of the Government's full year target. This was largely due to state revenues being only VND498trn or 67% of the full year target whilst by comparison state expenditures were in line with plan with VND643trn or 71% of full year target. It is therefore very likely that the full year fiscal deficit will be higher than the 4.8% target, thereby limiting the room for fiscal policy stimulus in the foreseeable future. We maintain our GDP growth forecast of 5% for 2012 and 5.5% for 2013.

Moody's downgraded Vietnam's sovereign credit rating one notch to B2 with stable outlook. It was the first change in Moody's assessment of Vietnam risk since 2010. S&P on the other hand raised its Banking Industry Country Risk Assessment for Vietnam from Group 10 to Group 9 on the view of reduced risks of economic imbalances. Although we share Moody's concern regarding slower medium term growth, we believe the Government remains committed to restructuring the economy and restoring confidence in the system.

Investment Update

Challenging times continue in the property sector in Vietnam with continued funding problems dogging the majority of projects in the office, residential, retail and hotel sectors. It is surprising that so many developers have not attempted to finish office, serviced apartment, hotel and retail projects which, by their very nature, cannot become income producing until the building is completed. No one will rent a half finished building. It is understandable that some residential-for-sale projects have struggled for funding as it is necessary to rely to some extent on pre-sales or 'off plan' sales to fund part of the construction budget but with rental property it is unforgivable in our belief not to secure funding. This does, however, provide opportunity for those with cash, management expertise and development experience. Cashflow is everything in the current development cycle and with so few development projects with sufficient funding it leaves the few players left in the market with a great opportunity to exploit gaps that are appearing. Take the office market for example. With so many new office projects stalled and the existing stock being taken up due to realistic rental pricing, there is not much Grade A or B+ space left unoccupied. Therefore any new projects that can come to market in the next six to twelve months will reap the benefits with, albeit modest, rental growth. At VPF we have partnered with an experienced, successful developer in Vietnam and are currently looking at a number of pipeline deals with this developer.

We believe the malaise in the property sector is unlikely to lift in the next six or even twelve months. Whilst this is not good news for some it will finally provide better opportunities for those, such as VPF, who have remained patient and vigilant of market conditions. The first phase of reform in Vietnam has led to the taming of some of the more wild macroeconomic factors such as inflation, interest rates and an unstable currency. The next phase is underway which will tackle the banking sector and inefficiencies within the State Owned Enterprises. This has not been an easy business and has led to some well-publicized problems at the highest political and business levels but the eventual medium-term outcome should be positive. It is our view that once the banking sector realizes that the only way out of the potentially deep non-performing loan hole in the property sector is to accept some sort of a haircut on their loan book we will then start to see more forced sales of what could be good quality projects given the right funding and development expertise. We do not expect to see a market recovery in time to save these developers; however, this should in turn provide the distress that is required to get the market moving again. We are ready and waiting.

For further information including the full September Monthly Report please visit - www.vietnampropertyfund.com or contact:

Enquiries:

Rachel Hill

   Dragon Capital Markets (Europe) Limited |         Tel: [phone] 

Tom Sheldon

   Seymour Pierce Limited (Nominated Adviser and Broker) |        Tel: [phone] 

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