Sale and leaseback to market cap rate ratio in emerging markets – an empirical study in Vietnam
| DOI | https://doi.org/10.1108/JPIF-03-2021-0019 |
| Published date | 02 September 2021 |
| Date | 02 September 2021 |
| Pages | 220-236 |
| Subject Matter | Property management & built environment,Real estate & property,Property valuation & finance |
| Author | Quan Le Truong,Chung Yim Yiu |
Sale and leaseback to market cap
rate ratio in emerging markets –
an empirical study in Vietnam
Quan Le Truong and Chung Yim Yiu
The University of Auckland, Auckland, New Zealand
Abstract
Purpose –This study hypothesises that sale and leaseback (SLB) cap rate is lower than the market cap rate in
emerging economies,and the difference is due to institutional cost and vacancy risk. This study aims to provide
a novel SLB-Cap-Rate Model to assess the performance of SLB transaction (SLBT).
Design/methodology/approach –SLBT data are generally not publicly available in developing countries.
This study collected data from 31 SLBTs by conducting semi-structured interviews with stakeholders in
Vietnam in 2019. The market cap rates were collected from consultants’reports. The hypotheses are tested by
three regression models.
Findings –The results show that the SLBT cap rate is significantly less than the market cap rate in Vietnam,
and most of the cap rate discount can be explained by institutional and risk factors. This suggests that SLBT
helps to reduce search costs for tenants and vacancy risks. It explains why SLBTs are becoming more common
in emerging countries.
Practical implications –The study has a strong practical implication for assessing the performance of
SLBT for both buyers and sellers. It introduces a novel model for analysing the cap rates and potential risks of
SLBT to facilitate property investment decisions.
Originality/value –This paper is one of the studies that contains new knowledge on SLBs in a developing
country specifically Vietnam.
Keywords Sale and leaseback, Cap rate, Vietnam, Institutional cost, Vacancy risk
Paper type Research paper
1. Introduction
Sale and leaseback transactions (SLBTs) involve ownership transfer of land and property
assets at an agreed price, and an agreement that the assets will immediately be leased back to
the seller at a pre-arranged rental payment schedule. SLBT is common in developed
economies. For example, SLBT accounts for about 13% of property transactions in European
markets during the peak of the financial crisis in 2008 (Harrington, 2015).
Literature highlights that the benefits of harnessing SLBT to the sellers include a price
premium or a rental discount (Sirmans and Slade, 2010). In particular, the theoretical
framework of Grenadier (2005) shows that any difference between the rental cost and market
rental price will have a corresponding impact on the sale price. However, most of the previous
studies on SLBT are in developed markets. Little is known about SLBT in developing or
emerging markets where they offer attractive risk premiums and higher transaction costs
than developed markets (Chin et al., 2006;Keogh and D’Arcy, 1994;Devaney et al., 2017).
Vietnam has become one of the most attractive investment destinations amongst
emerging markets with a robust growth rate by 7% per annum in recent years. Despite the
severe impact of the pandemic, its economy expanded by 2.91% in 2020 (Reuters, 2020).
This robust economic growth has bolstered the momentum of the property markets, with real
estate accounting for 13.6% of total gross domestic products (GDP) in 2019 (VNREA, 2020).
JPIF
40,2
220
The authors gratefully acknowledge the financial support provided by the PhD Research Grants 2019
from Business School, the University of Auckland. The authors would also like to thank Dr.Zhi Dong
and Dr. Abdul Rasheed-Amidu for the support for Ethics Application. The authors specially thanks two
anonymous referees for their comments.
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1463-578X.htm
Received 4 March 2021
Revised 18 May 2021
13 July 2021
Accepted 13 August 2021
Journal of Property Investment &
Finance
Vol. 40 No. 2, 2022
pp. 220-236
© Emerald Publishing Limited
1463-578X
DOI 10.1108/JPIF-03-2021-0019
The two largest cities, Ho Chi Minh and Hanoi, have become two of the most popular
investment destinations for investors in the Asia–Pacific region (Newell, 2021). Most foreign
investors in the Vietnam property markets are from Japan, South Korea and Singapore
(RCA, 2019;Mapletree, 2018;Savills, 2018).
However, unlike developed countries, the capitalisation (cap) rates of property investment
in emerging countries are normally much higher, corresponding to the markets’risk premium
and transaction costs. For example, the cap rate of Grade-A Office in Hanoi, Vietnam, was 7%
p.a. in 2020, compared to 4.5% in New York, USA (CBRE, 2020). In comparison, the cap rate is
much higher than the yield rate of Vietnam’s government bond. For example, the average
yield rate of the 10-year government bond in December 2020 was 2.34% p.a., whereas the
10-year government bond of the USA was 0.93% (VBMA, 2020). The gap reflects the risk and
higher transaction costs in property transactions in Vietnam (Table 1).
The high transaction costs may arise from the transaction structure, particularly
associated with the non-transparent legal and institutional framework. Vietnam’s property
market was promoted from a “low transparency level”to a “semi-transparency level”in 2020
and was ranked 56 out of 99 in the Global Real Estate Transparency Index (JLL, 2020).
The report highlighted that the major problems before the promotion were the “rules and
regulations [...] in areas such as land-use planning and lending standards”. It is widely
acknowledged that transactions of property in Vietnam must be selected cautiously.
For instance, the legal procedures of asset transfers can be very complicated and
time-consuming, especially for foreign firms. For example, state approvals and licences,
such as the Investment Registration Certificate (IRC), are not transferrable in Vietnam. Hence,
an asset transfer is considered a significant risk for foreign firms, as it is required to apply a
new IRC. It will also incur a 10% value added tax (Gisz, 2019).
Besidesasset transfers, a share transfer(Capital Share Acquisition)is an alternativemethod
of property transaction that does not require a new IRC. In fact,the vast majority of property
transactions,including SLBT, are structuredwith Capital Share Acquisition (Gisz, 2019;Ninh,
2018). Accordingly, Land Use Right (LUR) and assetson the land will be incorporated into an
independent single-asset company called a Special Purpose Vehicle (SPV). Consequently, all
capital shares of an SPV firm will be transferred to a new buyer under a Sale and Purchase
Agreement. It is costly to establish an SPV with valid business licences (Hoang, 2018;
Associates,2016;Bui, 2020). While a CapitalShare Acquisition imposes the taxrate of 20% for
the seller,this structure’s benefit outweighsasset transfer costsbecause of its convenienceand
lower risk.Therefore, the marketcap rate of property transactionsin Vietnam is usuallyhigher
than that in the developed markets due to the risk and transaction costs.
Our research question is as follows: Can SLBT help reduce the risk and transaction costs
in property transactions in Vietnam? This study hypothesises that investors are willing to
pay a premium for hedging the risk. Therefore, SLBTs are becoming more common in
Vietnam. Since 2011, several SLBTs in office and industrial properties in Vietnam have been
reported (RCA, 2019), but there have not been any studies on the performance of SLBT in
emerging markets. This study is a novel research on SLBT in an emerging economy.
2020 Office cap rate (p.a.)% Govt bond yield (p.a.)%
Vietnam 7.00 2.34
USA 4.50 0.93
Vietnam’s minus USA’s 2.50 1.41
Note(s): The office cap rate refers to the Grade-A office cap rate per annum. Govt bond yield refers to the
10-year government bond yield rate per annum
Sources(s): CBRE (2020) and VBMA (2020)
Table 1.
Cap rates per annum of
the Grade-A office and
10-year government
bond yield in Vietnam
and the USA in 2020
SLB to market
cap rate ratio
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