With developers rushing to build new condo hotels, or ‘condotels’, along Vietnam’s central coast, experts are concerned about this new style of property development.

A ‘condotel’, also known as a condo hotel or a ‘contel’, is legally considered a condominium but is operated as a hotel that offers short-term rentals and maintains a front desk.

Condo hotels are typically high-rise buildings developed and operated as luxury hotels, usually in major cities and resorts, according to The Wall Street Journal.

These hotels have condominium units in them which allow buyers to own a full-service vacation property. When they are not using the property, owners can leverage the marketing and management done by the hotel chain to rent the unit.

Those buying into condotel projects are promised a 10 percent dividend on the total profit of thebuilding.

According to the construction department of the south-central province of Khanh Hoa, this kind of real-estate development emerged in Vietnam as recently as five years ago.

Many property developers would now like to restructure their initial hotel projects into condotels, as they can recoup their investment much quicker by selling units to individual investors.

The 10 percent dividend is also more affordable than what are considered exorbitant bank loan interest rates that developers would otherwise have to pay if they ran the hotels on their own.

The condotel model allows developers to share the management and business risks with investors who purchase the condo units.

This explains the mushrooming popularity of condo hotels in several coastal Vietnamese cities.

Mushrooming projects

Almost every construction project being developed along the river and beach in the central city of Da Nang has at least one condotel, while Nha Trang, the famed beach city of Khanh Hoa Province, has become a major construction site for this kind of property.

Most of the multi-story construction projects in Da Nang are located on the coast from Son Tra to Ngu Hanh Son Districts.

The Condotel Furama Da Nang project, consisting of three 25-story tower buildings with a total of 1,000 condo units, is one of the largest. Another 27-story condo hotel is also being developed near the Thuan Phuoc Bridge.

An under-construction condotel project is seen next to the Thuan Phuoc Bridge in Da Nang.

Nha Trang is now home to some 20 condotel projects, capable of supplying a total of 10,000 condo units.

While most investors in condotel projects in Da Nang are from Hanoi and Ho Chi Minh City, T., a Da Nang resident, has recently purchased a 45-square-meter unit in one condotel for VND1.2 billion (US$52,863). The buyer expects to receive a 9 percent dividend per year for her investment.

Dong Luong Son, deputy chairman of the Khanh Hoa tourism association, said realty developers were looking to embrace the growth in tourism by building condo hotels.

The Cam Ranh Airport in Khanh Hoa currently handles as many as 70 flights per day, with local hotels constantly overbooked, especially during peak travel seasons. “Condotels have thus emerged as a lucrative market for property developers,” Son said.

In 2016, some 7,000 new apartment units in Khanh Hoa were sold, 70 percent of which were condotel rooms, according to the provincial real-estate agent association.

Tran Viet Trung, director of the Khanh Hoa tourism department, attributed the booming development of condotels in the last five years to soaring tourism growth.

“A developer can start making a profit once its condo hotel reaches 60 percent occupancy,” he said. “Three- and five-star condotels usually enjoy occupancy rates of up to 90 percent.”

A condotel is seen in Nha Trang, Khanh Hoa Province, located in south-central Vietnam.

Imminent risks

Despite optimism around the growth of tourism that the condotel proliferation suggests, their rapid rate of development has already led to several tax and legal issues, according to insiders.

The Khanh Hoa tourism department has recently inspected eight condo hotels and found multiple violations of tax laws.

Some developers have failed to declare the real functions of their units, while others have given misleading information about their ownership to buyers, according to the department.

Many other developers have also been caught not declaring taxes on rental contracts. Similarly, many condo unit owners also refuse to declare taxes when they lease the property to third parties.

Experts are concerned that the rapid rise in supply will soon exceed demand for condo hotels.

Realty developers in Da Nang appear to be preparing for an influx of visitors later this year, when the city is set to host the 2017 Asia-Pacific Economic Cooperation (APEC) Summit.

“Developers will face real trouble if tourist arrivals are not as high as expected,” Duong Thuy Dung, head of market research at CBRE Vietnam, warned at a recent press conference.

Da Nang currently has 14,225 available villas, resort and condotel rooms, and the figure is expected to rise to 32,000 by the end of this year.

It remains to be seen whether the city will attract enough visitors to fill these rooms.

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