The Theory of Rent

The Theory of Rent

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Asking what makes some districts more desirable to live in than others is like asking why red sportcars are more popular than pick-up trucks. It’s obvious, isn’t it? Jeremy King explains

Have you ever wondered why we live where we live? You may have thought that developers use a ‘pin the tail on the donkey’ approach to choosing the next residential hub, or that, like a flock of sheep, we see one person moving to a desirable looking area in pastures new and get this overwhelming urge to follow. You may be surprised to learn then that there is, in fact, an anthropological reason behind where we reside. There’s even a scientific formula to explain it.

A 19th century, German economist by the name of Johann Heinrich Von Thunen was the first person to develop a model to explain why people choose to live in particular locations around a city. His model concentrated on agricultural land usage and the relationships between markets, production, distance and land price. Assuming all else is equal, farmers prefer to produce their products on land closest to the market. So, the closer to the market, the higher the price for land.

This early model can be adopted to explain why people choose to live where they do in modern cities. Given that the central business district (CBD) is where most people travel to for work, and assuming most people prefer less commuting time, it goes without saying that the demand for housing will be greater nearer to this area. We can see this in prices around the CBD of Ho Chi Minh City with the highest rents and land costs in District 1 and District 3.

The Long Haul
The big factor is travelling time, but not necessarily distance. The less time in transit the better — and the more you are prepared to pay for the privilege. As new infrastructure is being developed around and through the city, certain locations are becoming more desirable because of the improved accessibility to the CBD. Also, other previously overlooked areas will become more desirable in the future as major infrastructure projects are completed.

It’s clear to see that roads such as the Hanoi Highway have provided the focus point for development in Binh Thanh (The Manor and Saigon Pearl), District 2 (The Vista, The Estella, Blooming Park, etc.) and Districts 9 and Thu Duc to a lesser extent.

The East-West Highway from the CBD through District 8 to Binh Chanh and Binh Tan Districts is now having a major impact on travel times to the central business district and residential development is mushrooming along this route.

The road to the airport, Nguyen Van Troi, is also proving to be a catalyst for commercial development (e.g. Centrepoint) as is the airport itself (CT Plaza).

In Saigon, while it can be said that expats often gravitate to the compounds of An Phu or District 7 (usually on the advice of their relocation agent), they have the perfect opportunity to look and assess the city purely on its geographical merits. Once you free yourself of preconceptions, you may be surprised which areas pop up on your radar for consideration.

Traffic jams are a major headache. It takes almost double the time to get into work than it did six months ago. And it will only get worse in the established areas as more and more cars start to cram the roads. To avoid traffic jams people either move closer to the central business area or locate near modern efficient transport networks. You could take up cycling but, let’s face it, your life insurance premiums would skyrocket if your broker ever found out!

New city ring roads, the Ho Chi Minh City-Long Thanh Highway, the extension of the East- West Highway, the Saigon River Tunnel, the metro railway system and other projects that are currently under construction will create many new ‘hot’ locations where people will move to because of the better infrastructure.

This will apply to expats as well who generally like to live near services offered in the city centre.

The District 4 Phenomenon
However, there are some anomalies to Von Thunen’s theory. For instance, Phu My Hung is not connected to District 1 by good roads. But this district acts like a mini CBD, with its own hub and the roads emanating from there.

Other such secondary CBD hubs are sure to develop in the future with the Thu Thiem area opposite District 1 the most likely location.

While District 4 is a location that does not fit the theory at this time, it is forecasted to. This district adjoins the CBD but prices here are perhaps half of what they are in District 3. The District 4 phenomenon is common to most cities around the world. As a city develops, the wealthier people initially congregate at the centre with the poorer people on the fringe. As the central area becomes too dense for living, the wealthy will move out as businesses take over. However, these people tend to “leap-frog” the poorer area as it is an undesirable place to live.

In the end, though, as traffic congestion gets worse, the wealthier people are compelled to move in and ‘gentrify’ the poor area because of its close proximity to the core of the city and shorter travelling time. District 4 is primed for this to happen over the next ten years just as it has happened in London (Notting Hill Gate, Ladbroke Grove, Brixton), Sydney (Redfern, Surrey Hills, Balmain, Newtown) and New York (Brooklyn, Queens, TriBeCa) and most older cities around the world.

The gentrification of District 4 will be further enhanced as the ports are relocated and the roads (from District 1 through to Phu My Hung) are improved. Being in between District 1 and Phu My Hung, the area must logically be redeveloped and land prices will increase. We have seen the redevelopment of port areas in Melbourne, London and Sydney. The price of property has skyrocketed as the areas once swarming with big beefy dock workers have been replaced by the beautiful people doing lunch at trendy restaurants and bars, all wanting to live close to the action and enjoy water views.

Binh Thanh District is another area that will be significantly more sophisticated in the future with the numerous projects planned in the area.

The greatest boom area over the next ten years will arguably be the Thu Thiem area. You only need to go up to the top of the Bitexco Financial Tower and check out the view to the east over Thu Thiem to see what is happening. The tunnel leads to a highway (currently under construction) that cuts a swathe through the greenery in District 2 and will eventually lead to a new airport at Long Thanh. Development in this area will be major in the coming years as it’s being touted as the next Ho Chi Minh City CBD.

So if your crystal ball is on the fritz and you’re looking for the next development hot spot, bare Von Thunen’s theory in mind and watch the infrastructure as it develops. It will significantly impact upon where you’ll be living in the future.

Jeremy King API, MRICS is the managing director of Knight Frank — Ho Chi Minh City. He has over 20 years experience in property with the past five years in Vietnam. If you have any questions email him at jeremy [dot] king [at] vn [dot] knightfrank [dot] com or visit www.knightfrank.com.vn [4] for more info.

Republished with the Kind Permission of Word HCMC [5]