Shock waves swept through the investors a few days ago as Empire Group, the developer of the Cocobay Da Nang Complex, announced that it will stop paying shophouse and condotel buyers the annuity it had promised them, citing financial difficulties. It had earlier guaranteed these payments until 2026.

The promise of guaranteed annual returns has been a primary factor in attracting thousands to invest in condotels.

The first condotel project in Vietnam came up in 2013 on a seaside street in the central resort town of Nha Trang. A year later another was developed in Da Nang City. But the concept of condotels was still new to Vietnamese investors and the guaranteed return policy had yet to appear.

It was not until 2016 that the craze really took root, with condotels appearing at coastal resorts alongside villas and more modest houses.

These term became well-known across the country as many developers, small and big, entered the condotel sector with projects dotting the country's entire coastline. According to real estate services firm CBRE, about 30,000 condotel units had been launched by the end of 2018 and another 3,000 units have been added to the market this year.

With increase number of condotel projects coming up, competition became fierce and developers started offering higher guaranteed returns.

Major developers of condotel units or resort villas began to promise guaranteed returns of 5-10 percent per year for 5-10 years. Newer developers upped the game by promising up to 15 percent per year for 5-15 years.

Soon enough, investors were lining up to buy condotels and the projects' open sales events attracted hundreds of potential customers and registered hundreds of successful transactions. In some projects, investors were able to resell their units just 1-2 months after buying for profits of hundreds of millions of dong (VND100 million = $4,300).

Some investors even bought multiple units or an entire block in hope of receiving large payments in guaranteed returns for little effort.

In addition to stirring up the coastal tourism markets, the strategy of promising guaranteed returns was also a key factor in the mushrooming of condotel and resort villa projects in mountainous areas such as the northern resort town of Sa Pa or emerging markets with tourism potential like the northern provinces of Bac Ninh, Hoa Binh, Lang Son and Hai Duong.

Even in recent years, when these models started facing ownership challenges and disputes because of the lack of a legal framework, the guaranteed returns proved to be an effective bait, resulting in small-scale crazes for certain projects. Just this year, a developer promised guaranteed returns for 60 years with the margin increasing yearly, and the project successfully sold over 3,000 units in just a few months.

The race to be the developer with the best offer in the resort property market has long been a hotly discussed topic among the market's participants, with many expressing doubts and worrying that these agreements would collapse.

Since the last 3-4 years, experts from the real estate services provider Savills have already been warning that guaranteed returns of over 10 percent per year was extremely high and tough to achieve. In comparison, a profit of 5 percent per year was already considered a good figure for condotels in Thailand and Indonesia.

Duong Thuy Dung, Senior Director of property consultancy CBRE Vietnam, suggested that profits of 8-12 percent per year could only be achieved if there was no competition in the market, and in case of fierce competition, the maximum guaranteed return that could be offered would be 6 percent.

She said this strategy was only a selling gimmick with great risks as there was still no mechanism to protect buyers should the developers not deliver on their promise.

A CEO in the real estate sector also calculated that tourist accommodation establishments usually suffer losses in the first 3-5 years after opening. Inexperienced operators therefore would find it difficult to maintain operations if they had to pay a minimum guaranteed profit of 14 percent for five years while shouldering the losses accumulated in the first 3-5 years.

Additionally, if they hired international management companies, they would have to shoulder additional costs of 13-15 percent. The total cost for the first few years, therefore, would make it difficult for them to even survive, and sharing profits with buyers as promised would be almost impossible, the CEO added, declining to be named.

Many of these predictions have since become reality.

After operating for 2-3 years, many condotel developers are already struggling to maintain the payment of guaranteed returns and some projects have even collapsed.

Cocobay Da Nang is not the first condotel project to stop paying buyers the promised returns. The developer of the Bavico condotel project in Nha Trang had to negotiate with buyers to reduce the guaranteed returns from 15 percent per year down to 8 percent, and it could not even pay the revised amount.

Nguyen Duc Thanh, chairman of Empire Group, has admitted that after beginning operations, Cocobay Da Nang suffered losses in the first two years and after that, it only generated profits of 5-6 percent per year.

He claimed that his company had signed partnership agreements with two major firms, but had to make many adjustments to the project's design to meet the partners' requests, causing the project to be significantly delayed and making the promised returns of 12 percent per year impossible to achieve.

Troy Griffiths, Deputy Managing Director of Savills Vietnam, said the fact of condotel developers breaking their promises to buyers has also occurred in other markets around the world, and it's certain that more such cases would continue to occur in Vietnam.

Investors and buyers need to be careful whenever developers promise huge profits because market fluctuations during the long repayment period are ever present risks, he added.

Griffiths also said that many second-home resort projects have been adopting the model of sharing profits between the owner and the developer/operator instead of guaranteed returns. He suggested that this could be a more stable and less risky direction for Vietnam's resort market.