Vnre.blogspot.com - There is an old Vietnamese proverb which states that “Clever trading can’t compare with ample capital.” The accuracy of this saying seems applicable when it comes to the fiercely competitive property market in Vietnam. Wise investors know, only when they secure significant long-term capital resources, will they have a chance to stay in the race.
In Vietnam, financing for real estate market is increasingly becoming a thorny problem. Traditional capital sources have been severely depleted and more than ever, new capital sources are demanded to quench the raging thirst of the market.
The raging thirst
By the Ministry of Construction’s estimates, Vietnam’s cities allocate 50 percent of their area for housing while the figure is 20 percent in rural areas. Under Decision No. 76/2004/QD-TTG, by 2020, Vietnam will need to achieve a housing area of 20 square meters per capita in urban regions and 18 square meters per capita in rural regions. Accomplishing this will require constructing 1.3 billion square meters of housing, over 16 million houses.
On average, the price for semi-perma- nent housing is US$84 per square meter. However, the price regulated by the Government is many times lower than the market price in cities such as Hanoi and Ho Chi Minh, where each square meter may carry a hefty price tag of US$5,000 or more. At the base price level then, the need for capital could reach US$130 billion though the real number is likely to be significantly higher.
Traditionally, financial institutions have been the primary capital source for Vietnam’s real estate market. According to the Ministry of Finance, by the end of 2008, the total amount of loans allocated to real estate was around US$6 billion, accounting for 9.15 percent of the total amount of loans in the banking system. The total amount of lending to the property market in 2009 was US$7.89 billion, exceeding 10 percent of the total amount lent by financial institutions.
Mr. Le Duc Tho, Deputy General Director of VietinBank, said that speculation has made prices of properties higher than their real value. If banks continue to pour capital into the market, it may contribute to creating an unsustain- able development model. There is also a risk of default if the market becomes frozen because of extraordinarily high price levels.
Notably, only around 10 percent of Vietnamese citizens have bank accounts. Yet people have a habit of saving up money at home and holding it in either US dollars or gold. As a result, there is a great deal of idle money in the economy. Though it hard to determine the exact impact of these funds on the real estate market, there is little doubt it plays a major role in spurring the escalating prices.
In addition, the World Bank lists Vietnam among the top ten for receivers of remittances. More importantly, a large proportion of these remittances are invested in real estate. “From 2010 on, overseas Vietnamese will intensify their investment in homeland. Sixty to seventy percent of remittances will be present in property investment,” said Mr. Pham Thieu Hoa, Secretary General of the Business Association of Overseas Vietnamese.
In the commercial real estate sector, foreign direct investment (FDI) takes center stand. Since the beginning of 2010 project making headlines have included A US$3 billion project in Van Don by Quang Ninh of Emerging Market Group (USA), a US$902.5 million project by Skybridge Dragon Sea Company Limited (USA), to build a complex of buildings with meeting/ exhibition halls, shopping and real estate trading centers in Ba Ria, Vung Tau, and a US$120 million project by Daewon, Binh Khanh Investment Company Limited. Inflows of FDI will surely attract more capital to Vietnam’s property market.
Capital markets are also playing a prominent role in real estate financing. Issuing stocks to provide capital has become common. In OTC markets, many companies who focus on the property industry are also highly sought, companies such as IDJF, Sacomreal and Petroland have all enacted capital raising strategies that include listing shares.
It is said that scarcity breeds both competition and innovation. Recently, some fairly new strategies to raise capital have begun to be utilized in Vietnam. Two methods, the issuance of asset backed securities and REITS – real estate investment trusts – have both been making their contribution to the financial options of those seeking investment in Vietnam’s property and real estate sectors.
Capital cost can be prohibitive in markets like Vietnam. In terms of assessing the profitability of a project capital cost, must be taken into account. Bank lending rates vary from 13 percent to 15 percent for businesses for real estate projects. Individual loans range from 18 to 20 percent. Many individuals, however, fail to fulfill the requirements of banks and are forced to accept higher interest rates from finance companies.
For large or corporate projects, issuing a bond might be an option. The coupon rate is generally somewhere in the region of 6 to 12 percent. “Issuing bonds is all about credit rating. There’s nothing like Standard and Poor or Moody’s in Vietnam, so it’s really difficult for small enterprises to do this,” Mr. Johan Nyvene, Chief Executive Officer of Ho Chi Minh City Securities Corporation (HSC) said. “Only state-owned corporations or large private companies like Vincom, Tan Tao, Kinh Bac, etc, seem to be succeed in bonds issuing.
One of the most common sources for financing projects is early payment from prospective buyers. In this case, opportunity cost is traded off for capital at the early stage of construction process. If the project owners have sufficient funds to complete their property, they will have an opportunity to sell it at a higher price rather than sell it earlier at a discount. Furthermore, it seems that since the price of real estate in Vietnam rarely falls, this financing method can allow buyers some price discounts and stave off some of the rocketing price increases
With all the options for capital sources, companies and individuals participat- ing in Vietnam’s real estate market need to consider carefully and pick the most suitable method for them. This market can stay frozen longer than you can stay solvent but can also be extremely lucrative.
Source: Vietnam Financial Review