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Friday, July 1, 2022

Capital for realty: Accessibility and efficiency needed

By Tue Nhien

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As one of the few sectors majorly contributing to the economy’s growth, real estate is also one of the channels with the strongest capital absorption. For this reason, the sector can provide and maintain effective capital flows.

Dependence on bank credit

On its development journey over the years, this market has somehow diversified its sources of funding, including bank credit, the stock market, corporate bonds, foreign direct investment (FDI), and investment funds.

The most important is probably the flow of credit from banks, as these financial establishments finance not only realty firms—the creators of supply, but also individual customers—the main force of demand in the housing market. In other words, the credit from banks is a major source of support for both the supply and demand sides of this market. Therefore, in case there are changes in any credit policy or mechanism for real estate, this market will be significantly affected.

Credit for the real estate sector accounts for nearly 20% of the total outstanding loans, which has not changed much since the beginning of the year, but is a drastic fall compared to the previous period, said a representative of the State Bank of Vietnam (SBV) recently. As the growth of credit balance was 6.75% in the first four months of this year, the total outstanding loans of the system were more than VND11,100 trillion, of which an estimated VND2,000 trillion was given to the real estate sector. Meanwhile, according to the Ministry of Construction, the outstanding credit balance for real estate was over VND783.94 trillion at the end of the first quarter.

These figures, of course, do not include the fair number of real estate loans disguised as consumer loans or even manufacturing loans, of which banks are not aware. As banks are adopting the policy of tightening their credit for the real estate sector, revising up the risk coefficient for real estate loans or gradually reducing the ratio of short-term capital used as medium- and long-term loans, real estate loans have more reasons for this disguise.

The second important source of funding comes from the stock market, specifically the issuance of more shares for a capital increase to meet the objectives of doing business and developing new projects for those realty firms active on the bourse. For the past two years, taking advantage of the great growth momentum of the market, quite a few real estate enterprises have succeeded with their “massive” capital hikes thanks to the constantly soaring stock prices.

In addition, a prominent trend in the past three years has been the shift of focus among real estate companies from bank loans to corporate bond issuance. This lessens the capital supply pressure on the banking industry to a certain extent but puts at risk individuals investing in such corporate bonds.

As per recent data from SSI Research, realty businesses in 2021 alone sold a total of VND318.2 trillion or 44% of the total volume of corporate bonds issued. Meanwhile, FiinPro statistics revealed that some 20 real estate enterprises looked to spur their capital last year with nearly 1.7 billion shares, of which 1.1 billion were offered to existing shareholders.

Gone are the days of easy money

Faced with the risk of asset bubbles or overheated housing market in certain areas, plus stringent control policies from management agencies to stabilize the macro-economy, several banks have recently displayed signs of tightening their credit for real estate, even though lending rates for this sector remain much more tempting than in other fields. Some banks have implemented a policy of suspending or restricting real estate lending, slackening the pace of funding and loan disbursement.

Besides, as interest rates go up again, home loans that previously enjoyed preferential interest rates for the first 2-3 years will have to cope with greater interest payment pressure. The granting of new loans may slow down as borrowers are afraid of surging interest rates. In contrast, housing prices have recently skyrocketed, coupled with the impact of the property tax policy that may be implemented in the near future.

With all of the above, the real estate market will probably have to face challenges ahead, making it even harder for not only home loan borrowers but also realty firms to access credit from banks. Moreover, capital turnover will also be affected when the progress of sales slows down, and new projects take more time to be developed or cannot be developed at all due to the lack of capital.

Meanwhile, considering the recent movements of the stock market, perhaps it will be a tougher job to gather capital from the investors of listed companies, especially realty firms, in the future. With the market correction since the beginning of March, real estate stocks have been the group with the most catastrophic decline in the market, with many of them losing up to 50% compared to the recent peak.

In the corporate bond channel, the recent scandals starting with the wrongdoings of the Tan Hoang Minh Group have shaken investor confidence and led to management agencies strengthening their solutions to strictly control new bond issues.

The three most important sources of capital for real estate—bank credit, stocks and bonds—are grappling with quite a few restrictions, urging businesses in this sector to come up with breakthrough strategies to find new ways to raise capital.

Solution for the next stage

Seeking finance from international organizations and foreign investors is an option taken by many developers of branded real estate projects in recent years. In the early months of 2022, nearly US$2.7 billion worth of registered FDI capital was “poured” into the real estate market of Vietnam, making it the second largest FDI magnet, after the manufacturing and processing industry, according to the Housing and Real Estate Market Management Agency at the Ministry of Construction.

As one of the fastest-growing economies in recent years and one of the few nations which managed to avoid a recession during the Covid-19 pandemic over the past two years, Vietnam is expected to further recover strongly and attract greater FDI inflows. Furthermore, with the policy of fiscal expansion and promotion of infrastructure investment, it is believed that the real estate market will benefit considerably and capture more FDI inflows.

Vietnam should also shape policies to invite international real estate investment funds and trusts over to open up opportunities to mobilize capital for domestic realty firms. For their part, these businesses not only need to step up the introduction and promotion of their activities, projects and images, but also have to put in efforts to make their information transparent and improve their business efficiency to gain the trust of foreign investors, seeking opportunities for joint ventures and consortiums to develop new projects.

For the bank credit channel, it is essential to control speculative credit flows into the housing market to limit risks to the economy. That said, it is also necessary to adopt policies and solutions to ensure those actually in need of buying a house still have access to bank loans. Besides, the development of affordable housing projects for middle-income earners is the most crucial for the sustainable development of this market.

For the corporate bond market, despite the many recent “troubles” after a period of hot growth, it remains a popular capital mobilization tool for a lot of enterprises in developed economies. Therefore, in parallel with strict control, the operator needs to develop policies and expand mechanisms to help this market develop stably and sustainably in the coming time. It needs to become the primary medium- and long-term capital mobilization channel for the business community, especially realty firms, more so when the capital market of Vietnam is still at an early stage of development, with the money market only providing short-term loans.

Last but not least, authorities should further make or improve speculation control policies, prevent land prices in several provinces and cities from surging, and make planning transparent and public. This is aimed at preventing the situation in which, after each housing bubble, a vast amount of capital gets stuck in projects lacking a legal status or resources for further development.

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