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Sunday, July 21, 2024

Real estate bonds cause real headache

By Lawyer Pham Hoai Huan, Ph.D (*)

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Let the creditors cleanse the real estate market. They know better than all others how to deal with their money.


In 2023, there will be some VND130 trillion worth of real estate bonds reaching maturity. Now that the property market’s liquidity has tumbled, and many projects have ground to a halt due to legal problems and falling sales, the question over the implications of such bonds becoming due will be more striking. From financial perspectives, there are some noteworthy points as follows:

Numerous real estate companies are facing the risk of bankruptcy. Novaland days ago failed to settle mature bonds, and so far, some 60 enterprises – mainly real estate ones – have been unable to pay interest and principal of bonds upon maturity, which are all indications for a worsening situation in the next two quarters when the pressure will grow stronger due to massive amounts of bonds reaching maturity.

Banks will be the next victims of the real estate crisis. The picture this time will be darker than in 2009 because, apart from debts owed to banks, real estate firms have plunged deeply into indebtness with other creditors being institutions and individuals via the massive issuance of bonds via private placement. These bondholders will together with banks have to deal with debtors. Given the labyrinth of the indebtedness, it will be very tough for creditors to deal with their debtors.

The last stakeholders are those who buy houses from real estate firms. They can be individuals who buy houses as an investment, or for the residential purpose only. No matter what, given the possibility of real estate firms failing to complete their projects or even going bankcrupt, homebuyers will see their money almost evaporate except a contract stating that they are the homebuyers. A major proportion of their savings will never return, and it also means assets in society will evaporate, possibly resulting in a setback of a decade or so for development.

Too big to fail

What are the implications of such a somber scenario to be ushered in by the real estate crisis? That disheartening scenario is quite visible to Government advisors as well as policymakers via reports obtained from different sources. From the State management perspective, such a bleak picture is undesirable. As an observer, I highly appraise the attention paid to the issue by policymakers. Their determination to address the crisis is not limited to speeches, but concrete actions, and the dialogue between the Government and real estate enterprises on February 17, 2023 is a good example.

By observing real estate crises in the country over the past decade, I notice a regular practice, which is that top-notch real estate enterprises have always had risky behaviors in both financial and legal respects, and on a large scale. Such risky behaviors lead to unsolvable consequences often referred to in the West as “too big to fail”.

Take, for example, the unpopular movement to develop officetel and condotel projects. When developers took to this trend, building tens of thousands of such units, numerous questions surfaced, such as the legality for those so-called apartments, how prevailing regulations govern such developments, or their construction norms. The risks repeat themselves when real estate firms venture into legal and financial quagmires now.

An interesting point is that when the real estate industry is elevated to a big scale, giant players will resort to the “too big to fail” rule to put State management agencies in a fait accompli. That is the bargaining chip wielded by enterprises in negotiations with State agencies, which has always paid off in the past ten years’ development of the real estate industry. It would be illogical if major real estate players refrain from using this practice this time to exert pressure on the Government.

It is this practice that puts the Government in hot water when weighing measures to deal with real estate bonds. The right question is not “whether to rescue the real estate sector”, but “whether rule of the law and market forces should prevail when it comes to dealing with the real estate bond problem.”

Solutions to be considered

Although the Government and bondholders are not in the same position in terms of interests, in the case of real estate bonds, I advocate for both sides to apply free-market principles, with the Law on Bankruptcy being the key vehicle. Specifically:


Creditors without guarantees or with partial guarantees can take legal action by demanding proceedings of bankruptcy be started three months upon the expiry of the bonds when real estate enterprises still fail to make payments. There are two points to reckon with regarding this regulation:

First, from the perspective of real estate enterprises, they have no motive to start proceedings of bankruptcy, though they are bound by the law to do so. It is quite understandable when they propose extending the settlement schedule or swapping apartments for debt.

Second, from bondholders’ perspective, they are in a starkly different position. It is incomprehensible they do not resort to the Law on Bankruptcy to deal with their debtors while seeking to recover their money.

By starting proceedings of bankruptcy, it is creditors that determine the fate of real estate enterprises. A creditors’ conference as provided for in the law will be where bondholders can determine whether to allow more time for real estate enterprises to recover, or decide to liquidate such enterprises and be entitled to assets that remain after the court receivership. The creditors’ conference will also be where bondholders can acquire real estate enterprises at a sharp discount via the swap of debts for shares.


By merely measuring contributions to the State budget, we can see a high proportion from real estate enterprises. However, when considering the economic structure with a view to both human and financial resources for development, it is apparent the real estate industry has snapped up a major part of such resources, and therefore, other industries have to accept a shrinking share of the cake. Farmers surrender their land, the manufacturing sector does not have financial resources for expansion, and urban dwellers have to buy houses at steep prices, all being apparent consequences.

I vote for the Government and the market perform their functions. Let the creditors cleanse the real estate market. They know better than all others how to deal with their money. The Government should grasp this opportunity to boost its social housing program by acquiring projects from real estate enterprises. Only by performing this function does the State has the opportunity to acquire projects at a low price to turn them into social houses. The cost for that transformation will be borne by real estate enterprises. By taking this approach, the Government will at the same time be able to tackle the problem of steep housing prices that it has failed to do over the years.

(*) Director of Practicing Law Academy

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