Markets & Prices
Last updated: Friday, June 14, 2013
How Will Real Estate Be Rescued?Posted: Monday, June 11, 2012
The Vietnamese real estate market is sliding further into crisis. To date, there have been no official statistical data about market performances but, according to industry experts, up to 80 percent, and even higher, of small and medium property companies have gone out of business. Some big names have also found themselves in dilemma and accepted to slash estate prices on hopes of living through the tough time. Many have discharged financial obligations to the State Budget. Recent policies signalled determinations to rescue the property market to avoid dangerous implications for the economy.
However, bailouts and market supporting policies have also fuelled up concerns over microeconomic outlook and “bailout” subsequence.
When to stimulate buying?
The hottest desire of real estate companies is to reschedule debts to borrow new money. Property loans have piled up. According to data from real estate associations, real estate businesses are incurring a total debt of VND200 trillion (nearly US$10 billion), of which bad debts have already exceeded VND8 trillion. Financial statements showed that real estate companies are running out of cash. A number of listed big property firms have been added to “watch-list” by stock exchange operators. Well-known names include Investment & Trading of Real Estate Joint Stock Company (ITC) with a loss of VND137.3 billion and an inventory of VND1,739 billion; Quoc Cuong Gia Lai Joint Stock Company (QCG) with a loss of VND39.83 billion ad an inventory of VND2,685.4 billion; Transport Engineering Construction & Business Investment Stock Company 584 (NTB) with a loss of more than VND1.1 billion and an inventory of VND1,136.5 billion; and Ha Tien 1 Cement Joint Stock Company (HT1) with a loss of VND8.94 billion and an inventory of VND1,168 billion.
The State Bank of Vietnam (SBV) has issued many policies in favour of the real estate market in a short time. The first is the policy in lieu of Circular 13, which reduces capital adequacy ratio (CAR) for property and securities loans from 250 percent to 150 percent. Then, the Circular 09 and the Official Dispatch 2056 launched a number of monetary measures in support of property market. Accordingly, many real estate segments were excluded from the list of “out of lending encouragement” sectors. Besides, the central bank allowed commercial lenders and enterprises to restructure debts and extend loan maturity.
The SBV also quickly brought down regulatory interest rates from 14 percent to 11 percent per annum. But, a slump of 0.76 percent in credit supply the first five months of this year showed that companies did not need much capital for their business operations.
The market did not react to these support policies as expected. Lacklustre persisted. According to industry insiders, bad debts hindered businesses from access new loans and companies were exhausted in a prolonged slump. Worse, inventories grew up and price cuts did not help boost sales.
Mr Nguyen Huu Cuong, President of Hanoi Real Estate Club, said most businesses now fail to meet borrowing requirements because of no security assets. He hoped banks would revalue collaterals and reschedule debts to widen accessibility to credits for real estate enterprises.
Nonperforming loan is a very difficult problem and is being weighed up and down by lenders. Policies start to touch many problems. The SBV allows credit institutions cross-purchase debts and buy debts of enterprises. This measure sounds great because the bad debt problem is partially resolved without any pence from the Government. It is expected to end long-standing overlapped debt reality of the banking system.
Notably, demand stimulus has been launched. A lot of researches affirmed that the property market is somewhere at the bottom and it will soon revitalise. This is a golden chance to buy cheap assets. Banks started to increase home loans. In a recent press briefing, Mr Vu Xuan Thien, Deputy Director of Housing and Real Estate Market Management Department under the Ministry of Construction, said: There is no ground for [accurate] judging but all expects a better outlook towards the end of the year because banks have reduced interest rates and resumed home loans. The Ministry of Construction has recently signed an in-principle contract with the Vietnam Bank for Investment and Development (BIDV) to apply 14 percent lending rate on property loans. This is an opportunity for the market to develop in the last months of the year. “If I have money, I will buy a house now,” he said.
Where to find rescue money?
The Ministry of Finance has approved to extend payment terms for land rentals worth VND64 trillion for troubled companies.
Deputy Construction Minister Nguyen Tran Nam said the Government had used only VND60 trillion out of VND120 trillion to be allocated for investment in 2012. Hence, VND120 trillion will be pumped into the economy in the last seven months. With the remaining fund of public investment package plus VND38 trillion from government bonds and advance funds in 2013, the market is likely to get VND200 trillion from now to the end of the year. He hoped this cash flow would certainly stimulate economic growth and have positive impacts on many other industries, including real estate.
This is just the “feeding” capital. As gold market is volatile, stock market is risky, interest rates are on the fall, and investment into production is not a good option now, real estate is likely the best option if it has good supporting policies. In the past, real estate is a surely profitable investment channel. The Ministry of Construction’s officials said money will flow into real estate sooner or later as interest rates are reducing and other investment channels lose lustre. The bailout package size may reach VND400 trillion, including both direct and indirect sources.
The property market is being supported. The SBV widened the credit valve for this market, even speculative investments. BIDV launched a VND6 trillion loan for real estate options. Other lenders also had similar policies.
Real estate bubble will not burst with such a strong backing. But, many started to fear that prices would be pushed up and stayed far from real values. A majority of people will not afford to buy houses then.
Following the stimulus package worth US$8 billion in 2008, inflation escalated 22 percent. It took several years to curb inflation. But, the devaluation of local currency reduces real income of people. This year, obsessions return when the VND400 trillion (US$20 billion) package is launched.