Boosting Capital Inflows to Property Market

There are three main capital sources flowing into the real estate market in Vietnam, normally, including owner’s capital, bank loans and capital mobilized from customers, who are peoples, enterprises and governments.

 

The decisive capital flow that drives the real estate market movements is bank credit loans. However, in its turn, this important capital source is not enough to meet the young development of current real estate market. Therefore, mobilization of capital flows for property from different sources remains issue worthy for attention.

 

In early months of 2010, loan balance from commercial banks for real estate stayed steady due to shortage in mobilized input capital. It is estimated that bank loans flowed in real estate market will see a slight increase but the portion of loan balance for real estate/ total loan balance just remains at around 11 percent. With the current policies, the bank loan source is reaching the limit but other available potential capital sources are waiting to be mobilized in the right time and manner.

 

Doctor Nguyen Dai Lai, an economic expert, said that investment in real estate requires strong, medium-term and long-term capital source and a stable financial plan. However, beside medium-term and long-term capital from banks or from corresponding capital contributions of customers, under-1-year capital source is also pouring into this market. In specific period, the ‘hot’ capital flows even take the control on the real estate market, creating ‘treading water’ opportunities, hot fevers and bubbles in this market as well as pushing the risk probability on financial market. The most visible feature can be seen in hot capital source is quick involvement and sudden withdrawal. The scale, speed, lifetime and portion of this hot capital source, especially, if being mobilized from such unstable sources as overnight loans, “black” credit, speculation capital, etc. when it involves in market will cause corresponding negative effects to the real estate market in particular and stability of the financial market in general.

 

According to Doctor Lai, therefore, one of the capital solutions to this market is transparency in short-term investment control and management, which is becoming more essential and visible.

 

It is not simply to prevent hot capital pouring into real estate market for its negative effects by administrative or legal methods. The nature of the issue here is management should be transparency and public and should give a warning and orientation to the market through effects made to total demand and supply instead of automatic prohibition under any forms. As a victim of non-transparency, the real estate market is running under the influences of rumours and techniques to make prices and waves of the speculators, etc. Mr Lai said.

 

Moreover, the prices of property are likely to keep increasing constantly. In just a short time, price of a property may go up several or even tens of times. Short supply and huge demand in this market create virtually a great attraction for investors who are hunting for thick return in a quick time. On the other hand, majority of transactions in real estate market (80 percent) is unofficial due to various reasons such as non-fulfillment in legality, unstable and hanged zoning, complicated administrative procedures. Many economic groups turn their business premises to “young” real estate product or trade in property though this is not their business function. Such a substandard market has created opportunities for go-between and speculators make unreal fever and bubbles in this market.

 

Regarding medium and long-term capital solutions, Mr Lai admitted that the real estate market is thirsting for capital to develop due to shortfall. Investment banking operations, development banking operations, real estate funds and real estate securitisation are very good instruments but have not deployed to offset financial shortfall of the property market.

 

It is now very important to find out solutions to manage short-term capital sources injected into the real estate market to mitigate potential risks associated with it. “One of the first measures is to identify the source of medium and long term capital which has been made short-termed on the real estate market. There are many sources of finance like mobilising from the public, owners’ equity and bank loans. Meanwhile, one of the major causes for the instability and risk on the real estate market is the very wide difference between the State and enterprises, between rumour and the reality, etc.,” Lai said.

 

At present, to raise funds for their projects, developers prefer mobilising capital from buyers and speculators who expect thick profit in a short time. However, the mechanism of civil borrowing relations and responsibility of project owners in the form of this transaction are unclear, taking the recent fraudulence in Thanh Ha project in Ha Dong district, Hanoi as an example. After this incident, many people distrust project developers. Hence, to protect this medium and long-term financial source, the State needs to apply legal regulations to force project developers to make information clear.

 

For credit source from banks, according to Mr Lai, if credit conditions and credit risk management are not strictly complied, it will wrongly used. On the other hands, not all property projects have the same risk.