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Economic Sector

Last updated: Thursday, August 17, 2017

 

Investing in Projects Using Bank Loans: Looking Through Legal Factors

Posted: Monday, July 24, 2017


While the economy is shifting towards market trends, completing the legal framework will be the foundation to drives that development into the right orbit and reduces operating risks. In the Vietnamese property market, this matter is considered a bottleneck of the market as referred by many experts.

Mr Su Ngoc Khuong, Director of Investment Division at Savills Vietnam, said, if the market develops strongly and the legal corridor is not complete, it will be risky not only for investors but also for customers.

Important role of bank funding
For a developing market like Vietnam, funds mainly come from banks - crucial to the implementation of many real estate projects. This is also the case in most real estate markets in the world.

He said, in essence, bank loans and mortgages are not bad loans but rather a financial tool for project development. Investors must ensure the financial health and stable cash flow to pay interests and loan.

Especially, for unimplemented or initially implemented projects, a loan is essential to clear construction grounds and pay land-use fees after investors fulfil other financial obligations. If they are financially incapable to proceed with their projects after having fulfilled these obligations, they may transfer a part or the whole of their projects to one or more investors with better financial conditions to continue the projects.

“This is critical to the success or failure of many projects as investors poorly manage their finances and ineffectively carry out their projects, leading to a capital shortage,” he said.

Many projects have been frozen for a long time because they cannot find capable investors to forge cooperation or they are too late to seek new funds. In the case of a joint venture, this may pose a risk to the rest of shareholders when a big shareholder has to sell his or her stake to banks if he or she cannot pay interests.

But, according to some specialists, for new projects, investors must pay careful attention to land compensation and site clearance because they are complicated, time-consuming and risky. It is necessary for investors to pour their money into the first work, site clearance. This means that their capital may be caught in their projects. If they cannot settle land compensation and clearance, using financial leverages funded by banks will lead to a series of risks.

Investor competency is decisive
The restart of many big M&A-driven projects, bank supports or projects funded by overseas Vietnamese have caught the attention of the market and created good liquidity for projects.

First of all, human and social significance can be considered when investors can prove their financial capacity. In addition, projects resurrected by bank loans not only prove the prestige of investors but also show the potential of such projects. This will be an important condition to improve projects’ liquidity.

Khuong noted that, as big banks always apply very strict project appraisals, the reinvestment will be carried out only when those projects have potential. Normally, M&A-driven projects or projects with new partners will result in changes in designs and business strategies to have a new look and new future and to create better liquidity.

He also warned that one of property investment risks comes from legal affairs. Therefore, investors must be clear about the progress of projects, missing obligatory documents, financial health and legal procedures for mortgage at banks before making an investment. Once grasping these factors, they can fully analyse and make most appropriate decisions and avoid risks and losses.

Luong Tuan








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