How to Channel Capital into Real Estate Market?

 

To curb rising inflation, which tended to continue escalating in Vietnam, the credit crunch policy was officially adopted in February 2011 and the real estate market was a target. According to official data released by the General Statistics Office (GSO), changes in consumer prices, housing and construction material prices, gold prices and US dollar prices are represented in the following table.

 

Inflation is at alarming rate (as it approximates a two-digit growth in the first few months of this year), forcing the Government to raise interest rates to reduce money supply, primarily targeted at non-manufacturing sectors. Capital flows into the real estate market are blockaded and dried up, sending big investors into difficulty and causing property prices to moderate. Lending rates in early 2009 was over 20 percent, higher than in early 2011 (over 16 percent on paper but over 18 percent in reality).

- In early 2009, the world fell into terrible financial crisis but this woe was basically resolved in early 2011 and the global economy gradually stabilised. Given such world economic contexts, curbing inflation in Vietnam will be a more difficult work.

- Like other governments, the Government of Vietnam launched a stimulus package in early 2009, helping the Vietnamese economy revive quickly after that. A considerable part of the stimulus package was channelled into social housing projects and affordable housing projects for low-income earners residing in urban zones. The stimulus package offered more funds to realty investors, thus warming up the market and increasing the confidence of small investors and end-buyers. This was a good condition for investors to raise more funds by “buying and selling houses on paper”. In early 2011, the launch of another stimulus package was not reasonable because no other country did. The market was no longer supported by the State funding and market participants lost the confidence in a rapid warming of the market to make investment decisions. Capital solution at present is much more difficult than at the beginning of 2009.

- In early 2009, big investors in the world had to withstand the global economic crisis and foreign direct investment (FDI) inflows to Vietnam were slowed down as a result. The rise of this financial source was excluded. On the other hand, the global financial crisis receded by far and major foreign investors may be weighing up the possibility of investing into the very attractive real estate market of Vietnam. Hence, it is highly likely that FDI sources will come to the real estate sector.

- Currently, the entire political system of Vietnam is preparing for the election of lawmaking National Assembly and People's Councils at all levels while the personnel of central and local governments depend on this election. So, it is unlikely to have important decisions on solutions to the real estate market in the near term but after the personnel of the next administration is completed.

 

The Vietnamese real estate market is critically short of capital and seeking out new capital sources is the most important solution. The current money-short market is similar to that at the start of 2009 but sources of working capital for the market are dissimilar. Capital solution now completely depends on the perception of authorities as feasible sources of capital will make consumers and investors continue believing in benefits they will obtain from the real estate market.

First of all, it is noted that the degree of real estate development is uneven from region to region in Vietnam. At present, the real estate market in Hanoi is very is different from other cities, including Ho Chi Minh City. The Hanoi market is for the entire nation, not only residents in the capital city. So, the supply will hardly meet the demand in a decade to go. Moreover, the newly expanded Hanoi is being re-planned and each planning decision has direct impacts on the “heat” of affected localities.

In the capital-short context, the movement of the real estate market is always dependent on capital solutions. For the time being, capital solutions may include as follows:

This credit source can come in official or unofficial form, can be guaranteed by mortgaged real estate or other instruments, and can come from domestic or foreign sources.

 

Credit loans from domestic commercial banks are usually not very big if they come in unofficial forms or are not guaranteed by collateralised properties. Domestic lending is mainly formed by the real estate mortgage. Currently, in Vietnam, sources for with realty-secured credits are being limited in order to stave off inflation. Hence, capital solution from domestic credit sources is unlikely in case inflation is not eased.

Credit loans from foreign commercial banks are also usually not very big if they come in unofficial forms or are not guaranteed by collateralised properties. A larger amount of credits must be formed by guaranteed real estate but it is a pity that the Vietnamese laws do not allow mortgaging real estate to borrow money from foreign legal entities. Thus, capital solution from foreign credit sources is impossible until the Vietnamese laws are not amended to allow mortgaging real estate at foreign commercial banks.

Pooling from retail investors and end-buyers in the form of future options (often called buying/selling real estate on paper)

This solution was primarily applied in 2009 and 2010 and helped the Vietnamese property to stand firm. The prerequisite for this solution is investors and consumers must believe in returns they will get from getting involved in the market. In Hanoi, this condition is not hard to be achieved because of undersupply of housing and workplace.

In the context of capital shortage, investors with limited capacity cannot usually survive in the market or continue their incomplete projects or keep their completed reality products. In this case, they usually resolve their capital matters by transferring their projects to other investors or accepting M&A deals. This is a capital solution but it is often less likely to apply when a company is facing capital dearth. Under the prevailing laws of Vietnam, M&A is only applied to domestic companies, not expanded to foreign legal entities. Thus, this solution does not play a primary role in the Vietnamese real estate market.

The Land Law 2003, which took effect on July 1, 2004, allows foreign investors to invest in housing real estate sector, with specific instructions on money collection from land use stated in the Decree 181/2004/ND-CP and the Decree 84/2007/ND-CP. Since 2007, the amount of FDI capital registered for housing real estate has surged sharply, accounting for 40 percent of total FDI. Shortly after this legal barrier was eradicated, the global financial crisis occurred and FDI capital for the housing property shrank as a result.

 

To date, the world financial crisis has been receded and FDI flows may rise again. Foreign investors can carry out wholly foreign-invested projects or set up joint ventures with Vietnamese investors. This is an important capital solution; hence, real estate authorities and domestic investors should have specific initiatives to solve capital matters and improve the efficiency of foreign direct investment capital.

Recently, many policymakers have mentioned establishing real estate market development support funds like real estate trust funds, housing savings funds, etc. In fact, these funds are only suitable for weak groups in the society (the poor, low-income earners, women, the disabled, etc), which cannot be the big source of capital for the market. For this reason, this source impossibly solves the capital shortage of the market.

To troubleshoot capital problems, the real estate market actually needs “leveraging” policies. In fact, the central and local governments difficultly make decisions on strong changes in the last five months of the current administration term.

 

However, the Hanoi real estate market still has strong vitality and exerts a pull on all investors. At least, capital flows in the form of “buying/selling on paper” are always very strong. Its realty market will repeat the scenario in 2010: The market lacks capital but local fevers still happen. Such fevers are not rooted from supply and demand relations but completely from other formalistic causes like planning information, price-hike tactics of investors, etc.

 

Real estate markets in other developed urban zones like Ho Chi Minh City, Da Nang, Hai Phong, Can Tho, Binh Duong and Dong Nai, the supply seems to keep up with the demand, forcing speculative moves to decrease and prices to fall. Future contacts can be accepted in these localities but largely depended on the “belief” in future profits. A good impact may generate capital for the market and a bad one may send retail investors to shift to other fields.

Capital solutions will be the central matter of the Vietnamese real estate market in 2011. The following are major solutions that need to be done immediately:

In the event that the domestic real estate market is short of capital while developed countries have escaped from the global financial crisis, the most important measure is credit flows from foreign banks. The Vietnamese laws currently disallow this mortgage mechanism because it has not recognised land-use rights by foreign organisations and individuals who are not investors in the country. It is easy to put real estate in pledge but it is more important to solve collateralised property when borrowers default. This legal change not only necessarily creates a stronger capital channel for the Vietnamese real estate market but also meets the need of expanding the stock market or expanding the M&A mechanism when foreign large companies get involved.

Recently, many foreign investors are very interested in the Vietnamese potential housing real estate market. This is an important capital solution. To support this capital solution, [Vietnam] needs to offer preferential land access to foreign investors on the one hand but must also seek to improve the efficiency of FDI in the real estate market on the other. Most FDI housing real estate projects mobilise capital from consumers like domestic investors. Foreign investors do not actually bring their capital into Vietnam but make profits from capital mobilised from domestic consumers.

 

In fact, "buying/selling houses on paper" is a very important capital solution but there are potential risks in this mechanism. These are risks in quality, progress, value, on ownership certification procedures. The Decree No. 71/2010/ND-CP on instructions for the implementation of the Housing Land provides regulations to address risks from this mechanism but this ruling impossibly ensures risk-free. Then, it is necessary to create a mechanism to ensure financial service transactions and ensure stakeholders’ monitor over quality and progress. On the other hand, it is necessary to have specific regulations on conditions on implementation of this mechanism for domestic and foreign investors to create equality in the environment for real estate business on the one hand and use most FDI capital on the other.