Many Realty Project Investment Licenses Revoked

The biggest challenge facing real estate companies is to seek out financial sources to continue their projects as scheduled. Without capital sources, many projects will lose investment licenses. Mr Nicholas Holt said: "In a sector that is highly leveraged, many developers are stalling their developments in search of capital whilst some are under threat of losing investment licenses.”

 

However, difficulties against real estate companies multiplied as the government has recently required local commercial banks to reduce their lending to nonmanufacturing sectors to 22 percent of total loan structure by June 30 and to 16 per cent by December 31, 2011 - one of measures to combat inflation have put a further squeeze on credit to the property sector. Currently, bank loans to the property sector are on the decrease.

With further monetary tightening being carried out by the government, property owners and developers have to be innovative to source finance from means other than bank loans.

 

Following government legislation, pre-sales off plan are not allowed. Pre-sales can only occur once a number of conditions are met, notably the foundations of a development are complete. Financing through capital contribution contracts and business cooperation contracts can begin before the foundations are complete [although this is restricted by the Decree 71). A successful pre-sales campaign can help finance an important part of the development. Selling and self-financing through phasing is obviously limited to suitable projects, for example a mixed villa and condominium development, where the sales of villas as they are being completed could fund the construction of the apartment building. This can reduce the financial burden on the developer significantly as sales from one phase will finance the next.

 

Other similar options are available increasingly being used by savvy developers. For example, participation lending, where the lender gives advantageous rate of interest for a share in the profits, is a possible way of enticing lenders and reducing the financial burden.

 

Besides, many domestic developers join hands with foreign partners who come with finance and expertise.

 

For big property developers, financial restraint is also an opportunity for them to extend their arms to global markets. On the corporate level, developers can raise finance through debt or equity finance. Although corporate bonds have been a solution, the credit rating of many Vietnamese companies and high interest rates make bond issuance a less attractive solution. Raising capital through an initial public offering (IPO) has also been an important source of finances although the current state of the stock markets has recently dampened interest.

 

According to economic experts, the illiquidity and lot size of property has been a consistent problem in raising capital in the sector. There is a lot of idle money in Vietnam, privately held or otherwise that could find its way into property. A solution seen throughout the western world and increasingly in Eastern Asia is the liquid, tax transparent securitized form of property, real estate investment trusts.