Many real estate companies have directly borrowed money from investors and pledged to pay higher interest rates than banks. This is their new self-rescue tool in a depressed market before it may be too late. However, this ploy also presents many risks for both investors and fundraising companies.
Self-rescue
The real estate market has been frozen for a long time as a result of tightened credit policy applied to this sector. Many companies have been thus caught in a dilemma. If they fail to mobilise funds to continue and complete their projects, they will be highly likely to face huge losses or go bankrupt. While commercial banks are coping with liquidity strains, it is definitely much harder for property companies to borrow money.
Recently, rumour has it that Flamingo Dai Lai Joint Stock Company, the investor of the well-known Flamingo Dai Lai Resort, is carrying out a villa construction partnership programme that offers high interest rates and preferences for creditors. Accordingly, if a customer signs a two-year investment cooperation contract worth of VND1 billion (US$50,000), he will be offered an interest rate of 23 percent in the first year.
The company also pledges to pay an interest rate that is 8 percent higher than a 12-month lending rate at commercial banks in the following year. Interest will be paid on an annual basis. When the contract comes to maturity, the customer will be repaid the principal and he will be allowed to continue the programme to enjoy more incentives. In addition, he will become the owner of Flamingo Villa Share 3 (FVS3) and enjoy many other benefits like a five-night stay in a luxury villa, 21 percent discount in villa purchasing price, and others.
Ocean Group Joint Stock Company, the investor of Star City Le Van Luong project, is also applying this form. With this special programme, the company confirmed that customers would have a profit of 22 percent per annum from their credit immediately after purchase contracts are signed. The interest rate will be fixed until the delivery of houses (expected September 2013). Thus, future apartment buyers are given higher interest rates than current deposit rates of 14 percent per annum applied by commercial banks.
In addition, the investor is applying a very flexible payment method for homebuyers, with 15 rounds of payments made in more than three years. More remarkably, the Hanoi Stock Exchange-listed Sai Gon Thuong Tin Real Estate Joint Stock Company (ticker: SCR) issues 18-month “floating” bonds worth VND99 billion bearing free interest rates, which are adjusted on a monthly basis.
Investors also wield this ploy for small projects. A series of mini apartments, a form of housing for middle-income earners, are also offering interest rates similar to banks until the delivery of houses. If everything goes smoothly, homebuyers will have multiple benefits because they purchase houses when prices are low, enjoy higher interest rates and quicker delivery of houses. Investors will have capital to continue with their projects and customers will get future benefits.
Compared with sale-off, this manoeuvre benefits both sides: Investors can mobilise unemployed cash from end-buyers who have real demand for property. Besides, in this context, as the gold market is instable, the stock market plummets, and bank interest rates decline, the real estate market can be a long term “shelter” for domestic and international investors.
This self-fundraising trend is getting more popular towards the end of this year when inward remittances surge. Total overseas remittances in 2011 are estimated to increase over 5 percent year on year and more than 70 percent of this capital is projected to flow into the property market.
Potential risks
Many companies have felt the strain of exorbitant interest rates of 22 - 27 percent as they have to pay off debts. Many reported giant losses in the third quarter. According to data released by stock exchanges, many good real estate performers started suffering losses in the third quarter. Thu Duc Housing Development Corporation (TDH) incurred a loss of nearly VND6 billion; Van Phat Hung Corporation (VPH) with over VND3 billion; and Song Da Urban & Industrial Zone Investment and Development Joint Stock Company (SJS) with over VND9 billion.
In the first nine months of 2011, Kinhbac City Development Share Holding Corporation (KBC) suffered an accrued loss of VND119 billion; Quoc Cuong Gia Lai Joint Stock Company (QCG), more than VND9 billion; and Investment & Trading of Real Estate Joint Stock Company (ITC), nearly VND81 billion.
Many investors are very “excited” with much higher interest rates than banks, currently hovering at 23 percent. However, taking PetroVietnam Landmark project as an example, the interest rate of 23 percent is lower than the actual rate this business borrows from banks. PVL borrowed VND100 billion from Lien Viet Post Joint Stock Commercial Bank (LienVietPostBank) with maturity on November 23, 2011. If the borrower fails to settle the debt on the date of maturity, according to the agreement, the rate will increase 25 percent each year plus a fined rate of 150 percent for overdue loans. In total, it may have to pay an interest rate of up to 40 percent per annum.
Fundraising is one possible way to sell products or attract customers, but the debts of real estate companies are undeniable. Many loss-making companies are raising funds for their projects and this is posing risks to investors. It is not advisable to rule out the possibility that these indebted enterprises want money from retail investors to settle their liabilities with banks. Given unclear information disclosure, a wrong decision may place investors at a disadvantage.
Huong Giang
Vietnamese
