Real estate market is considered a thermometer of national economy because the recession or recovery of national economy is mirrored in real estate market with a certain lag. According to a report released by the Ministry of Construction, the real estate market faced difficulty in the first six months of 2012; house prices dropped in all market segments; deals steeply plunged. Even, many projects had no deals at all. Therefore, it holds no surprise that real estate loans (together with bad debt in securities industry) account for the largest proportions in total bad debts of credit institutions in Vietnam.
Avoiding groundless optimism
Investments in real estate development and cement production projects and other non-core businesses have caused giant State-owned enterprises (SOEs) and popular private firms to hold above half of bad debts in the banking system. Credit institutions stopped funding the real estate market. The burst of real estate bubble has panicked investors although none wants to mention it.
Bad real estate debts include debts of investors to construction contractors; debts of investors to credit institutions; and land-related loans of investors (land rents, site clearance compensations, etc).
Another source of debts comes from deposits and advances from homebuyers. However, investors do not have houses to hand to buyers.
Bad property debts come from both subjective and objective reasons. Objectively, economic slowdown and other risks drag on property demand. And, subjective causes decide the severity of bad debts. In particular, risk management capabilities, especially monetary risk management of both lenders and borrowers play very important roles. In fact, many real estate companies (and not only they) know little about business risk management, even have very poor knowledge of market and investment project establishment, and disregard target market research. What they care is eventual ideal results: Multiple profits on investment.
Another reason is groundless optimistic forecast by specialists and authorities, aiming to sooth the public. This lingers property investors to use timely solutions to deal with bad debts.
Only enterprises that are alive can repay debts
Credit institutions deal with bad property debts in two ways: (1) immediately cash recovery; and (2) future cash recovery.
The first method has six ways to deal with security assets: Compulsory sale, package sale, general sale, inclusion of all debts, leasing and legal actions.
The future cash recovery is expected to have two ways to handle debts: Convert debts into shares; and convert bad debts into securities.
I think that our country can apply these methods now except securitisation because our stock market is too young.
However, these methods are deployed at the last resort. As only living businesses can repay debts, lenders should sit down with indebted companies to discuss solutions.
If they have good incomplete projects like building affordable houses or offices for lease, banks should fund them to complete those projects.
If borrowers find buyers for their ongoing projects and change purposes of those projects like hospitals or schools, banks (and authorities) should facilitate them to finalise the deals if they do not cause any problems to master planning.
Debt freezing, debt rescheduling and rate cut should also be taken into consideration if borrowers can thereby increase the capacity of repayment.
They can sell projects to other investors or cancel suspended projects.
Some bankers used to say that they would rather let capital be idle rather than lend real estate companies. In reality, not all the property market of Vietnam is frozen. Some projects are stilling making a profit in this tough time. So, why did they discontinue financing? Real estate businesses are important customers of banks and they are not deserved to be dropped. Banks should have had risk management plans for your businesses, not behaved like that.
Apart from reducing prices, changing usage purposes to sellable segments and cutting expenses to deal with bad debts, real estate businesses also need to seek out other creative solutions like accepting instalment payments. These will ease pressures for customers, banks and themselves.
Finally, real estate enterprises must undergo restructuring.
A majority of real estate companies have small operating scale, with registered capital of less than VND10 billion (less than VND500,000), they are not strong enough to deal with risks. Hence, they should amalgamate to form a stronger entity to withstand risks.
Small businesses should not, and cannot, be allowed to develop and operate real estate but they should be allowed to buy and sell real estate. Transferring capital into Real Estate Investment Trust (REIT) is the best way. The Government should allow Ho Chi Minh City and Hanoi to pilot this approach. Property associations there will stand out to mobilise capital. We can learn this method from Singapore or other countries.
Normally, the Government does not intervene into the market. But, current alarming bad debts of the banking system and enterprises are causing bad impacts on economic growth; the State Bank of Vietnam and other authorities start seeking appropriate instruments and measures to boost up business environment. This is much-expected and applauded move to ensure healthy development of involved industries and the economy.
Dr Pham Sy Liem
Vice Chairman, Vietnam Federation of Civil Engineering Associations
Vietnamese
