Real Estate Stocks: Strong Magnet to Foreign Investors

Property credit tightening is narrowing credit access for many real estate companies. But, this does not seem to concern real estate stock investors on the stock exchange, particularly foreign investment funds, which have rushed to buy property stocks in large quantity.

Prospective market

Currently, the real estate sector is leading the Vietnamese stock market in large-cap listings on all HOSE, HNX and UPCoM bourses. Structurally, this sector plays an important role in economic growth and stock market trends.

In 2019, real estate stocks are still doubted regarding growth, because their positive performance in 2018 was resulted from timely and reasonable efforts and interventions of industry authorities and local governments.

According to the Vietnam Association of Realtors (VARs), in 2018, the real estate supply in Hanoi reached about 44,788 products, 23.77% more than a year ago. Of the sum, apartment was still a key segment, accounting for 87.26% of the total supply.

In Ho Chi Minh City, the supply amounted at 49,948 products in 2018, up 16.2% year on year. Just like the market in Hanoi, the apartment segment accounted for nearly 90% of the supply.

By liquidity, successful apartment deals reached 27,595 in 2018, up 32.8% year on year. The midmarket segment occupied the biggest share of over 50% of the supply. Residential land also sharply increased 3.3 folds from a year earlier to 3,106 products.

Successful deals in Ho Chi Minh City totaled 30,957 units, down 24.1% from 2017. Upmarket segments secured the highest share of 41.1%, followed by the midmarket and affordable segments with 36% and over 22% respectively.

According to VietinBank Securities Joint Stock Company, revenue of listed real estate companies rose steeply in 2018. The 5-year compound annual growth rate (CAGR), a type of rate of return, reached 19.6% and 23.6%, respectively. Inventory turnover in 2018 was also much higher than in previous years, standing at 78%.
Mr. Nguyen Nhat Cuong, Deputy Director of Vietinbank Research Center, said that in 2019, it is hardly likely to see a similar crisis as 10 years ago. Instead, the risk against real estate firms in 2019 is the speed of inventory turnover, capital structure and return on capital employed. Currently, their inventory and debt ratio have dropped sharply.

Data from Vietinbank Securities showed that, real estate firms enjoyed high growth in the period from 2008 to 2018. In 2018, their revenue grew by over 50%, their cost of goods sold (COGS) climbed 46% and their compound profit surged 65%.

Remarking on the current opportunity with property stocks, Mr. Le Hoang Chau, Chairman of the Ho Chi Minh City Real Estate Association (HoREA), said that in other countries investment funds and stock markets are the main sources of funding for the real estate market, but in Vietnam, real estate companies still largely depend on bank credits which are more expensive and less stable.

Before 2019, a project investor needed capital equal to 15 - 20% of the investment value, while the rest may be raised from bank loans and from customers. However, according to amended Circular 36, starting from the beginning of 2019, credit institutions and foreign bank branches can use at most 40% of short-term capital for medium and long-term loans.

Great opportunity for real estate stocks in 2019

In 2019, with the robust development of financial companies, real estate companies will have a new source of finance. Besides, other long-term capital channels such as issuing shares and bonds and raising advance capital from home buyers are also being chosen by real estate companies, let alone rolling waves of huge investment flows from other countries into the real estate market through cooperation with domestic enterprises.

According to Viet Dragon Securities Company (VDSC), the CAGR of the real estate industry was about 25 - 30% in recent years and decreased to 24% in 2018. The return on equity (ROE) improved and rose 9% on average on lowering interest expenses and less dependent on credit flows. VDSC believed that the sector’s price to earnings (P/E) ratio is about 13 times, which is relatively low and more reasonable than before.

Large funds are still interested in real estate stocks, particularly Vietnam Enterprise Investments Limited. Since late 2017, most of Dragon Capital’s investments have involved real estate companies, including many new listings such as Vinhomes Joint Stock Company (VHM), Century Land Joint Stock Company (CRE) and Hai Phat Investment Joint Stock Company (HPX). As of the end of 2018, real estate accounted for nearly 28% of Vietnam Enterprise Investments Limited’s (VEIL) portfolio, becoming the largest sector on it, valued at US$1.43 billion. Among VEIL’s 10 largest investments, three are real estate stocks: Khang Dien House Trading and Invest Joint Stock Company - KDH (6.62%), Vinhomes Joint Stock Company - VHM (4.92%), and Dat Xanh Group Joint Stock Company - DXG (3.14%).

Mr. Vu Huu Dien, Deputy General Director of Dragon Capital, current housing demand is high and rising, particularly from young customers and newlyweds. Meanwhile, the supply is limited as a result of tightening policies, land allocation conditions, construction permits and outstanding bank loans.

Binh Minh