by Susan Paige
The Rise and Financial Dynamics of Vietnam’s Real Estate Sector
In the years leading up to 2019, Vietnam witnessed an exceptional growth in its real estate market. This period was marked by a significant migration of the middle class from rural areas to urban centers, fueling a demand for housing in cities. The real estate sector, riding on the wave of economic development, saw an unprecedented surge in construction, with buildings rising rapidly to accommodate the influx of new city dwellers.
To keep pace with the burgeoning demand for housing, real estate companies in Vietnam required substantial capital. These firms extensively borrowed from banks and issued bonds worth hundreds of millions of dollars. This aggressive fundraising was essential to meet the growing appetite of home buyers, who were eagerly investing in urban properties.
COVID-19: Impact and Post-Pandemic Recovery in Real Estate
The onset of the COVID-19 pandemic marked a dramatic shift in Vietnam’s real estate market. The once-bullish home buyers turned cautious, leading to a noticeable downturn in home sales. Many real estate companies, already heavily leveraged, found themselves in a precarious position. With dwindling sales and limited borrowing options, these firms faced a significant liquidity crunch.
With the worst of the pandemic seemingly behind and vaccination rates climbing, the country was shifting its focus from prevention to control. Plans were underway to reopen borders, and expectations were high for a full economic recovery.
The Bond Market’s Role and Regulatory Changes in Real Estate
In response to this liquidity crisis, numerous real estate firms in Vietnam looked towards the bond market. This pivot resulted in a substantial increase in bond issuances. In 2020, the value of Vietnam’s local currency corporate bonds stood at US$12 billion. By the end of 2021, this figure had more than doubled, reaching US$26 billion. A significant portion of these bonds were linked to the real estate market, reflecting the sector’s reliance on this financial instrument for survival.
Recognizing the role of Vietnam’s bond market in financing questionable activities in the real estate sector, regulators announced a series of reforms in September 2022, encapsulated in Decree No. 65/2022/ND-CP (Decree 65). Key reforms included the requirement for investors to be certified as ‘professional investors,’ mandating credit ratings for high-value bond issuances, and restricting the use of raised funds to specific projects or debt restructuring only. However, these well-intentioned reforms had unintended consequences, causing disruptions in the bond market and constraining cash flow for real estate firms, especially in light of Vietnam’s first interest rate increase in two years.
External Influences and Market Fragility in Vietnamese Real Estate
However, the recalibration of financing strategies in Vietnam’s real estate sector was soon tested by external market forces. The financial turmoil surrounding China’s second-largest property developer, humorously dubbed a ‘debt bomb’ in the Vietnamese press, had far-reaching impacts. This situation, often likened to the ‘hand-Evergrande’ scenario, sent ripples across global markets, affecting various sectors including the interest in the Meyer Blue price in Singapore. The incident served as a stark reminder of the inherent vulnerabilities and interconnected nature of the real estate market within the region, where events in one country can influence market trends and investor interests in another.
The default of Evergrande at the end of 2021 sent shockwaves through global markets, and its impact was keenly felt in Vietnam. With liabilities nearing US$300 billion, the collapse of such a substantial company was a wake-up call for Vietnam, a country with many similarities to its northern neighbor in political, economic, and structural aspects. This event prompted consumers, investors, and regulators in Vietnam to seriously consider the possibility of a similar crisis occurring in their own backyard. As a result, the Vietnamese real estate sector came under intense scrutiny. Regulators actively sought to identify and address systemic vulnerabilities within the sector.
Global Conflicts, Economic Pressures, and Vietnam’s Strategic Response
However, the outbreak of war between Russia and Ukraine introduced new challenges. This conflict led to rampant inflation in two of Vietnam’s major export markets: the European Union and the United States. The inflationary pressures in these regions caused a tightening of consumer spending, which, in turn, led to a decrease in orders for Vietnamese manufactured goods, notably in the garments and textiles sector. Given that the US and EU represented almost 50 percent of Vietnam’s total exports in 2022, even a slight drop in orders had significant repercussions for the Vietnamese economy, resulting in layoffs in several manufacturing sectors.
Compounding these challenges were the policy responses by the European Central Bank and the United States Federal Reserve, which raised interest rates to combat inflation. These actions strengthened the Euro and the US dollar, exerting downward pressure on the Vietnamese dong. The dong, being a heavily managed currency, required vigilant oversight from the State Bank of Vietnam (SBV). The SBV employs various strategies to maintain currency stability, such as managing foreign reserves, regulating credit growth, and adjusting interest rates as necessary.
Fortunately, at the start of 2022, Vietnam’s foreign reserves were robust, estimated by the World Bank to be upwards of US$109 billion. This level of reserves, well above the recommended threshold for three months’ worth of imports, provided a cushion that might allow the SBV to avoid, or at least delay, raising interest rates. This was a crucial factor for the stability of Vietnam’s real estate sector amidst these challenging global economic conditions.
Market Challenges: Regulatory Responses and Economic Turbulence
March 2022 marked a significant turning point for Vietnam’s real estate market. Amidst global economic adjustments, the market faced challenges linked to allegations of unethical practices. This phase was highlighted by the arrest of Trinh Van Quyet, chairman of a prominent real estate developer. Quyet was accused of manipulating the stock market by selling a substantial number of shares without notifying the State Securities Commission. This incident triggered widespread concern, particularly as the company in question had extensive projects across Vietnam in various real estate sectors. The arrest of Quyet created a ripple of uncertainty among investors, leading to a slowdown in the real estate sector.
Compounding these challenges, September saw an increase in interest rates, with a rise of up to 1 percent in most categories. The State Bank of Vietnam (SBV), in its efforts to maintain control over the dong amidst soaring global inflation, especially from the US, found its foreign reserves depleting rapidly.
The crackdown on misconduct in the real estate sector persisted throughout 2022, culminating in the arrest of Truong My Lan, chairwoman of Van Thinh Phat Holdings Group, in October. Lan faced allegations of bond fraud. The real impact, however, stemmed from rumors linking her company to Saigon Commercial Bank, which triggered a bank run. This event brought the challenges of the real estate and bond markets back into the limelight, eroding consumer and investor confidence.
Adding to these challenges, the SBV raised interest rates again in late October, further increasing borrowing costs and exacerbating the sector’s difficulties.
Current State and Ongoing Challenges in Vietnam’s Real Estate
As 2022 ended and 2023 began, the real estate sector continued to struggle. Manufacturing orders decreased, interest rates were higher, and the residential real estate market remained largely stagnant. The bond market was still in a state of restricted activity compared to the previous year, and consumer confidence had not recovered, leading to indefinite delays in numerous real estate projects. The first two months of 2023 saw a substantial increase in real estate business closures, indicating that the sector might require additional interventions to revive.
Despite these domestic challenges, foreign firms in Vietnam’s real estate market experienced a markedly different scenario, suggesting a nuanced impact of these economic conditions.
Vietnam’s real estate sector presents a complex picture at present. On one hand, global inflation is showing signs of stabilization, suggesting a potential positive turn for the global economy and, by extension, for macroeconomic stability in Vietnam.
On the other hand, efforts to cleanse the real estate market of unethical practices remain steadfast. The introduction of a new decree, Decree 08, which amends some aspects of the previous bond market reforms (Decree 65), has been received positively, although its long-term impact remains uncertain.
Moreover, a recent interest rate cut aims to stimulate recovery in the real estate sector. However, it’s unclear if the global factors contributing to rising interest rates have fully abated. As a result, the relief provided to local real estate firms could be temporary.
Given these uncertainties, a cautious and measured approach is advisable for firms operating in this sector. It is still premature to predict when consumer and investor confidence will fully return to the market.
An Opportune Moment for Foreign Real Estate Firms
Recently, there has been significant interest from international investors in Vietnam’s real estate market, as evidenced by reports of Singapore’s CapitalLand considering a substantial acquisition from VinHomes. This is reminiscent of the buzz around developments like Meyer Blue in Singapore, which have also drawn considerable attention from investors. While the CapitalLand and VinHomes deal remains unconfirmed, it highlights the potential opportunities for foreign firms in Vietnam’s current market landscape.
The challenges in Vietnam’s real estate sector, particularly affecting residential properties and local companies, require foreign entities to exercise due diligence. They must thoroughly understand the financial backgrounds of their Vietnamese partners, as well as the origins of capital and supply chains involved. This becomes increasingly important as several projects are currently stalled, leaving many homebuyers in a state of uncertainty and contributing to a decline in consumer sentiment towards the local real estate sector.
However, this scenario presents a unique opportunity for foreign firms. There is a prevailing consumer interest in home ownership, with a tendency to favor established and reputable international brands. Consequently, foreign companies seeking to merge with or acquire Vietnamese real estate businesses may find favorable conditions for such ventures. Furthermore, cash-strapped domestic companies might be open to international partnerships, potentially offering advantageous terms.
Reflections and Future Prospects
The real estate sector in Vietnam has endured significant challenges over the past few years, exacerbated by pre-existing issues of overleveraging among many real estate companies. The onset of COVID-19 and subsequent geopolitical events, such as the war in Eastern Europe, have served as a wake-up call for the industry.
Looking ahead, the shift towards a more sustainable bond market and a more prudent approach to real estate development could be beneficial. Such changes are likely to lead to a more stable real estate market in Vietnam, ultimately strengthening the foundation of the country’s economy. This, in turn, could catalyze more robust and sustained economic growth in the long term.
So, what do you think ?