A myriad of challenges awaits

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Developers will face many difficulties until the middle of this year as the oversupply in all property market segments and stricter legal framework put a burden on their shoulders.

At the end of January 2011, SSI carried out a survey at many realty enterprises in Ho Chi Minh City and Hanoi to assess market prospects, address legal framework issues and other challenges impacting on realty enterprises this year.

Based on the survey, SSI believes the property market will continue to face many challenges at least until the middle of 2011.

Firstly, the current legal framework causes many pressures on developers, especially regulations concerning land compensation and property transfer and amended rules on trading land, apartments and contribution capital contracts.

For example, a project developer is returned with an amount of money the developer has paid land owners in line with land prices set up by municipal or provincial people’s committee. However, this amount of money is often much lower than the sum the developer paid because the land prices set by authorities are lower than the levels the land owners ask for.

According to the new Decree 71, developers are not allowed to transfer a part or whole of their projects to others before the project’s infrastructure is basically completed. The decree has prevented developers from  focusing on their main projects via restructuring portfolio, cutting back on less important projects. Based on the current accounting rule, the developers are not allowed to account turnover from selling projects which have not been built or have just half completed.

Secondly, the apartment market is experiencing an abundance of middle-end and social housing projects. There will be thousands of new apartments planned to be launched in the near future.

The fierce competition in the market is unavoidable. It is very difficult for realty enterprises to get big profits, even a few of them will experience losses.

Ho Chi Minh City-based developers predict that the apartment segment will be down and they have been moving to focus on low-rise houses to ensure the projects’ sales progress as schedule.

Apartments with price ranging from $579-$724 per square metre in the south still have high liquidity. However, some of local enterprises in Ba Ria-Vung Tau and Dong Nai provinces are divesting from apartment projects and moving to invest more in landplots with lower costs in the suburban areas.

In the north, most segments have low liquidity. Even though property prices in several small areas increased, it did not reflect the real market.

The apartment segment, especially high-end apartments offered at more than $1,700 per square metre (exclusive of VAT) is showing signs of oversupply in primary market. Many developers started divestment from the segment while others found ways to delay their projects with the expectation that offering prices of the apartments in the near future will be raised.

Even though property prices are increasing, it is very difficult for large developers with a series of large-scale projects to get profits by selling apartments.

Thousands of apartments from Mulberry Lane, Park City, Royal City, Indochina Plaza, Hapulico Complex and Nam Cuong Residences will come online within next two years, pushing developers into a fierce competition like the current Ho Chi Minh City apartment market.

Thirdly, almost leaders of realty enterprises which SSI contacted last January said they faced difficulties in setting up business plans in 2011. They may set a low growth rate or no growth. Besides that, most developers were cautious in dealing with questions relevant to expanding their business or raising capital.

Presently, mobilising capital via share sales is not as simple as before. High borrowing costs put more burden on realty enterprises especially those who do not have enough condition to sell their products to collect money.

The property market is a gloomy picture. Meanwhile, many Ho Chi Minh City-based developers thought the market had nearly bottomed out.

However, the current annual national urbanisation rate is still over 3-4 per cent, reflecting the high demand for apartments. Higher and higher input costs and compensation may prevent Ho Chi Minh City apartment developers from developing products at sales prices of $579-$724 per square metre.

SSI supposed that the market is nearly bottomed out and may surprisingly recover immediately after important macro issues such as interest rates and inflation were solved. The issues are expected to be improved after this first quarter and their impacts may be clear from this second quarter.

Therefore, in the second half of 2011, especially in the four quarter, there will be several large developers releasing their best business results.