Bond pressure retained in real estate

The government is being urged to create a new mechanism for some housing permit approvals, photo Le Toan

An inability to sell products is seriously impacting the revenue of real estate enterprises and puts them at risk of default, according to a report released in January by VNDirect.

Previously, bond issuers had to buy if their real estate bonds or corporate bonds were due. But the revised draft of Decree No.65/2022/ND-CP dated September 2022 is expected to stretch the grace debt period for an additional two years to the beginning of 2024.

As a result, bond issuers would have more time to arrange capital to relieve pressure in the short term. It also allows them to negotiate with the bond owners to pay using products instead of cash to help decrease the debt repayment pressure, according to Ngo Minh Duc, director of LCTV Investment.

However, Vietcombank Securities warned last month that it could still take time for the market to relay feedback on the decree revision, meaning the bond market could remain quiet this year.

According to the Credit Department for Economic Sectors under the State Bank of Vietnam, the outstanding credit for commercial real estate in 2022 was close to $35 billion, with urban areas and housing development projects receiving the most concern. The Hanoi Stock Exchange said that the outstanding individual bonds of real estate companies totalled around $17.7 billion at the end of 2022. Therefore, real estate enterprises are borrowing up to $52.5 billion through credit and bonds.

Many alternative solutions have been mapped out. The Ministry of Finance (MoF) has proposed that the government consider allowing enterprises to pay principal and interest on bonds in shares and real estate products.

The MoF has also submitted to the government a draft decree on trading private placement of corporate bonds in the domestic market and offering bonds to international markets.

According to Le Hong Khang, manager of Credit Analytics at FiinRatings, the two main short-term solutions expected to create a boost for the real estate market are increasing supply and supporting real estate businesses to increase their liquidity.

On supply, the government should create a mechanism to approve additional permits for commercial housing projects.

To support real estate businesses to increase liquidity, the government needs to launch a credit policy for homebuyers, reducing interest rates and allowing rescheduling and deferral of debts due to pay corporate bonds and bank loans.

FiinRatings also assessed that although the corporate bond mobilising channel will not be able to recover in size in a vibrant way until the end of the first half of 2023, some issuers with good credit quality, clean legal records, and clear and transparent corporate bond funding projects will still have a chance to successfully issue in the domestic debt market as well as with foreign investors.

Building a reliable corporate bond market Many businesses will see their bonds mature in 2023, with about $6.5-8.7 billion being due.

M&A activity likely ahead within real estate sector With lower cash flow, bonds tightened, and interest rates hiked, mergers and acquisitions are being considered an effective solution to help real estate businesses in difficulty.