Credit crunch to leave mark on market

Stephen Berlinguette

Already in 2008 we have seen a momentous shift in government policy towards Vietnam’s property market.
Between December and February 2008, the State Bank changed course from its pro-growth stance and enacted measures designed to clamp down on inflation and control the growth of one of inflation’s main culprits, the boom in investment properties, particularly land and condominiums.

In the aftermath of the bank’s moves, domestic lending slowed to a trickle, particularly for property investments. With foreign direct investment inflows at an all-time high, it is possible that foreign capital will take an even larger role in property investments in Vietnam.

A high gross domestic product growth rate, sound fundamentals and liberalisation policies have been the mainstay of Vietnam’s deserved status as a new economic tiger. The merits of the market, amplified by Vietnam’s World Trade Organization accession, led new foreign investment to Vietnam’s door in 2007.

FDI inflows in 2007 beat expectations by over $8 billion, with the actual figure at year’s end at $21.3 billion. Much of this investment flowed to the property sector, with upwards of 85 per cent of FDI in Ho Chi Minh City alone directed towards real estate.

By 2010, Vietnam expects to have welcomed another $38-41 billion in registered foreign capital. To entice investors, the government has plans to further ease FDI entry procedures and fully implement the Investment Law, which fused formerly separate legal structures for foreign and domestic firms. Furthermore, Vietnam’s efforts to liberalise property ownership laws applying to Viet Kieu, foreigners, and foreign firms continue apace and are projected to produce pilot programmes in 2008.

Domestic investment on a roll
The market for domestic property investment has been buoyant for some time. Though Vietnam continues to develop its financial sector, there are still only limited market opportunities for Vietnamese citizens to invest their savings. Accordingly, many domestic investors placed their money in gold and in the nascent stock market. Equally important, the property market has provided many domestic investors with large returns.
Until late 2007, reinvested stock market gains helped fuel the robust domestic demand for property in Vietnam. Though this demand persists in early 2008, the stock market decline since October has dried up some of the funding available to domestic investors for both development projects and property purchases.

Credit crunch bites
In February 2008, inflation hit 15.7 per cent, a rate not witnessed in Vietnam since the mid-1990s. After an average consumer price index rate of 12.63 per cent and a GDP growth rate of 8.5 per cent in 2007, the trend of a growing inflation rate hovering well above economic growth levels was established. Part of the blame for the high inflation rate went to the hot property market and the loose credit policies that supported bank lending for real estate investments.

Rising bank lending levels alone increased the money supply by 37 per cent last year. The supply of real estate could not keep up with demand and speculators and other investors drove up the prices of property and construction materials, a phenomenon that impacted on prices in the wider economy.

Prime Minister Nguyen Tan Dung has made a priority of controlling property market growth in order to help stabilise prices and make real estate more affordable for domestic buyers. In accordance with the prime minister’s focus on fighting inflation, the State Bank embarked on a tighter credit policy in December. First, the bank loosened the currency trading band, which allowed the dong more room for appreciation against the US dollar.
By the end of January, the State Bank had raised bank reserve requirements, increased interest rates, and began enforcing stricter rules for securities and real estate lending late last year. In February, the bank removed over VND20 trillion from circulation.

Though these moves were designed to slow inflation and curb speculation in the real estate market, the intended results have yet to appear. Inflation is ever present, having risen by over 6 per cent in both January and February. Yet, given the higher prices for credit and a more risk-averse environment, commercial and state banks have all but stopped loans to property investors. Many fear that a lack of capital will lead to a severe slowdown in projects, which could send property prices further upward.

FDI to fill the gap?
One of the key questions for this year is how the property market will weather the credit crunch and ensure that the voracious demand for real estate is addressed in Vietnam. If lending levels do not bounce back and with the stock market remaining on its current trajectory, the only domestic investors able to take advantage of abundant property demand in the near term will be those with access to capital sources other than domestic state and commercial banks.

This scenario could provide new opportunities to foreign investors. The real estate market is forecasted for a growth rate of 20-30 per cent in 2008. Demand for residential property among both Vietnamese people and expatriates, as well as for office and hotel space, will continue to be high until at least 2010. Thereafter, Savills anticipates that supply will begin to catch up with this demand, as many new projects will be completed and occupied. There is also a clear need for higher quality retail development and industrial facilities in anticipation of WTO compliance in 2009.

The economy’s fundamentals remain sound, and for many reasons Vietnam’s appeal as a destination for FDI is still high. Inflation at these levels, however, typically restrains investment and slows financial sector development. Ultimately, the appetite for risk among new sources of foreign capital may depend on whether inflation can indeed be tamed.