Diversifying investment capital in the real estate sector

Paring down dependence on credit

Dr. Dinh The Hien

It was forecast that the capital inflows into the Vietnamese real estate sector would continue to go up this year, thanks to positive signs from commercial banks as well as individuals and foreign investors.

Contrary to the public’s unease regarding real estate investment, capital streaming into real estate in 2017 surpassed 2016. The most positive sign is that the new capital originates from various sources rather than just from commercial banks like before.

Consumer loans flow into real estate

Although real estate credit vastly diminished from 12.5 per cent in 2016 to 6 per cent in 2017, the ratio of real estate/construction credit over total outstanding loans saw little reduction, falling from 17.1 per cent in 2016 to 15.8 per cent in 2017.

Nevertheless, consumer credit growth in 2017 shot up to 65 per cent, levelling up the ratio of consumer credit in total credit to 18 per cent in 2017 against the 12.3 per cent in 2016.

Particularly, consumer lending for home purchases and refurbishments grew at the most rapid rate and accounted for the largest proportion with 52.9 per cent in 2017. As a result, total credit for the real estate sector in 2017 has exceeded 2016.

Foreign investment influx

During 2016-2017, Vietnam witnessed a sharp increase in the volume of foreign investment flowing into the real estate sector. Specifically, foreign direct investment (FDI) streaming into real estate was equivalent to 8.5 per cent of the total registered capital, mounting to $3.05 billion in 2017 ($1 billion in 2016), which ranked third among all industries.

In 2017, an impressive number of prestigious foreign firms partook in Vietnam’s investment activities through partnerships or mergers and acquisitions (M&A). This includes Japan’s Mitsubishi investing $630 million in Phuc Khang Construction and Investment Corporation as well as Nishi Nippon Railroad and Hankyu Realty from Japan teaming up with Nam Long Group to develop the apartment and condominium complex called Mizuki Park, situated in Ho Chi Minh City’s Binh Chanh District, with total investment capital of $350 million.

Note: VAT and maintenance costs excluded. All prices were recorded from property trading transactions Unit: Million VND per square metre

Developers on track to mobilise capital

Along with the revival of the real estate market in the 2014-2017 period and the upturn of the stock market in 2017, real estate developers managed to decrease their inventory value by a considerable amount over the last 12 months.

Furthermore, the country’s total real estate inventory value shrank by 17 per cent, to VND25.7 trillion ($1.1 billion) in 2017. Real estate firms, especially listed ones, saw a hike in charter capital.

In 2017, the charter capital of the ten listed real estate developers reached VND6.094 trillion ($268.4 million), which advanced the total figure to approximately VND21.549 trillion ($950 million) over the course of 2015-2017, further luring capital into the real estate sector last year.

Banks and investors alike are optimistic about the profitability of the real estate sector

Rosy forecasts for 2018

Capital into the real estate market largely comes in the form of loans provided by commercial banks. There are concerns that the capital for Vietnam’s property market may decrease in 2018 as banks were required to downsize the proportion of medium- to long-term lending to 45 per cent in 2018 and 40 per cent in 2019.

Nevertheless, commercial banks are expected to dodge the feared reduction of real estate loans thanks to the healthy growth rate of consumer credit. Besides, the strong growth of the stock market would diversify the sources of capital for real estate developers. For instance, they can raise capital from domestic and foreign investors for their upcoming projects.

A substantial number of individual investors still regard the real estate sector as their preferred investment channel. Gold prices are expected to level out in 2018, which can prompt individual investors to seek profit from real estate projects.

Real estate is also expected to continue to appeal to foreign investors, due to the stability of the VND and the rapid growth of the Vietnamese economy.

However, the real estate market might still need to cope with several risks, including a potential downturn of the demand from speculative real estate investment due to the fairly high cost of real estate over the past four years. This would pose a challenge to individuals who buy real estate for residential purposes, as they have to endure price bubble created by speculation.