Full market recovery still out of reach for real estate

According to the Ministry of Finance’s report released last week, July saw a total of 56 successful private corporate bond issuances with a volume of approximately $1.88 billion. In which, real estate companies issued nearly $229.17 million, accounting for 12.1 per cent, marking the return of real estate corporate bonds after three months of being overshadowed by financial and banking bonds.

Full market recovery still out of reach for real estate, illustration photo/ Source: freepik.com

“Many real estate bond issuances had their documentation prepared by the end of Q1, but only completed legal procedures by the end of Q2 to execute and distribute bonds to investors,” said Do Bao Ngoc, deputy CEO of CSI Vietnam Construction Securities. “Additionally, these issuances were part of the companies’ capital plans set at the beginning of the year. Therefore, the successful legal completion in July may not necessarily be due to the impact of the three new laws on the real estate market.”

According to a report from the Vietnam Bond Market Association (VMBA), so far this year, real estate bonds rank second in terms of issuance value, after the banking sector, with approximately $1.36 billion raised.

The average bond interest rate in the market reached up to 12 per cent per year, with shorter maturities of around 2.7 years, while banking bonds had interest rates ranging from 4.7 to 7.4 per cent.

“In reality, real estate companies are raising funds to restructure debt and develop ongoing projects,” added Ngoc. “If only looking at bond issuance, we can only expect that supply will increase in the near future with many ongoing projects completing and providing products to meet the real housing demand of the public and investment demand.”

Developers are eager to expedite the completion of ongoing projects to sell at higher prices. Therefore, it is also expected that liquidity in the real estate market will increase, and prices may gradually decrease as supply increases towards the end of the year, added Ngoc.

The VBMA’s July report also noted a rapid increase in the rate of overdue bonds in this sector, with 116 companies facing payment difficulties, accounting for about 21 per cent of the total market debt.

“The concurrent push by banks to issue bonds is believed to be aimed at strengthening long-term capital to meet corporate borrowing needs. Alongside the resurgence of new issuances, the overdue rate continues to rise quickly as many companies face significant maturity burdens,” said a representative from MB Securities.

According to FiinGroup’s preliminary assessment report as of the end of June, based on the financial statements of more than 400 companies with bonds currently outstanding in the market, over 60 per cent of real estate companies fall into the category of having average or weak creditworthiness.

Additionally, the incidence of credit events such as bond defaults, delayed principal and interest payments, or extensions of debt repayment terms ranges from 20 to 30 per cent in the market.

“The amount of bond debt from companies that have not experienced any credit events and are maturing this year and in 2025 is nearly $12.5 billion. Thus, in a baseline scenario, if the default rate is around 20 per cent, while it could reach 30 per cent, we estimate that there will be approximately $2.5-4.17 billion in bonds encountering credit events and defaults by real estate companies,” said Le Hong Khang, manager of Credit Ratings at FiinRatings.

Legal constraints remain the most challenging issue for most real estate companies, which have used high leverage for extended periods to acquire land reserves.

“Under favourable market and business conditions, they can potentially refinance. However, if the market is unfavourable, it will lead to liquidity issues,” Khang explained. “In addition to awaiting regulatory resolutions for real estate projects with legal hurdles, it is crucial to rely on the market’s ability to find solutions that help companies with land reserves to secure financial solutions to complete their projects. This will help recoup initial investments.”

Khang anticipates a relatively slow recovery, with the next development cycle of the bond market expected to be significantly more positive, becoming a channel for medium and long-term capital that alleviates pressure on commercial banks.

“When Vietnam experienced a liquidity boom and a surge in bond issuance in 2022, it was also a period of rapid real estate market growth. I recognised that the real estate market is heavily dependent on this funding channel,” Khang said. “This is one of the critical pillars of the economy, and I can see that the government has set firm goals to build a healthy and sustainable bond market in the medium and long term, aiming to increase the size of the corporate bond market to 25-30 per cent of GDP by 2030.”

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