Neighbouring real estate wobbles and their impact on Vietnam

For many years before the pandemic, the Vietnamese real estate market was a no-brainer for both private and institutional investors.

Prof. Andreas Stoffers, country director of the Friedrich Naumann Foundation in Vietnam

It had a reputation for generating a high return within a short timeframe, and was buoyed by the traditional preference of the Vietnamese for real estate ownership.

Other drivers included the lack of safe alternatives in other areas, as well as a rather lax supervisory practice and low financial literacy among large sections of the population.

More recently, there has been strong growth in corporate bond issuance, which of course has an impact on foreign investors' view of Vietnam.

But it's also clear to them that the difficulties Vietnam is currently facing are both endogenous and exogenous. Of particular note here is the weakening of international trade due to a variety of factors.

For example, Vietnam's total international trade in the first seven months of this year fell by 13.9 per cent on-year and is now estimated at $374 billion. This is primarily due to weaker global demand.

In addition, there were lower prices for import and export goods in the first half of 2023, and relatively high logistics costs. In terms of the state budget, there were declining revenues over the first seven months (-7.8 per cent on-year).

The non-performing loan rate remains critical in Vietnam. In recent years, the issuance of corporate bonds has increased overall, and the number of defaults has also risen significantly.

Default rates reached 11.74 per cent in May, which is clearly too high. While these difficulties do not pose an existential threat, they must be kept in mind and appropriate measures must be initiated to identify, weigh, and manage the risks. These factors remain forefront in the minds of foreign investors when they look at Vietnam.

A closer look at the property market is essential to fully understand the impact of bond defaults in the nation, as the two markets in Vietnam are strongly linked. Almost a quarter of real estate bonds have defaulted as of May. In fact, a significant share of the increase can be attributed to property developers, as this sector has driven the bond market and attracted a significant number of investors.

To overcome liquidity problems, developers turned to professional bonds that could be issued easily and quickly. The regulator tried to protect retail investors from this type of risky investment by restricting access to these bonds – which do not require any regulation or transparency – as early as 2020.

However, the strict rules led to a stark decline in bond issuance, which affected the liquidity of developers and caused a temporary halt to ongoing real estate projects. Although the current situation can be explained by short-term indicators such as the credit environment, inflation, or rising interest rates, the solution to the problem is more fundamental and therefore should be addressed in the long term.

Developments in China should be a warning finger to all investors in Vietnam, as well as to the authorities. In addition, shocks with the likes of Evergrande show that real estate enterprises do face the risk of an exploding bad debt crisis, and Vietnam, with the unstable capital structure of its real estate enterprises, also faces similar risks.

Every investment involves a risk. However, it is crucial how one identifies, and ultimately, deals with them. As far as Vietnam is concerned, the problems in its real estate and bond markets are linked to three key factors, namely legal issues with institutions and the circumvention of regulations, the lack of financial knowledge among retail investors, and the current structure of the financial industry.

Addressing these factors is critical for a more stable and resilient financial ecosystem. Companies can do their part by improving their own risk management practices, opening up to independent ratings, and cooperating with renowned foreign capital providers.

In the long run, healthy companies and financially literate private investors will emerge strongly.

Ultimately, as elsewhere in the world, three things will count, location, location, and location. Added to this are construction quality and rental yields, which need to be given more consideration by investors.

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