New capital sources for real estate must be unlocked

January 09, 2024 | 10:00
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The real estate market not only needs solutions from credit and corporate bonds, but most importantly, it must open up capital flows from society, from investors and home buyers.

Apart from bank credit capital and corporate bonds, capital from home buyers and investors from investment cooperation contracts and business cooperation contracts are much larger and extremely important for the real estate market.

New capital sources for real estate must be unlocked
Nguyen Quang Thuan, chairman, FiinGroup

Data based on financial reports of 50 listed residential real estate businesses in December showed that these businesses have a total debt of $8 billion in the first three quarters of 2023. Of which, capital received from investment cooperation contracts and business cooperation contracts accounts for the majority. This capital source is about 2.5 times higher than the balance of bank credit capital and bonds.

In addition to capital from credit and bonds that are facing difficulties, capital from the market and investors are also facing a huge bottleneck.

On the home buyer side, real estate prices have increased too high, while people’s incomes have been affected by the economic downturn, making customers hesitant to invest their money into real estate products.

On the other hand, although home credit interest rates have tended to decrease recently, there are still risks due to the floating interest rate mechanism. Therefore, deciding to buy a house is probably not a priority for individuals in this period.

On the part of investors, the State Bank of Vietnam’s policy of controlling credit risks on the use of loans is also limiting capital contribution and business cooperation. Besides that, in the difficult economic context, many investors also choose a wait-and-see approach.

The capital problem of the real estate market needs a more comprehensive solution, instead of just focusing on bank credit or corporate bonds.

To clear the flow of capital from the market, first of all, project legal issues need to be resolved. Legality is the key to any solution to open capital channels in the real estate market, whether credit capital, investment trust capital, business cooperation, or advance receipt from home buyers and project transactions.

The fact that investors proactively implement real estate legal solutions with strong support from the government and local authorities is a key factor as a premise for promoting the market in general and capital channels in particular.

Changes from the laws on Real Estate Business and on Housing as well as the expected revised Land Law are all highly appreciated by market members. However, they will come into effect from the beginning of 2025 and these are fundamental elements that are more medium- and long-term in nature.

In the immediate future, urgent and supportive measures for accommodation and handling of current outstanding projects require stronger movements. The market also expects that transitional provisions from the amended laws related to land will also be expected to have specific instructions to contribute to handling outstanding or ongoing projects according to previous regulations.

Real estate credit capital is not only directly from banks and from corporate bond channels, but capital mobilised in society through business cooperation forms and from customers themselves is a major source of capital.

In addition to situational solutions, improving information transparency from developers will be both short-term situational and long-term solutions.

In the actual conditions of Vietnam, I propose a closed real estate credit programme focusing on the mid-range segment and below, to harmonise the interests of all parties. For this, the projects developers complete their procedures, ensuring a transparent price for their products and giving priority for developing mid and lower accommodation, from $2,900 per square metre downward.

In parallel, commercial banks should consider reducing loan interest rates for home buyers who meet specific conditions, credit disbursement for home buyers goes directly to the project developers, and selectively granting credit to investors depending on the credit risk assessed and appraised by commercial banks.

To implement this proposed programme, home buyers will have a house with reasonable capital costs and legality, even though the developers have to reduce their profits but can release inventory, implement new projects, and avoid violation of bond debt obligations.

Commercial banks, meanwhile, can increase monitoring costs but reduce bad debt risks, especially from investors, and disburse credit. The government will, in the end, balance the market between supply and demand, reducing risks of instability for the financial system, supporting economic growth, and ensuring macroeconomics balance.

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