Real estate must be allowed to connect robust value chains

April 18, 2023 | 10:00
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The real estate market is a bridge connecting industries and markets in the real estate value chain. Specifically, there are 35 industries and fields related to the real estate market, with the coefficient of diffusion from 0.5 to 1.7 times.
Real estate must be allowed to connect robust value chains
Dr. Can Van Luc - Member, National Financial and Monetary Policy Advisory Council

Four highly related industries are construction, accounting for 6.2 per cent of GDP; tourism accounting for 7.2 per cent of GDP (in 2019); accommodation and dining accounting for 2.27 per cent of GDP; and finance and banking accounting for 4.76 per cent of GDP in 2022.

As of the first quarter of 2023, the real estate business contributed 3.54 per cent of GDP and the economy, down 0.04 percentage points compared to the first quarter of 2022.

The real estate industry ranks second in terms of attracting foreign capital, accounting for about 10 per cent of newly registered foreign direct investment (FDI) every year. Towards the end of the first quarter of 2023, registered FDI in real estate reached nearly $66.7 billion, accounting for 15 per cent of total registered foreign capital.

There is an interconnected quadrilateral and close relationship between the markets of banking, securities, insurance, and real estate. If there is a problem in one of these four areas, it will affect other industries and the economy in general.

The real estate market is currently facing many issues, but I would like to focus on three main problems.

Firstly, legal problems are the biggest barriers and difficulties at the moment. Legal regulations of land, construction and real estate are extremely complicated, involving more than 100 laws, decrees, circulars, in which there are many overlapping and inconsistent regulations. For example, there is no consistency between the Law on Land, the Law on Housing, the Law on Real Estate Business on allowing foreigners to buy or own land use rights/real estate.

Additionally, legal regulations are often incomplete, not timely, and unrealistic, leading to a lack of a legal basis for implementation. For example, the law has no provisions on the issuance of certificates of land use rights, or ownership and transfer of tourism and resort real estate, leading to the backlog of many projects.

In addition, there is fear of wrongdoing, fear of responsibility, and extrusion of many officials, further slowing down or jamming projects.

The second is the issue of supply, demand, and price. Due to legal problems, few projects are approved in time, leading to a lack of supply, especially in the housing segment for low-income people, and social housing.

The lack of supply, large project costs, increased input costs, and inflated prices by intermediaries have left real estate prices in Vietnam high relative to people’s incomes. It takes well 23.5 years of income for a middle-class person in Vietnam to buy a house, much higher than Indonesia’s 18.5 years, India’s 9.2 years, and Malaysia’s 8.1 years.

The third is capital for the real estate market. In which, real estate credit in the first quarter of 2023 is estimated to increase by about 3 per cent, higher than the general credit growth of 2.06 per cent, compared to the end of 2022.

Total outstanding loans of real estate by the end of February 2023: about $113.5 billion, accounting for 21.2 per cent of the total outstanding loans of the economy; of which, housing loans are estimated at 67 per cent, the rest are loans for real estate business, accounting for about 33 per cent, according to the State Bank of Vietnam and the Ministry of Construction.

Meanwhile, private capital investment in this industry decreased sharply when the number of newly established real estate businesses in the last quarter was 940 enterprises, down 63.2 per cent; registered capital is $2.3 billion (down 60.5 per cent); more than 800 enterprises resumed operation (down 2.6 per cent) compared to the same period in 2022.

The third source of capital: newly registered FDI, capital contribution and share purchase in real estate in the first quarter of 2023 reached $766 million, accounting for 14 per cent of total registered FDI, ranking second in 18 industries attracting foreign investment; FDI disbursement for real estate reached $228.5 million, accounting for 5.3 per cent.

The last source of supply is the capital source from the recovering stock market with the number of bonds issued reaching nearly $1.2 billion, of which real estate enterprises issued $1.02 billion, ranking first and accounting for 83.2 per cent of total issuance.

It should be clearly seen that Vietnam still has a lot of room to develop credit for housing, real estate, industrial parks, and under-supplied segments. Therefore, it is necessary to approach a more balanced and harmonious development of the financial market, and at the same time create development but still control risks and take advantage of new opportunities.

From now to 2030, each year Vietnam needs around $35-44 billion in medium- and long-term capital, in addition to bank credit.

In particular, the country needs to pay attention to controlling financial and real estate risks. It also needs to quickly settle and ensure the legitimate interests of investors in recent cases; implement new decrees efficiently, speed up the review of real estate projects; accelerate disbursement of public investment; and focus on regulating supply demand and real estate prices.

Institutions should also be improved in the direction of amending the laws on securities, enterprises, land, housing, real estate, bidding, and construction.

Regulations on classification of real estate segments require appropriate credit, capital, and financial policies. Guidance should be provided, allowing the establishment of specialised real estate financial institutions in Vietnam. For real estate businesses, it is necessary to have a specific and feasible plan to pay off mature corporate bonds. Diversifying capital sources would help; in addition to bank credit, there are also bonds, stocks, investment funds, and finance leases.

Capital mobilisation is associated with specific capital use purposes. Businesses must reduce financial leverage and limit spread investment. They should head towards transparency and professionalism, especially in terms of credit records, securities issuance records, and implementation of previous commitments.

Finally, paying attention to financial risk management and actively commenting and criticising relevant policies and legal documents is also required.

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By Dr. Can Van Luc

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