Real estate progress hits credit curbs

Stalled projects mean that businesses cannot repay loans and years of struggling with bad debts follow. Photo: Le Toan

With the tightening orders being implemented, the real estate market has shown signs of cooling down. Figures from Batdongsan.com.vn’s April report showed that interest in land plots sold across the country decreased by 18 per cent compared to the previous month and decreased by 8 per cent compared to the same period in 2021.

According to Resolution No.11/NQ-CP dated January 30, the State Bank of Vietnam requires banks not to relax credit-granting conditions, and at the same time control credit in potentially risky areas such as real estate, securities, build-operate-transfer projects, and corporate bonds. Banks will have to strengthen control of credit facilities for borrowers participating in land auctions.

Since the beginning of the year, the State Bank has also continuously asked banks to tighten lending activities in the real estate sector. At the end of March and the beginning of April, a number of banks such as Techcombank and Sacombank had suspended the disbursement of real estate loans.

Discussing the signs of cooling down, the report analysed that there have been many unexpected variables in the market, such as negative information about violations of some large real estate developers, state management agencies’ tightened tax regulations, and controlled land plots for sale.

According to Nguyen Van Dinh, vice chairman of the Vietnam National Real Estate Association (VNREA), currently, bank credit and corporate bonds are the two main channels to raise capital for real estate projects in all segments.

“Relatively clear signals from the authorities recently regarding the tightening of capital inflows into real estate, especially the bank credit channel and corporate bonds, have now slowed down the progress of projects leading to the risk of lack of supply for the market,” said Dinh.

Can Van Luc, member of the National Monetary and Financial Policy Advisory Council, said that when projects are stalled, market liquidity decreases and bad debts increase. Economic recovery momentum therefore declines and businesses are hesitant to invest.

“Project stagnation also means that businesses cannot repay their loans, commercial banks face the risk of bad debts, and it takes years to handle them,” Luc emphasised.

“The fact is that the banking, insurance, real estate, and securities quadrilateral have a close connection with each other, and one area of risk will lead to another. Therefore, the tightening of capital flows strongly affects the real estate market,” Luc added.

According to statistics from the Vietnam Real Estate Brokers Association on bank credit, by the end of the first quarter of 2022, real estate credit’s outstanding balance increased by 2.24 per cent compared to the beginning of the year, much lower than the increase of over 5 per cent of the overall credit balance of the economy.

The growth rate of the real estate credit balance has slowed down after many years, as a result of controlling and tightening the source of money pouring into this industry. In addition, bank credit to finance the real estate business currently accounts for only about 35 per cent, most of which are loans to buy and repair houses.

Thus, the source of bank credit for the real estate business has not only decelerated but also decreased in proportion. Real estate businesses that want to maintain a normal growth rate are forced to find other sources of capital.

VNREA vice chairman Dinh commented that currently, real estate businesses are facing many issues. “It is difficult for them to access bank loans, and mobilising capital from customers also has many strict regulations,” he said. “Difficulty accessing capital from different channels at the same time will make it difficult for businesses to deploy many projects on schedule, leading to being unable to increase supply to meet housing demand for customers, while buying demand for housing is immeasurable.”

Even if the capital is suddenly stopped, many unfinished projects will also have a knock-on effect on a series of other related fields such as contractors and construction materials providers, Dinh added.

Faced with concerns about tightened credit and bond resources, experts say that businesses need to find new directions to continue their development.

Bui Van Doanh, director of the Vietnam Real Estate Research Institute, analysed that the recent cases of violations in the mobilisation of bond capital into real estate were uncommon. However, they also caused a disturbance in the market’s activities, causing businesses and investors to panic.

“It is undeniable that the state is trying to purify the market to bring positive signals, helping the market develop sustainably, but too tight control of capital flows into real estate will inevitably strangle the market,” Doanh said.

Real estate businesses are finding it increasingly difficult to raise capital and they will not have enough financial resources to expand their land bank and pay for activities related to project development such as construction fees, project guarantees, and many others, he added.

In addition, Doanh said that in the immediate future, businesses can cooperate with other enterprises that have capital in hand and expand via mergers and acquisitions.

“In the long-term, businesses need to establish for themselves transparent criteria on the land fund, finance, legal, development strategy, credit profile, and bond issuance record. The capital raising can be easy only if the information is transparent,” said Doanh.