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Vietnam’s Real Estate Market Recovery 2024: Unpacked

At the beginning of last year, construction work on buildings in Vietnam was slowly winding down as the real estate industry ground to a halt. Hard hats were hung up and cranes ten stories high fell dormant leaving the cement shells of unfinished residential towers standing dark and empty–cold reminders that Vietnam’s real estate market was not in good shape. 

This was due to a number of factors (see: Vietnam’s Real Estate Market Turmoil Explained) but in short, the Evergrande crisis in China in 2022, had led Vietnam to take a long hard look at its own real estate industry, and what it found was not good. The misuse of investor funds, particularly those acquired through the bond market, was rife, and a number of real estate firms were grossly over-leveraged. These revelations then went on to spook investors and consequently, at the beginning of 2023, it had become very challenging for real estate firms to access capital.

As a result, a number of projects were put on hold or cancelled with 235 real estate firms going out of business in the first two months of the year alone–the industry was indeed not in a good place. 

It was not until March, however, that, recognising the broader implications for Vietnam’s economy on the whole, key decision makers decided to step in. This intervention manifested in a number of ways but in the first instance saw the rolling back of Decree 65…

Bond market reforms delayed

Issued in September of 2023, Decree 65, strengthened regulations in the issuance of corporate bonds including requiring credit ratings for bonds, limiting access to bonds for non-professional investors, and requiring that firms clearly detail what funds raised through bonds would be used for and then only using funds for said purpose.

But these requirements proved to be too cumbersome and bond issuances, a sizable portion of which had historically been dominated by real estate firms, slowed down to a trickle.

In fact, by March just US$1.14 billion worth of corporate bonds had been issued, according to the Vietnam Bond Market Association–the VBMA. This was about two-thirds of the corporate bonds issued in the first three months of 2022.

In response, the real estate industry was quick to point its finger at Decree 65 and publicly began to advocate for a delay in the decree’s implementation. And, on March 3, it got its way when Decree 08 was issued. This second decree effectively put the reforms in Decree 65 on hold until January of 2024.

This saw bond issuances ramp-up over the remainder of the year and by the end of December, US$12.43 billion worth of corporate bonds had been issued. Of those, around 91 percent were issued in the last nine months of the year, after Decree 08 took effect.

But that was not the only action taken.

Interest rate cuts

A second crucial change also took place in March 2023 in the form of several interest rate cuts. The first was on March 15 and saw a one percent cut to the rediscount rate. This was followed by a half-a percent cut to the refinancing rate on April 4; then another .5 percent to the refinancing rate on May 25; and finally an additional .5 percent cut to both the refinancing and rediscount rate on June 19.

These cuts were welcomed by the business community broadly, however, the intended spike in borrowing, said interest rate cuts were intended to facilitate, was not forthcoming. That is to say, there was a small jump in credit growth in March, reaching 1.73 percent up from .75 percent in February, but this was to be an anomaly. Between March and June credit growth would average just shy of 1 percent each month and in July it would even contract by a little more than one-fifth of a percent.

This was in large part because many real estate firms were already over-leveraged and had sold off assets or already mortgaged any collateral of value and therefore no longer qualified for bank loans. As a result, many stalled projects stayed stalled, which did little to assuage a lack of consumer confidence in the sector, which was proving detrimental to a third crucial revenue stream.

Consumer prepayments dry up

Not only were real estate firms struggling to secure bank loans and issue bonds but homebuyer prepayments, which had been a key component of project financing in the past, were also becoming more difficult to access.

Essentially, in Vietnam, a popular means of raising finance and buying a home had been by paying periodic instalments when a construction project met certain key milestones. But as other sources of capital became inaccessible, real estate firms were forced to prioritise the funds they did have, which meant putting some projects on ice. Not only did this mean that milestones on some projects would not be met and therefore instalments would not be paid, but some homebuyers, who had already made part payments, were faced with the reality that their homes would be delayed or might never be finished at all

As a result, sentiment had taken a hit and new prepaying customers had become a scarcity. Vietnam’s biggest property developer, Vingroup, for example, had about US$2.77 billion in prepayments on its books in the first quarter of 2023. However, over the next three quarters, this number would fall by about 36 percent, landing at US$1.76 billion at the end of the year.

Foreign investors to the rescue?

Unable to acquire capital at home, local real estate firms went looking abroad. A number of them were successful too.

Malaysia’s Skyworld, for example, reportedly bought a block of land in Ho Chi Minh City for US$14.5 million by taking over a local real estate firm, Singapore’s CapitaLand dropped US$562 million on an 18.9-hectare real estate project in Binh Duong it acquired from Vietnam’s Becamex IDC, and two Japanese firms, Cosmos Initia and Koterasu, partnered-up with Vietnamese firm TTCapital Investment, on a US$150 million affordable housing project also in Binh Duong.

But these investments were few and far between and by years-end Vietnam’s real estate sector would record foreign direct investment inflows of just US$982 million, a 46 percent fall year on year, barely half of the US$1.8 billion the sector pulled in in 2022–the uncertainty in the market that had proved to be an issue for domestic investors appeared to be an issued for foreign investors as well.

Supplies dwindle, prices rise

With capital difficult to access and real estate firms downsizing or even going out of business the supply of new dwellings slowed down squeezing the housing supply and pushing prices up in some areas.

In Hanoi, for example, according to commercial real estate investment firm CBRE, by the end of the fourth quarter of 2023, the price of a new apartment had increased 13.6 percent year on year and on the secondary market by 5.2 percent.

Conversely, in Ho Chi Minh City new apartment prices actually fell by 1.7 percent and by 5 percent on the secondary market, year-on-year, however, prices in HCMC were already relatively high–an Urban Land Institute report released in May of 2023, found that median home prices in the southern metropolis were 32.5 times more than the annual household income and among the highest in Asia.

These high prices were also likely to continue in the short-term, CBRE concluded in its fourth quarter real estate reports, expecting the shortage in supply to continue.

Indeed, Ministry of Construction data showed that by the end of 2023, just 71 projects had been completed accounting for about 27,000 apartments. This was a far cry from the more than 57,000 completed in 2020. It was, however, a small improvement over 2022 which saw just a little over 18,000 new apartments enter the market. 

But whereas this might seem like a sign that the sector was bouncing back year-on-year, the number of newly licenced projects told a very different story.

In 2021, 239 projects were licenced covering just under 98,000 apartments; in 2022, 126 projects were licenced covering about 56,000 apartments; but by the end of 2023, only 67 new projects had been licensed covering just under 25,000 apartments–a possible augur of things to come (or not come as the case may be).

Regulatory reforms pass NA

But the end of the year also heralded the passage of yet more reforms that held some promise for improving market conditions. Overall, these reforms were designed to bring overlapping rules and regulations into line and provide greater protections for homebuyers and investors, as well as opportunities for developers.

The Law on Housing, for example, was passed on November 27 and would remove a requirement that 20 percent of the units in social housing projects be made available for lease for at least five years before they could be sold. Removing this requirement would unlock a sizable chunk of a social housing developer’s capital.

This was followed on November 28 by the Law on Real Estate Businesses which contained several pivotal changes including requiring real estate developers to have upfront at least 20 percent of the capital required to complete a project and restricting real estate firms to collecting not more than 5 percent of the property’s purchase price as a deposit.

Furthermore, on January 18 of this year, a revised Land Law finally passed Vietnam’s National Assembly. Among other things, this would allow residents of Vietnam living overseas to buy properties in Vietnam, and would remove a land pricing mechanism by which a base rate for land was set every five years, that municipalities would then multiply by a coefficient to determine the value of a piece of land.

On that last point, this had been a problem for projects across the board as the market value of land increased beyond the regulated land price and as a result owners refused to sell. This had caused extensive delays not just in housing projects but big infrastructure projects as well and with this in mind, this particular reform, held a lot of promise.

That said, the bulk of these reforms were not slated to kick in until January of 2025.

New year, old challenges

On the first of January, 2024, Decree 08 expired and once again Decree 65 came into force.

This was not welcome news, with the HCMC Real Estate Association appealing to the Ministry of Finance for an extension of the postponement. This request, however, was denied and the aforementioned raft of regulations on bond issuances, outlined in Decree 65, came back into force.

Once again corporate bond issuances fell.

By the end of March, just US$627.5 million of corporate bonds had been issued. This was just a little over 45 percent of the corporate bonds issued in the first quarter of 2023–much less than what had been issued when Decree 08 had been approved a year earlier.

Likewise, January saw credit growth contract by .68 percent which extended to negative .72 percent in February. Deposits were also sitting near record highs and in this context, by March of this year, it looked a lot like the real estate market still had a long way to go to realise a full recovery. 

This was, however, to take a back seat in public discourse as the high-profile arrests that had kicked off Vietnam’s real estate market crisis in 2022 were about to come to a head.

Real estate tycoon faces court

Truong My Lan, the head of real estate firm the Van Thinh Phat Group, whose arrest in October of 2022 caused a small bank run at Saigon Commercial Bank–or SCB–went on trial in March of this year. She was subsequently convicted of fraud, among a number of other crimes, for which she was given a death sentence.

Furthermore, on April 9 of this year, the investigation into the head of Vietnam’s FLC Group, Trinh Van Quyet, another high-profile real estate developer, finally came to a conclusion with Trinh charged with ‘stock market manipulation’ and ‘obtaining property by fraud’. This is still yet to play out in the courts.

But whether or not this will help restore confidence in the real estate sector and the authorities that monitor it, only time will tell.

What’s next?

Vietnam’s real estate industry has been through the wringer but it has not been for nothing. Its current challenges have led to reforms to the bond market that should reduce risks for investors and subsequently, the economy more broadly moving forward.

Likewise changes to the laws on Housing, Land, and Real Estate Businesses should shore up consumer and investor confidence when they return–and they will most definitely return. That said, Vietnam’s real estate market may not look quite like it did before, forced to adjust to the new regulatory environment and expectations of a cohort of much more cautious investors.

This transformation will, however, take some time during which changes in the industry are likely to be frequent and have broad implications. With this in mind, parties with an interest in Vietnam’s real estate market can make sure they are abreast of the latest developments by subscribing to the-shiv.

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