Bonds essential capital source for real estate market

By Nguyen Thanh Ha*

Wed, May 11, 2022 | 2:45 pm GMT+7

Currently, Vietnam's real estate market is highly dependent on the credit system and corporate bonds. In the first two months of 2022, about $1.13 billion in corporate bonds were issued, doubling the volume in the same period last year, according to financial database provider FiinPro.

Data from Vietnam Bond Market Association indicate 243 businesses issued bonds for the first time last year, accounting for 40% of the total issuance, of which the majority came from the real estate and construction sectors.

However, the State Bank of Vietnam has tightened both these capital raising channels, leading to tangible impacts on the market.

Corporate bond capital is considered a capital mobilization channel with many advantages and room for investors. Given the attractive profitability of the industry, real estate bonds have the edge in attracting investment from organizations and funds as well as taking advantage of people’s sizeable idle capital.

Compared to borrowing capital from commercial banks, investors can borrow from bondholders at a lower interest rate if they include incentives to buy housing projects for bondholders.

However, due to the nature of real estate businesses today, most are unlisted real estate enterprises and have a weak financial strength and many uncertainties, which leads to a lack of transparency in the bond market and hidden risks for the real estate market.

The fact that credit rating information on the bond market is currently minimal has resulted in real estate bonds becoming the most high-risk. It is the lack of transparency, combined with the recent complicated movements of the stock market that forced authorities to tighten the bond management mechanism.

The real estate market, which was already facing many difficulties during the Covid-19 pandemic, now faces a series of new challenges as large capital mobilization channels from banks and bonds are tightened through new government regulations - knowing that these regulations are introduced to smooth the flow of credit capital away from hot areas that could cause macro instability.

But if the policy is too hard on corporate bonds, real estate business operations would shrink. The number of licensed and implemented projects will decrease sharply, causing a supply shortage. This will expose the market to the potential for a price hike in the future. In fact, market liquidity is showing signs of deceleration.

Therefore, it is necessary to introduce solutions to control capital poured into the field of speculation and exaggerate real estate prices, but if the valve is tightened suddenly and without a roadmap, it will cause difficulties for the entire market, and enterprises will find it challenging to raise capital in the medium and long term, leading to significant impacts on the real estate market as well as future investment projects.

How to minimize bond capital risks?

To achieve transparency, updating the regulatory framework is vital to create a bond market that can grow healthily and sustainably. Specifically, the legal system must facilitate bond issuance and supervision.

The legal framework for corporate bond issuance needs to make consulting a professional, trained, and licensed activity. Conditions for establishing organizations to evaluate and rate credit in a systematic, objective, and grounded manner should be created to gradually improve the transparency of the legal system on bonds.

In addition to risk control, the policy must aim to create and promote development of the corporate bond market, considering it an important medium and long-term capital channel for enterprises. It is necessary to encourage the participation of reputable credit rating organizations; encourage credit institutions to participate in guaranteeing and discounting corporate bonds (market makers); diversify forms of corporate bonds; and encourage the participation of funds to invest in corporate bonds.

In addition to the efforts of state agencies in updating the law, businesses also need to comply with provisions of the legal framework, and take the initiative in being public and transparent about the purpose of bond mobilization, combined with transparency over the intention of using the capital raised from bonds in order to build confidence in the market.

Although the corporate bond market has made great strides through amending and updating the legal system of the National Assembly, up to now, there are no specific regulations on the issuance of unsecured bonds. Bond issuance dossiers also need to require enterprises to announce the purpose of bond issuance.

Currently, the view of amending the law or decree is going to close the gap, but we must still promote development of the bond market in particular and the stock market in general, rather than creating more administrative procedures, hindering the issuance of corporate bonds.

- State agencies may consider amending and supplementing regulations on credit rating for issued bonds to create and orient the market towards the habit of using results ratings by rating agencies. This helps create a transparent bond market, improves the quality of issued bonds, limits risks for investors, and creates more jobs for the labor market.

In addition, it is necessary to amend several regulations on the time limit and content of information disclosure to overcome recent shortcomings and, at the same time, increase transparency of the bond issuer and use of the bond issuer's capital.

- The synchronization of all units, state management agencies, and enterprises. Enhancing the position of press agencies, combined with authorities and businesses, will bring wrongdoing before the law. Enterprises also need to self-review and re-evaluate themselves, whether, in the past time, they have complied with provisions of the law or not; if not, they need to take immediate action.

The strong participation of authorities with the support and companionship of society can boost the capital market in general and the bond market in particular, contributing to the country's economic development.

* Lawyer Nguyen Thanh Ha is Chairman of SB Law.