Investors hesitant to build much-needed social housing in Vietnam over profitability concern: expert

Benefits for investors not being attractive enough make companies hesitant to invest in much-needed social housing in Vietnam, says Nguyen Van Dinh, a popular property legal consultant.

Due to the 10% profit limit and the lengthy incentive approval procedures, many businesses are not interested in participating in building social housing, Dinh told a seminar, titled "Investing in social housing development: New context, new opportunities", hosted by The Investor on Tuesday.

"Existing incentives (exemption from land use fees, preferential loans, tax reductions) are in fact difficult to access or insignificant compared to profits from commercial housing investment. Moreover, investment procedures for social housing projects are considered complicated and time-consuming, discouraging investors," he added.

In Vietnam, the need for affordable housing for low-income earners and workers is urgent, especially in large cities. The Government has issued many policies to develop social housing over the past decade, but the results are still limited compared to the set goals.

According to the National Housing Development Strategy, by 2020, it is necessary to build at least 12.5 million square meters of urban social housing. However, in the 2015-2020 period, the country only completed about 100,000 social housing apartments, fulfiling 41.4% of the plan, according to Dinh.

As of early 2023, a total of only about 147,000 apartments (about 7.35 million square meters) of social housing have been built nationwide, a very modest number compared to the needs of millions of households.

Meanwhile, the price of commercial housing in urban areas has increased to an average of VND77 million ($2,970)/m2 in Ho Chi Minh City in 2023, far beyond the reach of middle-income earners, let alone low-income earners. As a result, the majority of urban workers have to rent cramped rooms, or live in remote suburban areas.

Another reason for the poor development of social housing is the lack of preferential capital for this investment area, Dinh highlighted.

After the preferential credit package of VND30,000 billion ($1.16 billion) for the 2013-2016 period ended, new capital sources were very limited. In the period of 2016-2020, the Social Policy Bank was only allocated VND2,163 billion from the budget for social housing loans, equal to 27% of the identified demand (VND9,000 billion or $347.24 million), he cited.

The four state-owned commercial banks designated for preferential loans were not allocated interest rate compensation sources, leading to almost no projects being able to borrow preferential capital during this period.

The lack of cheap capital has also caused many social housing projects to stagnate. It was not until 2023 that the Government launched a VND120,000 billion ($4.63 billion) credit program (through four major commercial banks) for investors and social housing buyers to borrow at interest rates 1.5-2% lower than the market.

However, this is only a temporary solution. Disbursement is low because the procedures and loan conditions are still difficult for low-income people to access, and the interest rates are unattractive and the loan terms are too short.

Another reason is land fund for social housing development not being guaranteed. According to regulations, commercial housing projects must reserve 20% of their area for social housing or pay an equivalent amount.

"In reality, many localities have not strictly managed this 20% land fund. Some investors ask to pay money instead of building social housing, but the money collected is not effectively reinvested in other projects," Dinh stressed.

In addition, public land fund for social housing in large urban areas is very scarce, while high input prices increase costs, making the selling price of social housing still high (about VND15-20 million ($771.5) per m² which is very difficult for low-income workers to access).

Meanwhile, most low-income workers and laborers do not have enough savings to make purchases and also have difficulty proving their income to borrow from commercial banks.

Even with preferential lending policies, the requirement to pay monthly installments for 15-20 years is a heavy burden for people. Many people do not dare to borrow to buy a house because they are afraid of not being able to repay the debt.

This leads to a paradox in some places: social housing is still unsold after being built because buyers have difficulty accessing capital. For example, some projects in Binh Duong cost VND200-300 million ($11,570) a unit, but the sales rate is slow as workers cannot borrow money.

Currently, Vietnam does not have a national housing development fund. Some localities previously established local housing development funds but later had to merge them into development investment funds, which operated ineffectively. The previous national housing strategy (2011-2020) mentioned studying the housing savings fund model, but it has not been implemented yet.

Due to the lack of a specialized financial institution, long-term mobilization and lending for social housing mainly rely on the Social Policy Bank and short-term credit packages, leading to a lack of sustainability.

"In addition, preferential tax and credit policies for social housing development still have many limitations. For example, there are no strong enough corporate income tax incentives for enterprises, and there is no mechanism for issuing social housing bonds to mobilize long-term capital," Dinh told the seminar.

The combination of the above factors makes the Government's target of 1 million social housing apartments by 2030 very challenging. In that context, the proposal to establish the National Housing Development Fund/National Housing Fund is expected to be a "push" to remove bottlenecks in capital and mechanisms, creating a breakthrough for the social housing segment, he added.