Legal adjustments key to unleashing capital flows into real estate

Legal bottlenecks must be removed to revitalize the real estate and financial markets in Vietnam, while businesses must increase their cash flows to rescue themselves.

Real estate tends to depend on market liquidity and evaluation, and plays a key role in terms of collateral in the banking sector, accounting for VND2,580 trillion ($110 billion) by the end of 2022, or 21.1% of total credit supply, according to State Bank of Vietnam data.

The realty sector is also closely linked with other sectors like construction and construction materials while accounting for 15% of the country’s GDP and 11% of state budget revenue. As a result, developments in the sector can impact the financial system and macroeconomic conditions.

Woes in the sector and the bond market during the third quarter of last year were reflected by banks, such as non-performing loans (NPLs), especially group-two loans (those that miss payment deadlines by between 10 and 90 days).

In the domestic banking system, group-two loans reached 1.82% last year, the highest since 2017, and nearly double the 1.01% posted in 2020 during the Covid-19 pandemic.

Additionally, credit growth reached a modest 2.01% in the first quarter of this year, versus the target of 14% for 2023. This underwhelming performance poses risks to the credit market and could mean group-two loans become NPLs, possibly causing consequences similar to the 2011-2013 financial crisis.

Government rescue

Adjusting the legal framework would help investors access bank loans and aid the implementation of projects and sales in order to fulfill obligations with banks and bondholders.

Recently, the Ho Chi Minh City Real Estate Association (HoREA) proposed a new legal framework for 156 projects. The southern hub and its neighboring provinces have reported only 669 new apartments up for sale so far this year, plunging 44% year-on-year, according to data from real estate consultancy firm DKRA Vietnam.

The government has sought to resolve these issues with Decree 08/2023 on privately placed corporate bonds, Resolution 33 on boosting the real estate sector, and Decree 10/2023 on the Land Law, and is pushing for one million affordable houses by 2030.

Adapting and overcoming

In line with the government’s efforts, businesses are striving to overcome problems by selling assets to increase cash flow amid the frozen bond and credit markets.

Phat Dat Real Estate Development Corporation, listed on the Ho Chi Minh Stock Exchange (HoSE) as PDR, has been pursuing this solution since the end of 2022, reducing its outstanding bonds by 40% from VND2.85 trillion ($121.37 million) to VND1.61 trillion ($68.83 million), thereby reestablishing trust with bondholders and building resources to continue ongoing projects.

PDR is completing administrative procedures for projects, including Astral City, to maintain cash flow. Businesses’ efforts and government updates to the legal framework are essential to ensuring project implementation, investor sentiment, and homebuyers’ access to loans with suitable interest rates.

Construction and sales that meet legal conditions are also key to overcoming the current market woes.