VinaCapital’s chief economist Michael Kokalari gives his insights into liquidity issues as a burden to Vietnamese real estate developers despite strong demand for new housing.
Since last year, liquidity issues have been mounting for Vietnamese real estate developers. Emerging markets are notoriously prone to real estate boom and bust cycles, characterized by overbuilding of new housing units, but Vietnam’s housing market is undersupplied; developers’ current cash flow problems were not caused by insufficient demand for their products. The demand for new housing units in Vietnam by prospective owner-occupiers vastly outstrips the annual supply of new units, and mortgage penetration in Vietnam is still modest at around 20% of the GDP.
Consequently, the primary problem developers are facing is difficulty rolling-over their outstanding debts, which they need to do in order to complete their outstanding projects and repay loans. This “liquidity gap” problem will likely be solved with government policies, but not with government money.
Furthermore, we do not expect a significant increase in bank non-performing loans (NPLs) since there is limited room for a drop in Vietnamese housing prices given the enormous discrepancy between the demand and supply of new housing units.
Understanding the problem and possible solutions
Real estate developers in Vietnam have been experiencing difficulty accessing credit for months and some are now facing difficulties refinancing their maturing bonds. The problem largely stems from difficulties developers face securing approvals for their projects because banks require proper approvals/documentation in order to extend loans collateralized by those projects.
That said: 1) some developers overextended themselves by taking on too many “high-end” development projects that are not suitable for emerging middle-class homebuyers, 2) liquidity in Vietnam’s banking system is particularly tight at present, and 3) developers are facing structural issues accessing liquidity that we discussed in this report.
Vietnamese property developers do not have access to sufficient long-term funding to support their “land banking” activities. Said differently, the raw land that developers own does not become “bankable” until that land has been rezoned for residential usage and project approvals have been secured.
In recent years, developers increasingly met their funding needs with the issuance of two-year corporate bonds that were largely purchased by retail investors as an alternative to bank deposits. However, some developers used the funds from bond issuances for purposes other than those spelled out in the bonds’ prospectuses, prompting some high-profile arrests as well as a crackdown on corporate bond issuance via the new, highly publicized Decree 65.
Over the last few weeks, government officials and industry executives intensified their discussions and meetings aimed at solving the issues in Vietnam’s real estate market, resulting in a range of initiatives and proposals as shown in the below table.
Two weeks ago, Prime Minister Pham Minh Chinh held a conference on the country’s real estate sector, which was focused on resolving the issues currently impeding Vietnam’s real estate development industry. This meeting was attended by civil servants from various ministries, local government officials, and senior executives from major developers and banks.
Additionally, a vice chair of HCMC People’s Committee held a widely publicized meeting to review seven HCMC projects that have been delayed due to legal approval/zoning issues, including two projects owned by Novaland.
At the first meeting, PM Chinh criticized developers for focusing on the development of high-end housing rather than on providing reasonably priced units to the market and requested government agencies “at all levels” to remove obstacles impeding the project approval process.
Most Vietnam real estate experts, including VinaCapital’s VinaLiving real estate team, believe that the slow approval process is the biggest issue currently facing the sector, but many of the country’s civil servants are reportedly wary of signing off on new projects.
Addressing developers’ liquidity issues
The possibility of two new government-backed loan packages that would each flow circa $5 billion of new credit to both developers and homebuyers was raised at the meeting led by the Prime Minister.
In our understanding, the details of these potential new loan programs are still being worked out, but the focus would be on financing the development and purchase of affordable housing, and the programs would likely be administered through state-owned commercial banks (SOCBs), with the funds ultimately provided to the SOCBs directly from Vietnam’s central bank.
Next, the government introduced new regulations on Vietnam’s corporate bond market last year that severely impeded developers’ ability to re-finance/roll-over maturing corporate bonds.
However, protracted discussions on modifications to Decree 65 that could effectively ease some of those new restrictions have progressed to the point that it now seems possible that developers will be able to repay a significant proportion of their maturing corporate bonds in the form of real estate and/or newly issued shares.
Also, the implementation of restrictions on retail investors (who were major buyers of corporate bonds) purchasing newly issued bonds may be delayed by one year.
Tight liquidity in banking system
Mortgage rates in Vietnam are currently above 12%, which is too high for some prospective home buyers, while deposit rates at private sector banks are over 8% for 1-year deposits. Investors who would typically purchase apartments to earn an investment yield are instead parking their money in bank deposit accounts.
We believe that a circa 2-percentage point decrease in 6-12 month deposit rates to ~6%, coupled with a 1-2% depreciation in the value of the Vietnamese dong, could prompt savers to move money from bank deposits into rental properties and stocks, but it may be difficult for deposits to drop much in 2023 since credit growth outpaced deposit growth by about three percentage points annually over the last three years, leaving Vietnam’s system-wide loan-to-deposit (LDR) ratio (as it would be calculated in most jurisdictions) near 100% at end-2022.
The government could help lower the system-wide LDR by injecting more liquidity into the economy by: 1) rebuilding the SBV’s FX reserves, which could inject circa $20 billion into the economy this year, 2) funding the above-mentioned circa $10 billion government-backed loan packages via the SBV’s re-financing window, and 3) the government currently has over $20 billion of undisbursed infrastructure funds sitting at the central bank and could run down some of that balance in order to meet its target of spending $30 billion on infrastructure development this year.
Finally, we expect Vietnam’s nominal GDP (i.e., including inflation) to grow by about 10% this year, which would likely result in an organic increase of circa $40 billion of bank deposits. If the government was to inject $40-50 billion of new liquidity into the country’s economy, it is likely that bank deposit growth could outpace system-wide loan growth by circa 3 percentage points, which would lead to somewhat lower deposit rates in Vietnam (i.e., 13% loan growth versus 16% deposit growth).
Conclusions
The long-term prospects for Vietnam’s real estate market remain strong. High economic growth is driving robust demand for new housing by the country’s growing cohort of emerging middle-class consumers, but the number of new units suitable for those prospective home buyers is far below demand.
Despite those favorable supply and demand dynamics, some Vietnamese real estate developers are facing liquidity challenges, primarily due to slow project approvals, so we are encouraged by the government’s recent actions to address these and other issues that developers face.