Vietnam property developers face steeper path to growth: S&P Global

Property developers in Vietnam and Indonesia are going to face various hurdles in the next 12 months, including funding and regulatory issues, according to a new S&P Global Ratings report.

“For Vietnam, tighter credit conditions, project delays, and a decline in sales incentives from developers will hurt buyer sentiment and likely lead to a larger contraction in sales than in Indonesia,” said the report released on Friday.

However, both markets show promising growth potential. Factors supporting this view include the rising disposable income of the middle-income class, growing foreign direct investments, a population with over 70% under the age of 45, robust GDP growth, and ample headroom for further urbanization, according to the ratings company.

S&P Global expected aggregate residential sales in Vietnam to contract by 15%-20% in 2023, following the growth of 25%-30% in 2022.

Since June 2022, the Vietnamese government has tightened developers' access to funding, via both bank loans and the local bond market. This has squeezed developers' liquidity, which has in turn led to delays in project construction and handovers.

Buyers' sentiment has further waned as developers could no longer provide sales incentives such as mortgage interest subsidies and rental return guarantees. Buyers' access to mortgage loans has also diminished.

In Vietnam, investor-buyers accounted for about 86% of the total property purchased over 2020-2022, and overseas buyers contributed 45% of total buyers, according to real estate services firm CBRE.

Key factors enticing such buyers include the steady appreciation of property values and guarantees of rental returns associated with hospitality projects. Thanks to Vietnam’s robust economy, rising household incomes among the middle class - resulting in more disposable income to invest in housing - have also contributed to strong sales growth.

However, the high proportion of investor-buyers in Vietnam also leads to greater fluctuations in sales compared to Indonesia. This is because investors tend to be more sensitive to economic cycles and market sentiment.

The average selling price of apartments in Vietnam's first and second largest cities, Ho Chi Minh City and Hanoi, is about 8% and 30% higher than Indonesia's two largest cities, Jakarta and Surabaya, respectively, as of the end of 2022, according to the study.

This gap occurs despite Vietnam's GDP per capita being about 30% lower than Indonesia's.

“We believe Vietnam's faster growth in property prices is the result of the larger share of mid- to high-end residential projects targeting foreign and local investor-buyers,” the S&P Global analysts wrote.

Regulation in Indonesia and Vietnam will continue to evolve as their property markets develop, according to the study.

“We view Indonesia's regulatory policies as largely neutral. The country rolled out supportive measures during the pandemic - such as reduction in VAT - to boost sales of the developers' inventory and alleviate the financial stress on the property sector.”

It added: “In contrast, regulatory policies in Vietnam have skewed negative since mid-2022. Early easing signals appeared in early 2023 as the country took steps to reduce the property sector's financial stress.

“The recent easing of policies also aimed to support the affordable segment of the market and discourage property speculation. This approach may help steer Vietnam's property market toward more sustainable growth. But short-term pain is inevitable, in our view.”