[HO CHI MINH CITY] Vietnam’s property market continues to feel the strain from a real estate correction that started nearly a year ago, and this is likely to spill over to the banks in the country, said a report from S&P Global Ratings. But the credit rating agency said the banks are likely to manage the stresses, even as they are exposed both directly and through holdings of property-related corporate bonds.

S&P’s primary credit analyst Ivan Tan said in the report: “Vietnam’s property developers are still struggling to repay the debts (incurred) after the government cracked down on the rapidly expanding sector in 2022...

“In our view, the resultant property downturn and price correction could spill over to the banking sector. (The) recent interest-rate cuts and forbearance measures will mitigate the impact.”

Vietnam’s banks are expected to experience non-payment from commercial real estate loans and property-related bonds they hold. In a worst-case scenario, S&P said that sector-wide non-performing loans (NPLs) would hit about 4.5 per cent. The State Bank of Vietnam noted that the NPL ratio rose to 2.8 in March this year, from about 2 per cent at the end of last year. 

The Vietnam government’s more stringent rules on private placement bonds, together with a series of interest-rate hikes in late-2022, dried up liquidity and put many real estate projects under financial stress over the past year or so.

Potential homebuyers and bond investors delayed purchases due to the inflationary pressures, high interest rates and reduced confidence, after a major government crackdown led to the arrest of several high-profile business executives of property firms.

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In its report, S&P estimates aggregate residential sales in Vietnam to shrink by 15 per cent to 20 per cent this year, reversing the expansion of 25 per cent to 30 per cent in 2022.

In the first quarter of this year, data from consultancy CBRE Vietnam showed that purchases of condominium units in Ho Chi Minh City fell for a third straight quarter to a record low of 960, compared to 1,247 in the same period in 2022. The new condominium supply also plunged by 70 per cent year on year in the first six months of 2023.

These factors weaken the capacity of developers to repay their bonds, particularly those maturing this year and the next, the report noted.

However, these threats apply only to loans by overleveraged developers, who borrowed aggressively to finance their projects prior to 2022, but failed to ensure compliance in their land holdings and safeguard project cash flows.

“Not all property developers are in trouble,” said S&P’s Tan. “The large and well-established developers will likely have the financial buffers to tide through (the rough period).”

On the other hand, mortgage loans – which constitute the majority of about 15 per cent of the total loans in the banking system – could remain manageable, he added. This is due to the repayment capacity of borrowers being shored up by softening unemployment prospects, and the central bank’s four consecutive policy rate cuts this year alone.

He said that Vietnam’s favourable demographics, a growing middle class and young workforce will continue to drive up demand and support the property market’s recovery, despite the inherent volatility.

In the first half of this year, the government stepped in with a slew of measures to boost property market sentiment, such as relaxing certain corporate bond regulations and rolling out a massive 120 trillion dong (S$6.7 billion) low-interest credit package for social housing projects.

Other measures include revising existing laws on land and real estate taxes, easing lending rate pressures, and extending tax and land rent payment deadlines in 2023.

“We believe the government’s policy to instill greater discipline in developers’ funding and discourage property speculation is conducive for the long-term development of the bond and property markets,” said Tan. “There will, however, be short-term pain as the market adjusts to the new norms.”