Property crisis pressures Vietnam to act before it’s too late

TIME is running short for Vietnam to prevent a worsening property-sector credit crunch from derailing one of the world’s fastest economic expansions.

With about US$4.6 billion of property developer notes tracked by Vietnam’s bond association coming due next year, the firms will struggle to meet obligations without government support, according to local real estate executives and analysts. Funding has all but dried up after an anti-graft campaign spooked investors and authorities froze new bond issuance across the industry.

The looming maturity wall risks triggering a wave of defaults that could turn the property woes into a wider crisis for the banking sector and the economy. While the absolute scale of Vietnam’s property debt is tiny compared to that of China, the industry still makes up about 11 per cent of economic activity. Mounting worries of a China-style hit to growth are prompting calls for Vietnam’s government to act before it’s too late.

“The real estate sector is undergoing a major crisis,” said Tran Xuan Ngoc, chief executive at property developer Nam Long Group. “We don’t know when the crisis may pass as it depends on the government’s actions.”

At stake is an economic expansion projected by the International Monetary Fund to hit 7 per cent this year thanks to strong gains in construction and services. It also has implications for the nation’s banking industry, which has heavy ties to real estate. The two sectors comprise half of the stock benchmark’s weighting.

Signs of stress are already spreading. Fitch Ratings recently estimated a 5 per cent drop in home sales next year, which coupled with rising costs will lead to a rise in leverage at property firms. A lack of cash has forced businesses to turn to shadow loans at very high-interest rates and sell properties at discounts as deep as 40 per cent. Nam Long’s Ngoc said that it used to take about two months to sell 1,000 freshly-built homes in Vietnam; now it takes six to eight.

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The industry’s problems are poised to worsen as bonds come due, with SSI Securities forecasting that next year will be the biggest for property industry maturities ever. There’s not a lot of public data on maturities, with the majority of developers’ debt held in local currency. Most is held by local banks and retail investors.

The property crisis started earlier this year after officials issued a crackdown on corporate bond issuances following allegations of illegal activities, setting off a series of actions to rectify the property market. That included high-level arrests, a sudden freeze of new issuances and an overhaul of the bond industry.

Reforms needed

Analysts are looking to an easing of the country’s bond rules as a potential pressure release valve. A recent rule, known as Decree 65, pummelled property stocks and chilled new bond issuance by raising the bar on disclosure requirements as well as limiting the type of buyer to only institutional investors.

Any improvement in the nation’s property market will require major amendments to Decree 65, according to Maybank analyst Tyler Manh Dung Nguyen, who predicts the government is likely to respond when it sees the next round of developers’ corporate earnings next year.

The government has already appeared to ease their stance, with the Thanh Nien newspaper reporting last week that Vietnam’s finance ministry is proposing a decree amendment that would allow companies to extend corporate bond maturities as much as two years to ease a funding shortage.

Vietnam’s leaders remain focused on the nation’s economic growth targets as it seeks to become a major manufacturing hub, having already attracted the likes of Apple suppliers and Samsung Electronics. That means Hanoi is willing to move quickly and proactively to address risks. Finance Minister Ho Duc Phoc said last month the government is taking measures to ease access to capital for developers given the rout.

That may not be enough, according to Can Van Luc, chief economist at Bank for Investment and Development of Vietnam. He said that the government will need to do more to lure investors back into the bond market, such as shortening the application approval time for issuing corporate bonds to the public from the current level of six months to a year to a month or less.

“The proposed measures have removed difficulties on the supply side, making it easier for issuers to breathe. However, more demand-side solutions are needed to increase new cash flow into the market,” Luc said.

Speeding up the process for developers to get legal rights to develop land, lowering borrowing costs via rate cuts and ensuring accurate bond sale disclosures will also help, according to Tran Khanh Hien, head of research at VnDirect Securities.

Stress test

Cashflow is a big concern as refinancing risks loom large. The firms, which rely on short-term funding, are still digesting the new regulations around offering and trading corporate bonds just as they face the US$4.6 billion wall of debt due next year. The refinancing will become a “stress test for developers’ repayment capability,” Hien predicts.

Investors in developer stocks have already rushed for the exit, with shares of No Va Land Investment Group, Hai Phat Investment and Phat Dat Real Estate Development sinking more than 80 per cent this year. The former is in the midst of restructuring its business. The real estate association has said the property market is at risk of a downturn that could be a drag on the economy, which is already projected to fall from 7.4 per cent this year to 6.2 per cent in 2023.

Lenders to the industry may also suffer. Vietnam Technological and Commercial Joint-stock Bank, Tien Phong Commercial Joint Stock Bank and Military Commercial Joint Stock Bank have property exposures that range from 30 per cent to 70 per cent of their corporate bond portfolios, according to an Oct 18 analysis by Viet Capital Securities.

A broad selloff in shares is also hurting developers’ chances in raising funds in the stock market. Vietnam’s equity market has tumbled 31 per cent so far this year, making it the second worst among the global benchmarks tracked by Bloomberg.

“The property market will face headwinds in the short term not just from policy moves, but also from the rising rate environment,” said Nguyen Duc Hai, head of fixed income at Manulife Investment Fund Management (Vietnam). BLOOMBERG