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The Booming of New Investment Methods in the Real Estate Market

Vietnam’s real estate market has never undergone big long-lasting difficulties as it is now. This has badly affected all sectors in the economy.

At present, real estate price has been plummeting; many projects and land have been even dumping their prices in order for investors to cut losses and pay loans. Despite that, the market’s purchasing power remains weak.

Looking back to the real estate market over the past time, the ups and downs of real estate prices have been ascribed to many reasons. This market used to develop so quickly to a point that demand far outpaced supply. Having thought that “buying means success”, individuals and organisations engaging in the real estate market pushed prices to a peak. It seemed that most of them were speculators, not those who had a real demand for houses. With huge profits easily reaped from this market, many investors including individuals and organisations joined property projects, even though they had no property experiences; their investment was dictated by feeling.

Besides, running after the crowd effects and profits, many enterprises have failed to obey construction-related requirements and standards. As a result, low-quality housing products have resulted in customers’ reduced confidence toward the real estate market. Thus, although housing prices have remarkably decreased, there remains low demand due to customers’ declined confidence which cannot recover overnight.

Furthermore, rampant swindling in capital mobilisation and using capital from the state coffers for real estate projects have gradually been brought to light. Even, state management agencies’ weaknesses in construction planning and management, project approval and granting land title-deeds have also been exposed. Meanwhile, there have been more and more disputes over construction, management and usage of tenements.

All of these problems have increasingly darkened the real estate market. When there is no confidence for the market, it is impossible to determine the equilibrium of demand and supply.

Revitalising the real estate market is a must

Given such a situation, many solutions have been discussed to revive the real estate market. Some said that the market should be let to self-adjust for equilibrium. Still, due to some special characteristics of Vietnam’s real estate market, the view that the market should be supported indirectly with close supervision mechanisms seems to be more persuasive.

Firstly, this market closely pertains to various sectors involving a big number of enterprises. Hence, removal of this market’s difficulties is quite necessary for the sake of enterprises in general and property investors in particular.

Secondly, this market remains unprofessional. This could be seen in its overheating growth for a long period of time. Investors come from many sectors of the economy, regardless of their feeble financial health. Consequently, investors have failed to fulfill their responsibilities and neglected their initial commitments due to low-quality products.

In general, the majority of individual customers use their own capital and part of this capital is mobilised from their families, relatives and friends or from banks. It is their lack of professionalism that has prompted them not to sell products when the market declines, in hope of the market’s recovery.

Thirdly, the market boasts great potential and has developed not in line with the real housing demand. In spite of a huge property inventory which cannot be classified exactly, property supply remains humble as compared to people’s big real demand. Many people are still looking for houses and many others who have already had houses are seeking to upgrade their houses with bigger size and even buy more houses.

Fourthly, despite economic woes, there remains a substantial speculated capital inflow waiting for opportunities to jump into the market. Given weaknesses in property management, local authorities should use sturdy actions in approving projects. Therefore, difficulty-stricken enterprises’ projects sitting at convenient locations would be highly profitable opportunities for investors.

With the Government’s Resolution No. 02/NQ-CP in early January 2013, a number of solutions to production and business difficulties have gradually been applied.

However, over the past four months, guiding documents for implementing this Resolution have not yet been promulgated. Two basic solutions including changing commercial houses into social houses, and supporting those in purchasing or buy-leasing social houses remain controversial, due to a lack of detailed guiding documents. For example, when commercial houses are divided into small apartments, there will be many big issues and pressure in master-planning, transport, environment and anti-fire activities.

Implementation of social housing projects and conversion of commercial houses into social houses is also problematic because of a lack of criteria: who will be allowed to change their projects and how will legal aftermath be solved in the wake of the change. Enterprises are now awaiting clear-cut solutions from authorized agencies, so that their difficulties can be removed as soon as possible.

However, cautious plans and close examination and supervision over this change should be taken. This is to prevent enterprises from taking advantage of the Government’s preferential policies in order to massively change projects for profits only, without heeding their responsibilities and the Government’s core targets, which are both to facilitate people to approach social houses more easily and melt the real estate market’s standstill.

It has been encouraging that Vietnam’s macro-economic situation has continued being stable since early this year, with remarkable improvements in banks’ liquidity. This is a good basis for Vietnam to lure more foreign direct investment (FDI) (coaxed and disbursed FDI kept increasing, with property business ranking second via total newly registered and added sum of over $300 million).

Despite some positive credit growth, enterprises still find it difficult to access loans from banks. Positively, this means that banks have taken more caution when providing loans for enterprises. Nevertheless, this limits banks’ disbursement and affects enterprises’ performance.

Forecast for upcoming market development

With expectations for reduced taxes which will be considered by the National Assembly this May, and a VND 30 trillion (about $1.44 billion) bail-out for the real estate market with an average annual lending rate of 6 per cent already passed by the Government, the market will hopefully see positive changes in the remaining months of this year.

However, based on this market’s current situation, how to support this market should be importantly learned from other nations’ experiences. But because Vietnam has its own characteristics, the support plan and measures need to be carefully studied in line with such characteristics. Supporting the market when prices still sit at high levels (not exactly mirroring per capita incomes) will no doubt continue consolidate confidence for big property fever spells.

Supporting the real estate market needs to be in line with the restructuring of the market in the economy. There would need natural dismissal of badly-managed and financially-weak enterprises, so that the market can develop better, with customers’ interest being focused on.

Thus, it is necessary to support the market. But the problem is how to select the time and methods for support, as well as what requirements and conditions will be imposed on enterprises, so that the market can be revived and sustainably develop.  

With concerted actions from the Government, it is likely that the market’s liquidity will improve in the coming time. Whether recovery signals are clear or not largely depend on the implementation of these actions, which will help restructure the property sector and gradually restore investors’ confidence. This will help mobilise more capital from mass and foreign investors.

The market will soon rebound with the booming of new investment methods

With the establishment and operation of the Property Investment Fund under the Ministry of Finance’s Circular No. 228/2012/TT-BTC dated on 1 July 2012, it is likely that in the coming time, Vietnam’s property market will witness the booming of investments from these property investment funds. Property investment fund certificates will be eyed by investors including individuals and organisations because this investment model is so attractive. As legally regulated, a property investment fund must earmark at least 90 per cent of its annual profits as dividends for investors. With their close legal supervision, incomes from these funds will be substantial and relatively stable. The growth in asset value in the long term will be far attractive than other share or bond funds.

Apart from local real property investment funds, along with the economic restructuring, Vietnam’s real estate market will continue remaining highly attractive to foreign investment funds in the coming time.

Dr. Lawyer Trinh Van Quyet - General Director of SMiC Law Firm.

(Young Knowledge News).