Real estate developers criticized for overdependence on bank loans

By Nguyen Tieu   February 13, 2024 | 06:00 am PT
Real estate developers criticized for overdependence on bank loans
Houses and land plots in Thu Duc City, HCMC, in July 2023. Photo by VnExpress/Quynh Tran
Property developers fund their projects unsustainably, with more than 80% of their money coming from short-term bank loans and bonds, according to experts.

Stephen Higgins, head of capital markets Vietnam at real estate consultancy Cushman & Wakefield, said the ideal funding structure is for equity to account for 30-40%, bank loans, bonds and short- and medium-term debts of three to five for 50% or less, and money from strategic real estate investors for five to 10 years for 20-40%.

But in Vietnam it is normal for equity to account for less than 20% and short-term loans from banks and bonds for the rest with almost nothing from long-term investors.

The difficult situation developers have faced in the last two years has shown the unsustainability of their capital structures and the need to change them.

Economist Can Van Luc said bank loans accounted for 54% of the funds used by developers in 2023, followed by bonds (26%), FDI (10%), and owners’ equity (10%).

"Relying too much on credit brings a lot of risks to not only businesses but also banks."

Pham Anh Khoi, chief economist at real estate company Dat Xanh Services, said in other countries property firms depend on banks for only 30% for developing projects and not 50-70% like in Vietnam.

Because of this extreme dependence, when banks tighten credit or lending conditions, property firms are devastated, he said.

"Unlike their Vietnamese counterparts, foreign developers do not obtain money from buyers before completing their projects. However, they can raise money from funds dedicated to real estate, and this can account for more than 30%."

Higgins said Vietnamese businesses should consider diversifying their source of funds by approaching private funds, sovereign funds, international financial institutions, real estate investment trust funds, and hedge funds.

Thuan said the key to recovery is building trust, especially in the bond market, and limiting reliance on credit.

According to another economist Le Xuan Nghia, the real estate market’s long slump has partly been due to the serious shortage of affordable and social housing and surfeit of high-end units.

Developers need to focus their resources on housing that serves the needs of buyers since this is a market with very high demand and cash flows and scarce supply.

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