Current Challenges Of Real Estate Market

The real demand for housing in big cities like Ho Chi Minh City and Hanoi is still very large, but the number of houses located in the affordable areas can meet the desires of low-income people, young households, and officer. According to a newly released report, Bao Viet Securities Company (BSC) believes that the incorrect positioning of the product segment, focusing too much on the high-end segment and the investment segment greatly affects the efficiency of business of the enterprise.

Supply and demand situation of real estate product segments

Across the real estate industry, investors offering high-end products account for a high proportion. The product portfolio structure is gradually shifting to the high-end segment because real estate businesses aim to develop high-end projects to maintain profits, reach many customers who are willing to spend lots of money to invest in luxury apartments, resorts, or luxury villas. In addition, there are other reasons why real estate businesses do not build low- and mid-range projects. That is because the work of licensing new projects has slowed down due to changes in regulations and laws.

Attention

According to data from the Vietnam Real Estate Brokers Association, the total supply to the market in 2022 will reach about 48,500 products (down 10% compared to the previous year), the supply of luxury apartments increased by 17% over the previous year while supply of mid-end and affordable apartments decreased by -30% y/y and -60% y/y respectively.

The decrease in apartment supply led to an increase in the average selling price of apartments (+12% y/y in HCMC and +23% y/y in Hanoi), led by the high-end segment. The market is gloomy and gradually disappears when towards the end of 2022, the trading volume is getting lower and lower.

According to BSC, if in the first half of 2022, the absorption rate always reach 60-70% even though there are more than 16,000 new products in Ho Chi Minh City and 8,000 new products in Hanoi, entering the second half of 2022, the absorption rate were only 35% in Q3 2022 and 18-21% in Q4 2022, although the total number of new products in the second half of the year decreased by -75% compared to the first half of 2022 in Ho Chi Minh City and by -61%. compared to the first half of 2022 in Hanoi.

Financial leverage

In the period of “cheap money” and the attractiveness of profits brought by real estate projects, businesses make the most of financial leverage to expand their land bank and scale.

Faced with many difficulties in applying for investment policies and licensing new projects, mergers and acquisitions of real estate projects continuously exploded, helping the real estate industry rise to the leading position in terms of value of merger and acquisition transactions.

The total value of mergers and acquisitions in the real estate industry in the period of 2020-9 first months of 2022 reached 8.3 billion USD (5.2 times higher than the period of 2018-2019), according to BSC’s statistics. .

The trend of acquired land bank is a huge supply of land in neighboring provinces, the shift from a rare land fund in the inner city with a very high price, to suburban areas and neighboring provinces with a large land bank with much cheaper and expecting ring roads, highway connections.

Real estate businesses actively borrow capital as leverage to finance projects. Sources of capital mobilization are from customers, stock bonds, investment funds (domestic and foreign) and credit from banks. The most special is the continuous issuance of corporate bonds, thereby posing potential risks when corporate liquidity has problems

Supply and demand mismatch and excessive leverage

According to BSC, besides the “cheap money” factor and the high investment demand of individuals, the debt structure has shifted to corporate bonds, also because the projects do not meet the legal conditions, making it difficult for businesses to access to bank loans.

Financial expert, Dr. Nguyen Tri Hieu assessed the risks of the corporate bond market as reflected in the fact that bond interest rates were pushed up very high or many bonds were issued by real estate companies and had no collateral.

However, the “cheap money” period has ended, real estate businesses are going through a period of thirst for capital to maintain production and sales. The real estate industry faces many challenges:

(1) The market is negative, both businesses and home buyers depend on loans

(2) Credit to the real estate sector is still strictly controlled

(3) Other capital channels such as bonds/stocks are not favorable

(4) Bank’s lending interest rate is high

(5) The bond maturity point is focused on 2023-2024.

Real estate businesses find it difficult to mobilize capital from customers because of reduced confidence of homebuyers, unmet real demand, sharp decrease in investment demand and limited access to loans.

Other capital channels such as bonds and stocks have encountered many “headwinds”. In 2022, the real estate market received information from (1) “purifying the market” and (2) making mistakes in the issuance of bonds by leading real estate corporations, making business activities worse. Bond issuance is also relatively quiet. In 2022, the issuance of real estate corporate bonds reached VND 50,427 billion (-79.1% decrease over the same period last year), of which only VND 280 billion in the fourth quarter of 2022 (-99.7% decrease compared to the same period last year).

Liquidity pressure is huge because the bond maturity falls are concentrated in 2023-2024. The maturity scale of corporate bonds of real estate businesses in 2023 increased by nearly 80% compared to 2022 and accounted for 49% of the total maturity value of the whole market. Although corporate bond repurchase activities are positive in 2022, the pressure to mature corporate bonds in the next 2 years is still very large, especially in the second quarter of the third quarter of 2023 and the first quarter of 2024.

The high interest rate environment will negatively affect both real estate developers and home buyers. The average lending interest rate has increased sharply in the second half of 2022 from 8%-9%  to 12.5%/year in 2022 and will continue to maintain a high base level in 2023 in the context of policy currencies of many countries are tightening in the fight against the inflation crisis. The environment of rising interest rates is especially negative for both real estate customers and businesses.

For real estate businesses, in addition to the decrease in the number of transactions when homebuyers are affected, interest costs will increase by about 38.9% and businesses must apply discount programs to raise demand.

Solutions to overcome difficult times

First of all, businesses must seriously reduce prices, bringing real estate to real value. Implementing high discounts, purchase incentives, and reasonable cash flow policies will stimulate demand and generate revenue.

Second, enterprises carry out product restructuring and appropriate loan restructuring. Make links with other businesses, accelerate product sales, debt repayment and production.

Third, focus must be on creating products that are suitable for social needs, selecting segments of commercial housing projects with reasonable prices, affordable housing, social housing, etc.

Fourth, the Government needs to simplify administrative procedures in project licensing, speed up the planning of social housing, affordable housing with appropriate infrastructure. In addition, it is necessary to redesign the policy to attract businesses to invest in social housing and affordable housing, with policies like the past time, it is not possible to encourage businesses to participate in this segment.

The real estate industry is entering a temporary gloomy phase, a period of comprehensive restructuring to be ready for the next cycle of the industry. The long-term outlook is positive as real housing demand is still high and supply is gradually “untied” thanks to (1) accelerated progress of legal completion, the market towards transparency, health, increase sustainability through the revised Decree 65/2022/ND-CP, the revised Land Law and Decision No. 1435/QD-TTg, (2) synchronously developed connectivity infrastructure will gradually pull the demand real estate to suburban areas, reducing the pressure on big cities where the remaining land fund is very limited.

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