(((you are an experienced corporate business analyst; your task is to draw conclusions on the real estate market of Vietnam based on this information in {} ))) {Vietnam’s real estate market has fallen on hard times with sales down, capital scarce, and many projects slowing to a halt. But it’s not all doom and gloom with foreign investors well poised to benefit from the current downturn. In this article, we will explore what led to these challenges, how they came about, and where foreign firms can find opportunities in the market.

In the decade or so to 2019, Vietnam’s real estate market experienced rapid growth. Buildings could not go up fast enough as the middle class rode a wave of economic development out of the countryside and into apartments in the cities.

Accommodating all these new home buyers, however, took vast sums of capital. Real estate firms were borrowing from banks hand over fist and issuing hundreds of thousands of millions of dollars’ worth of bonds to satisfy the surging demand.

But then COVID-19 happened, and Vietnam’s home buyers changed from bulls to bears. This led to a downturn in home sales and a number of real estate companies, that were overleveraged to begin with, found themselves short of cash and unable to borrow more.

Facing a liquidity crisis, many of these firms turned to Vietnam’s bond market. This led to a huge jump in bond issuances. In 2020, Vietnam’s local currency corporate bonds were worth US$12 billion. By the end of 2021, however, that figure had more than doubled to US$26 billion, the bulk of which were connected to the real estate market.

This successful rewiring of financing Vietnam’s real estate sector, however, was to be short lived. North of the border, China’s second biggest property developer was holding onto what the Vietnamese press would dub a ‘debt bomb’ (or perhaps a ‘hand-Evergrande’), that was about to wreak havoc on global markets, including in Vietnam.

Spotlight finds real estate market after Evergrande default
When Evergrande defaulted at the end of 2021, it rippled through global markets. The damage the collapse of a company with almost US$300 billion dollars’ worth of liabilities could do, was lost on very few in Vietnam.

Politically, economically, and structurally very similar to its neighbor to the north, consumers, investors, and regulators in Vietnam began asking the question: Could this happen here?

Consumer and investor sentiment nosedived and the Vietnam real estate sector found itself under increased scrutiny as regulators worked to isolate and rectify systemic issues.

This was, however, all kicking off as Vietnam was emerging from prolonged lockdowns brought on by the COVID-19 pandemic. For the most part, the worst of the pandemic had passed and vaccination rates were high. On a macro level, discussion had shifted from prevention to control – reopening the borders had risen up the agenda and soon a full economic recovery was expected to begin.

But then, of course, Russia and Ukraine went to war.

War pushes currency controls into the mix
Rampant inflation in two of Vietnam’s key export markets, the European Union and the United States, as a result of the war in Eastern Europe, posed a problem for Vietnam on more fronts than one.

On one hand, rising inflation led to consumers in these foreign markets tightening their belts. In Vietnam, this meant orders of manufactured goods, particularly in garments and textiles, began to drop off.

For context, the US and the EU, in 2022, accounted for US$76 billion and US$109 billion, respectively, or US$185 billion combined, of Vietnam’s total exports of US$371.3 billion – almost 50 percent.

In this light, a small drop off in orders had the potential to have far reaching implications for Vietnam’s economy – several manufacturers implemented layoffs to survive the downturn.

But the more important development was that both the European Central Bank and the United States Federal Reserve moved to raise interest rates to curb inflation. This strengthened both the Euro and the US dollar, putting downward pressure on the local currency.

This was a critical development. The Vietnamese dong is a heavily managed currency and Vietnam’s central bank, the State Bank of Vietnam (SBV), works hard to keep the currency stable against the greenback. It does this through a number of mechanisms, including buying and selling its foreign reserves, regulating credit growth, and, of course, raising or lowering interest rates as needed.

Fortunately, for Vietnam’s real estate sector, at the beginning of 2022, Vietnam’s foreign reserves were upwards of US$109 billion, according to World Bank estimates. This was well above the recommended three months’ worth of imports and meant that the SBV could avoid raising interest rates for some time, maybe even altogether.

A tycoon is arrested, interest rates rise
But it was in March of 2022, as global economies were adjusting to their new war-footing, that cracks started to appear in Vietnam’s real estate market connected to allegations of underhanded and shady dealings. This culminated with the arrest of Trinh Van Quyet, chairman of real estate developer FLC.

The allegations against Quyet centered around stock market manipulation whereby he offloaded 74.8 million shares of the company he founded without notifying the State Securities Commission.

This set alarm bells ringing.

FLC was well known in the real estate sector with projects all over Vietnam in industrial, commercial, and residential real estate. The news of Quyet’s arrest rattled investors and the real estate sector once again began to freeze up.

This was further exacerbated by an interest rate hike in September that saw interest rates raised up to 1 percent in most categories – the SBV had tried its hardest to keep the dong under control but inflation, particularly in the US, was well and truly out of normal bounds and the SBV was burning through its foreign reserves fast.

Corporate bond market reforms take effect
The role Vietnam’s bond market had played in financing the nefarious activities of several big players in the real estate market had not been lost on regulators and a wave of reforms were announced in September of 2022. These were outlined in Decree No. 65/2022/ND-CP (Decree 65).

Decree 65 detailed a number of changes to the market, but three key reforms stood out:

Investors would be required to be certified as a ‘professional investors,’ which meant confirming they had the knowledge to understand the risk they were taking on;
Credit ratings would be made compulsory for high-value bond issuances; and,
The ability for firms to raise funds through bonds to simply increase capital would be removed. Instead, firms would only be able to use funds for specific projects or restructuring of debt.
But these reforms, as noble as they were, may have been too ambitious too soon. The bond market wasn’t ready to have its playing field redrawn and, right or wrong, these reforms had an adverse effect. The bond market quickly jammed up, stymying cash flow for real estate firms, many of which were now contending with Vietnam’s aforementioned first interest rate rise in two years.

A second tycoon arrested, a second-rate rise
For much of 2022, the crackdown on malfeasance in the real estate sector had continued with the occasional arrest or two making a small ripple in the local press. But when Truong My Lan, the chairwoman of real estate firm Van Thinh Phat Holdings Group, was arrested in October of 2022, that began to change.

Lan was alleged to have committed bond fraud to the tune of tens of millions of dollars but it was not her arrest necessarily that made national headlines. Instead, rumors surfaced that Van Thinh Phat Holdings Group was connected to Saigon Commercial Bank. This led to a bank run that saw the real estate sector’s troubles, and those of the bond market, take center stage once again in public discourse.

Notably, this was only temporary with the SBV stepping in and placing the bank under ‘special scrutiny’. That said, the damage was already done; consumer and investor confidence in Vietnam’s real estate sector had taken another hit.

But the blows to Vietnam’s real estate sector, in the autumn of 2022, didn’t stop there.

With inflation in North America and Europe continuing to trend upward, pressure mounting on the dong, and foreign currency reserves coming down at pace, the SBV moved on interest rates for a second time. Just weeks after Lan’s arrest, on October 25, rates increased up to 1 percent on selected products, further increasing the cost of borrowing.

The downturn extends into the new year
At the end of December, manufacturing orders were down, interest rates were up, and the residential real estate market was more-or-less stagnant. The bond market, compared to a year before, was still relatively frozen, and consumer confidence stubbornly refused to return with a slew of real estate projects on hold indefinitely.

Vietnam’s real estate sector had been through the ringer and there was no sign it would abate anytime soon.

In the first two months of 2023, a total of 235 real estate firms went out of business, an increase of over 20 percent compared to the first two months of 2022, according to the General Statistics Office.

It was clear at this point that further steps to unfreeze the market would likely need to be taken.

All this aside, the outlook for foreign firms was markedly different.

An opportune moment for foreign real estate firms
Earlier this week, it was reported that Singapore’s CapitalLand was mulling over buying US$2 billion worth of real estate projects from Vietnam’s VinHomes.

Neither party has confirmed the deal, but if the acquisition goes through, it would be one of the most significant transactions of the year, and there may be more to follow.

While the challenges faced by Vietnam’s real estate sector are primarily confined to residential real estate and local companies, foreign firms collaborating with Vietnamese firms must ensure that they fully understand the origin of their partner’s capital, as well as that of their partners’ and supply chains.

Several projects have been put on hold, leaving thousands of homebuyers uncertain about when they can move into their new homes. As a result, consumer sentiment towards the real estate sector has declined.

However, this situation may not necessarily be detrimental, as consumers may still have a desire to own homes but prefer more recognizable and reputable international brands. Therefore, foreign firms looking to merge or acquire real estate businesses may find this to be an excellent opportunity.

Companies eager to enter or expand their presence in the Vietnamese market may also discover that cash-strapped domestic companies are searching for international support and may be willing to offer discounts.

Nevertheless, both foreign and domestic firms must ask themselves how long this turmoil will last.

As of now, Vietnam’s real estate sector is a mixed-bag
Global inflation is starting to stabilize and a turning point for the global economy may not be far off. This bodes well for broader macroeconomic stability.

That said, the drive to weed bad actors out of the real estate market, has shown little sign of relenting.

A new decree with respect to bond market regulation (Decree 08 ) was also issued on March 5, which rolled-back some of the bond market reforms outlined in Decree 65. It’s difficult to ascertain at this time what the impact will be on the market, but thus far reception has been mostly positive.

Then there was an interest rate cut last week, in part to stimulate a recovery of the real estate sector. It is still not clear that the global factors driving up interest rates have fully subsided, however, and any boost this gives local real estate firms may be short-lived.

Ultimately, it’s too early to tell when positive consumer and investor sentiment might return to the market. In the interim, a slow and steady, cautious approach should help firms navigate these troubled waters.

Short-term pain may lead to long-term gains
The real estate sector has been hit hard in the last three or four years. It was, however, not in a great way to begin with. Many real estate companies were overleveraged before COVID-19 and the breakneck speed with which these firms were moving was driving them into dangerous territory.

In this light, COVID-19 and then the war in Eastern Europe may have been the wake-up call the sector needed.

Moving forward, a more sustainable bond market and a more cautious and thoughtful approach to real estate development may provide Vietnam with a more stable real estate market. This would shore up the foundations of its economy overall and may even be an impetus for stronger, broader economic growth over the long term.}