Last update 6/6/2011 11:00:00 AM (GMT+7)

A bitter pill for property developers

VietNamNet Bridge - Many property developers feel as if they were in the hot water these days as the property market has reached the freezing point characterized by sluggish sales and an exodus from secondary investors.

The situation is being further aggravated now that the pressure is piling up on developers as they do not know how and where to find enough funds to continue their projects as the Government’s credit tightening policy comes to a deadline.

As told by the central State Bank of Vietnam, credit institutions have to squeeze tighter the faucet of financial source for real estate sector, and all will have to limit credits for non-manufacturing sectors to less than 22% of the total by June 30 and 16% by late this year.

Unlike the 2008 credit tightening program when developers could still survive the shock by resorting to profits earned from previous years, this year’s credit crunch is really a tough challenge for many developers because most of them have experienced a gloomy market for three years.

Le Hoang Chau, chairman of the HCMC Real Estate Association (HoREA), described the current credit crunch as a very bitter pill for most property developers, saying that the current difficulty was twice as much as the shock in 2008, and this year’s difficulties might send some realty companies into bankruptcy.

From poor business performance

Chau told the Daily that many members of the association entered this year with a command that they had to restructure their business activities, redistribute their funds and investment portfolios. Their business targets for this year were to survive, not to grow.

The apartment market with abundant supply remains gloomy as low liquidity has failed to attract secondary investors. Although it is suggested that this is a right time for buyers in dire need of accommodation, high interest rates is discouraging them. Many people keep a wait-and-see attitude, hoping housing prices and interest rates to come down.

To make the market move, most developers have to offer different incentives to entice homebuyers. Instead of cutting selling prices, they woo potential buyers with flexible payment, interest rate support, discount in cash, lucky draw for luxury sedan and motorbike, saving books and even gold. However, not all sales programs work.

The above ingredients plus the soaring input costs caused a strong decrease in profits for most developers in the first quarter of this year. For example, Phat Dat Corporation reported a loss of nearly VND14 billion in the first three months of this year while the company earned some VND48 billion in last year’s first quarter. Van Phat Hung Corporation saw its profits after tax shrank 86% against the first quarter of last year, while Khang Dien Housing Investment and Trading Corporation witnessed its quarter-on-quarter profits reduced by 86%. Besides, companies such as Sacomreal, Dream House Investment Corp, Khang An Real Estate Investment JSC and Song Da – Thang Long Corporation also saw their profits contracted by 73%, 75%, 94% and 84% against the year-ago period, respectively.

… to projects transferred

Chau said poor business performance plus the pressures from high interest rates, due debts and construction progress as committed to customers have prompted many developers to delay their housing project construction.

There are no specific figures about the number of property developers who have delayed their projects, but the phenomenon, as Chau said, is very popular in the market. Many companies have had to transfer their projects to other partners in a move to collect more funds to continue developing their existing projects and to ride through the storm.

In fact, transferring property projects is a normal activity in the market, and the activity sometimes brings profits to sellers. However, the market is witnessing many property projects being transferred these days.

The deputy director of a big realty firm in HCMC said her company used to receive five proposals of buying projects from other partners within a day.

Besides projects transferred recently, Chuong Duong JSC is negotiating with a foreign partner to transfer its condo project in Thu Duc District. Khang An Real Estate Investment JSC is working on legal procedure to transfer its Tan Tao A residential project in HCMC. After taking over Ha Thuan Hung Company to acquire Phu Gia Hung apartment project in HCMC’s Go Vap District, Dat Xanh Real Estate Services Corporation has received a transfer from Five-Star Group a 20-hectare project in the Mekong Delta province of Long An. In a recent report, Van Phat Hung Corporation says it would consider transferring some projects in HCMC.

Most recently, CapitaValue Homes Ltd., a subsidiary of Singaporean property developer CapitaLand Ltd, bought a condo project of Khang Dien Sai Gon Real Estate Co via a joint venture agreement, in which CapitaValue Homes holds a 70% stake. The US$70-million project, located in Binh Trung Dong Ward in HCMC’s District 2, has 974 apartments targeting middle-income earners.

However, in terms of market development, some property experts reckoned that the downturn, though posing a lot of difficulties to most property developers, was a chance to sort out inexperienced and incompetent developers on the market. This forces small companies to join hands for a bigger company to develop their projects.

… and harsh for credit institutions

Nguyen Van Duc, deputy director of Dat Lanh Real Estate Company, said the credit crunch was too harsh for developers because most loans were for medium and long term. The problem is that developers have spent the loans on their project development. Therefore, even banks face difficulties in retrieving loans disbursed to developers.

The general director of a joint-stock bank in HCMC, which has disbursed a lot to the property sector, said his bank stopped new loans for property and was working on retrieving loans. However, the challenging problem is that most credit contracts for the property sector were long term, thus his bank had no way to get back those loans before terms.

“We find it hard to meet the requirement of reducing loans for non-manufacturing sectors to 22% by the end of June,” he said.

Le Tham Duong, head of the business management faculty of the HCMC Banking University, said real estate companies were currently trying to find money to pay back to banks, and were trying to sell their products by all means. However, not all of them would be successful.

Riding through the storm, Duong said, depended on every company’s strategy, as well as solutions of management agencies.

Duong said if there was no financial solution to support developers, many realty firms would likely collapse in the coming time.

Commenting on the issue as a market observer, Brett Ashton, managing director of Savills Vietnam, said the Government resolution was unfortunate for property developers, but it was necessary to tame inflation in the economy. The resolution means very high interest rates for everyone and a lack of access to bank loans for developers. Even if they are willing to pay the high interest rates, many developers are finding it very difficult to convince banks to lend.

Ashton said some banks were heavily exposed to real estate, which means they are much more likely to feel the effects of the property meltdown. It would be very difficult for developers with large debts and their banks over the next two years.

He, however, reckoned that while it could lead to some bankruptcies in the property sector, a little pain now was better than allowing land prices to continue rising.

“Go through the pain now and let a few fail or there will be a much larger punishment in a few years,” Ashton said.

Looking overall, he said the market has not been as bad as people tend to say it is. It has actually been a more normal market like other regional cities. Some developers will go bust while some other investors will pick up projects for very good prices.

“With every problem comes an opportunity. Just depends on which side of the table you are on,” Ashton said, adding that project and development site liquidity should pick up and it was healthy and needed to rebalance the market into a more long term stable one.

Source: SGT