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Capital channel snags in real estate market
Business need to find a stable and legal channel of capital mobilisation for the development of the real estate market, as the economy has not yet turned the corner.
Legalise mobilised capital sources
It is currently illegal to mobilise the capital before a site has been cleared for construction. The new draft of a personal income tax bill covering real estate transactions may legalise the action. In any case, domestic investors can get around the law in many ways even when their project is still on paper. The situation is the same for foreign investors. The large-scale Kaengnam project involves a loan between the purchasers and the investor.
Le Chi Hieu, Chairman of the Thu Duc House Real Estate Company, said a real estate company may have only 20-30 percent of the total capital required. Besides borrowing money from the bank and issuing bonds, businesses must raise money from their stakeholders, partners and customers. More than 70 percent of transactions in the mortgage sector are in the form of capital borrowing or capital investment contracts.
Businesses are asking the Ministry of Construction to allow the investor to directly raise 20-50 percent of their total project capital without listing on the market. The rest can still be transacted through the market to ensure public demand. Nguyen Tran Nam, deputy Minister of Construction, says that requiring 100% of project capital to be transacted through the market is not reasonable for the investor.
Negative effects of foreign investment capital
Foreign investment capital remains the mainstay, but capital inflows are very unstable. According to the General Statistics Office, except for September, when foreign direct investment (FDI) surged due to the US$1.7 billion project registered by a Taipei investor, in the first eight months of this year, Vietnam only attracted US$1.87 billion from 28 new and 2 expanded real estate projects.
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William Ross, from HSBC bank in Vietnam, says many Vietnamese investors depend on the FDI from foreign partners. However, only some of them can see the other side of the coin. In reality, many foreign investors seek investment cooperation from domestic businesses but it often takes years before they break the ground on their registered projects.
The General Director of Richard Ellis Vietnam, Marc Townsend, shares this view and says that it is high time the domestic businesses mastered and controlled their own capital sources. Foreign businesses should be simply contributors and customers. |
Self-reliant
A business depends on three main sources of capital coming from its shareholders, banks and customers. The most difficult problem is how to access bank loans. The connection between banks and businesses is strained because demand often exceeds supply. In the first 8 months of 2009, commercial banks loaned VND157 trillion, a year-on-year increase of 14 percent. However, the credit bubble in the realty market has made the banks increasingly cautious about providing credit for new projects.
Mobilising capital from the whole of society, especially through credit bonds and real estate investment trusts (REIT), is the best solution. Ken Atkinson, general director of Grant Thornton Vietnam says pension funds and insurance premiums are useful but have not yet received much attention from businesses.
The government has allowed businesses to issue real estate bonds and many have succeeded in mobilising capital through this channel. Sacomreal last year issued VND850 billion worth of bonds. However, this is not an ideal channel because the interest rate is not very high and the regulations are cumbersome. Therefore, businesses would rather combine their bond issuance with the right to purchase realty products to gain new ground.
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