Lawyer Pham Duy Khuong answered VN News Agency TV on the topic of Evergrande crisis and effect to Vietnam’s real estate market, in which he gave notes on raising capital through corporate bonds.
The financial world is very interested in the fact that China’s second largest real estate company – Evergrande is suffering from a huge debt of more than 300 billion USD and is on the verge of bankruptcy due to insolvency. So how will Evergrande’s crisis affect the future of Vietnam’s real estate market?
The Evergrande crisis has had a significant impact on the Chinese economy. As one of the countries that continuously promote the development of the real estate market, high-end real estate projects are constantly being built in China, even though people have only average incomes.
According to experts, Vietnam is not directly affected by the crisis. Vietnam’s stock market is having strong development steps, but it is still not comparable to the stock market in the world.
However, there are contractors for Evergrande’s projects who are also contractors for Vietnamese projects, Evergrande’s default and inability to pay that contractor will also cause indirect effects. Along with that, this incident will also have a direct impact on the decision of Vietnamese real estate bond investors.
According to lawyer Pham Duy Khuong, managing director of ASL LAW, Evergrande’s crisis is a lesson for Vietnamese businesses about the insolvency caused by money not being used effectively and for the right purposes.
Risks in the real estate market
Both China and Vietnam have concerns about the rapidly developing real estate market. In terms of per capita income, the prices of apartments in big cities in China such as Beijing, Shanghai or in Vietnam, Hanoi and Ho Chi Minh City are very high. The real estate market develops too fast, creating irrationalities in prices, away from purchasing power as well as creating a unreal market.
Moreover, China’s Evergrande crisis has shown that real estate businesses always have to face the risk of a bad debt crisis. Many Vietnamese real estate businesses with unsustainable capital structures also face similar risks.
The risks of the real estate industry always exist along with the risks of the economy. In the third quarter, Vietnam’s GDP dropped sharply due to the heavy impacts of the fourth Covid-19 epidemic. This has shown that the real estate sector can hardly count on the positive changes of the economy to continue developing after 2 years of trying to fight the effects of the epidemic. In the third quarter of this year, the freezing of the Vietnamese economy made it difficult for real estate businesses to repay bank loans.
According to lawyer Pham Duy Khuong, raising capital or using financial leverage is completely positive. But in the case of Vietnamese real estate businesses raising capital by using corporate bonds, but without collateral, there is a huge risk. Whether there are collateral assets or not, the most important thing is, after businesses mobilize financial resources, they use them for the right purposes.
Therefore, it is necessary to have mechanisms to control the mobilization of real estate bonds in Vietnam. In addition, investors must have a reasonable financial use plan as well as be open and transparent about their financial capacity as well as their business plan. Next, securities companies must also be objective and independent, in assessing the financial capacity of the businesses they are providing services to, before offering bonds to individual investors.
Real estate investors can also cross-reference a bank’s internal credit ratings to learn about a business’s ability to repay, loan levels and business plans.
For the time being, it is possible that real estate businesses have not yet encountered insolvency and can still try to manage or extend, but until 2022, when the due debts are approaching, a lot of real estate businesses will face huge financial pressure.
However, Vietnam does not have large-scale real estate companies raising capital by international bonds like China. Vietnam’s monetary policy in the past 4 years has been well controlled and the State Bank has also strengthened supervision of real estate loans, with a roadmap to protect the safety of the commercial banking system.
In the near future, large real estate companies in Vietnam are planning to implement more projects. This shows that Vietnam’s real estate market has a very good support of the economy in the coming time. The difficulties caused by the recent epidemic are also gradually being controlled. Although there have been concerns about debt activity in real estate companies, it can still be controlled. In short, Vietnam’s real estate market at the moment is facing a number of difficulties but they can all be overcome.