- State Policies
Another feature affected the residential session this year was the strong increase in State management measures. Three new regulations were issued in the second half of the year: Circular 13 and Decrees 69 and 71.
Decree 71
Real estate investment sector requires strong and long-term capital. However, the lack of capital is a constant that business activities in this area have concerns.
On 23 June 2010, the Government of Vietnam promulgated Decree No. 71/2010/ND-CP ("Decree 71") guiding the implementation of the Law on Residential Housing dated 29 November 2005. On 08/08/2010, Decree 71/2010/ND-CP of the Government's guiding Housing Law will take effect for several regulations to minimize risks on real estate market, which, raise capital is a focal point.
Decree 71/2010/ND-CP comprises open regulations on capital sources relative to the real estate market such as those covering bond issuances and loans from investment funds; regulations on the transfer of the land use rights with infrastructure to secondary investors after site clearance and the compensation phase - secondary investors, if raising capital for their projects, must get written approval from the primary investors after the primary investors obtain land use certificates; regulations on capital contribution for profits/products sharing, etc.
Decree 71 contains regulations describing ways the project developers raise capital from the buyers and concrete conditions to diverse capital-raising methods; regulations when individuals and family households transfer their land use rights to a buyer; regulations associated with property transactions via trading centers and those that are not required to take place at trading centers; regulations on mortgages and covering types of contracts in property transactions and time bases for the transfer of the ownership rights of land and housing transactions. Decree 71 also comprises regulations and detailed guidance concerning housing transactions of Vietnamese people residing abroad and foreigners owning or leasing houses in Vietnam.
With the presence of these regulations property transactions, more open and transparent regulations concerning Vietnamese people living abroad and foreigners owning and leasing houses in Vietnam are expected to rev up the domestic property market.
- Difficult for short-term speculative projects
The transfer of project land in the form of capital-contributing investment contracts is quite easy before the Decree 71 came to effect. Most real estate companies liquidated old capital-contributing contracts and replaced the name of new buyers or set up contract appendices. Sellers pay a trading fee specified by project investors (usually less than 1 percent of total transaction value) and property transfer tax. It usually takes one week to complete this transaction.
However, since August 8, 2010, the Decree 71 disallows the transfer of project land in the form of capital contributing contracts (details in Clause 1, Article 60). Hence, cooperation contracts signed before August 8, 2010 will not be allowed to transfer until purchase contracts are reached with investors. With this policy, the chance of “treading water” will become much more difficult than before.
- The market of long-term investors
With the impact of Decree 71, when the real estate market stops trading project land in the form of capital-contributing contracts, other market segments are expected to be more active. The demand will be switched to land and houses with ownership certificates instead of investing in project land. Besides, the supply in these segments will also increase. On the primary market, there will be no longer much room for speculators to complete a deal in a very short term because the Decree 71 provides investors cannot use more than 20 percent of houses in each project to raise funds in the form of capital-contributing contracts. The transfer is not allowed until purchase contracts with investors are signed. For the rest of apartments, speculators hardly tread water with longer time and higher cost than old-type investments.
- Difficult to increase prices in the short term
In the short term, the real estate market in Vietnam will hardly increase prices following the enactment of the Decree 71 for the below reasons:
First, without speculators on the secondary market, the market lacks the ground for price hike.
Secondly, the State Bank of Vietnam (SBV) is likely to pursue tightened monetary policies in the coming time to stabilize the local dong. Besides, banks are discouraged to provide loans for real estate investors.
Thirdly, after a long period of price rise, property prices are not low in relation to other regional countries. The price rate in Ho Chi Minh City climbed 2-4 times since early 2006.
In the long term, the Decree 71 helps minimize risks for buyers. This strengthens the confidence of investors in long-term housing investments. Additionally, a brake on real estate speculation will make the market develop more sustainably.
The enforcement of the Decree 71 aims to weaken speculation and reduce market liquidity. Tight monetary policies and limited lending for real estate investments are the devastating news for the real estate market in the short term. In the long term, the government’s policy for the sustained real estate market development is necessary.
With the impact of the decree 71, in 2010, the residential session reduced trading volume in quiet. The secondary investors, individual investors ... encountered many difficulties. However, it is undeniable that the Decree will contribute to promptly solve with violations of the investment, raising capital from investors in the housing development projects, new urban areas, market stability in areas with occurrence of "land fever", no transparence in the land transfer. It effects on orienting development of market with transparence.
Decree 71 would seem to be an effort to consolidate all the legislation relating to residential housing in general while providing clarity on various issues directly affecting developers in Vietnam. The clarification on completion of foundation works and clarification of parking spaces have been long overdue. The requirement for Prime Minister's approval could potentially be a major stumbling block for large scale developments. As with all legislation, the effectiveness of Decree 71 will very much depend on how the authorities seek to implement the new provisions.
Decree 69
The Government has recently issued Decree No. 69/2010/ND-CP dated 13 August 2009 ("Decree 69") providing additional regulations on matters such as land use zoning, land prices, land recovery, compensation, assistance and resettlement. One of the issues arising from Decree 69 is Article 11 which sets out circumstances whereby re-determination of land prices would be applicable. Real estate companies said planned land-use and compensation fees would eat into their profits and could even force them into liquidation.
In this, new land fees for real estate enterprises will be based on market prices. Real estate firms will be forced to pay the full market price, instead of 20 to 30 per cent as before. Enterprises investing in housing projects would have to pay twice – first when buying the land from its owners and second when paying usage and clearance fees.
The new regulation had several weaknesses that were detrimental to real estate firms. The new decree should be modified because real estate companies would have to pay the same fees for land that had no infrastructure as that with infrastructure because market prices were based on developed land.
Real estate firms would be hardest hit because companies typically paid very high compensation costs for agricultural land, which was however cheap in comparison to developed land. Under the new rules, they would have to pay far more to develop rural land.
Circular 13:
Circular 13/2010/TT-NHNN from the SBV increased the risk guarantee ratio to 250 per cent of credit for real estate business, from 100 per cent, and requires banks to set aside 9 per cent of their capital for risk prevention purposes. As a result, credit for the real estate market tightened strongly.
According to financial specialists, if call deposits of organizations are not counted into the mobilized funds of banks, which would make it difficult for banks and limit the lending activities. In addition, by regulating a high risk coefficient rate of 250 percent to funds for stock and real estate investments, banks must reconsider whether it is necessary to develop these types of lending. Although the ratios given in Circular 13 are for credit rating as well as risk management, in the current context, they seem to be unsuitable and may prevent the credit from developing.
In fact, recently, the pressure to raise interest rates has been gradually strengthened. Therefore, in order to carry out the interest rate cut policy, and stimulate credit growth, SBV should firstly increase the money supply to the market. The plan for money supply administration of the early months of the year may even be recalculated, and new plan to provide money to the economy should be made, in order to ensure that the economy would be in necessary liquidity status.
However, the effect of Circular 13 has in fact brought many positive actions. Some financial specialists believe that there are less and less sudden changes in banks' credit growth of real estate investments, since large-scale property companies often do not depend too much on this channel. The increase in safety reserves of banks hence would not put negative impact on businesses.
The impacts on interest rates as well as on psychology are only in short term from three to six months. In long term, the coefficient risk ratio increase applicable to real estate sector would help banks to ensure the capital safety and become more stable against the negative changes of the macro-economy. On the other hand, that would also help the property market to grow sustainably, professionally with less speculation. Once the revenue source is stabilized and the market grows, lending rates would slowly be reduced.
It should be noted that, almost in parallel with the issuance of Circular 13 of the SBV, the issuance of government's Decree 71 with new provisions and adjustments on property market has created opportunities for big real estate investors with financial potential to raise capital in a more flexible way. For example, there are the provisions allowing firms to pre-raise 20 percent of the total capital, or issue bonds, etc.
In contrast, the secondary investors and individuals would have more difficulties. Selling apartments and houses on paper contract would hardly occur as before, and this would affect the demand of the property market in short term.
In short, under the impact of Decree 71 and Circular 13, the property market may face difficulties in short term, since the trading with capital contribution contracts, which used to account for very large proportion in trading value of the market in the recent time, is now restricted. Moreover, once Circular 13 officially takes effect, the credit supply for real estate market may be shrunk, while bank loans currently play a very important role. However, in long term, those two policies both aim to orient the property market to grow more sustainably and stably. They help purify the market and eliminate from the game those businesses that are less professional with low financial capacity.
Many real estate analysts believe that the new regulations are setting up a new framework for the market in the future. They tighten credit, increase fees and risk prevention and discourage speculation. Consequently, investors and developers must rely more on their own capital, be more creative in seeking funds, be more careful in investment, and make more efforts in delivering products to owner-occupiers. Only strong and professional enterprises can survive, while smaller and unprofessional ones will wither on the vine.
The impact of the new policy on real estate market in Vietnam
Real estate market in 2010 witnessed various local and temporary ups and downs and management policies failed to catch up with market fluctuations. The property market would entirely depend on the government’s policies applied to curb price increases and seek capital sources for the market. There might be policies that could positively change the market, but they would have strong impact on the benefits of investment projects. Similarly, there might be planning adjustments that could lead the market to develop towards a more balanced state.
The interest rate is maintained at the current level of 16 percent, policies on price control are applied sufficiently to cut the current increasing trend of goods prices and the government has no effective solutions to increase capital for property market, the market would continue being in capital shortage, causing investors to continue “selling properties on papers” to call for funds from savings, and idle money in the population. The amount of capital poured into property market would be at least, or might increase slightly from foreign direct investment flows.
In this situation, real estate market would have the same monthly price increase rate as the price increase of consumer goods. The lack of capital would have stronger impact on real estate market. The number of transactions in low price areas might increase, but the number of transactions in high price areas would slow down and gradually reduce.
- Economic Crisis
Entering 2010, the housing market in Ho Chi Minh City has retained the recovery of growth in 2009 along with the growth of the economy but it also still has the effects / impacts of the crisis of the world economy began in the mid 2007:
- From the impact of the global economic crisis, the housing market in Ho Chi Minh City is faced with the actual situation that the State is tightening of monetary policy. The commercial banks have also increased credit risk management. The whole economy has to face the question: "To give priority to fighting inflation or investment priorities?"
- Housing price now in Ho Chi Minh City is too high compared with the income of the people, the level of economic development and far exceeds the value of housing value. Due to the impact of economics crisis, prices of basic needs have been increasing fast. So, many cannot afford to buy house now. Housing price volatility is not uniform between provinces. Demand for housing will move more strongly into outlying areas and suburban areas of Ho Chi Minh City like Binh Duong, Dong Nai, Long An because infrastructure and transport connections with central areas now are more and more convenient.
- From the third quarter of 2010 to year end 2010, along with the tightening of credit to the real estate market, housing market started showing signs of stagnation transaction. Outstanding loans to build new urban area at the time of negative growth in 2010 (-) compared with growth of 10.2% in 2009; or loans to build, repair and purchase of dwelling houses only increased 5.47% compared to 27.2% by 2009.
- Interest rates high, most banks are applying the interest rate of approximately 13% per annum or higher. This also shows that the macroeconomic factors are not stable, inflation is always on the risk exceeds a certain level it is difficult to build a housing market for sustainable development.
- Price for housing is not increased but still remains high, while the price of real property (land, apartments) in the area of Ho Chi Minh City is hardly increased with slow transaction.
- Progress of implementation of housing projects is slow, although the mechanism has been removed, reducing the availability of goods to market. Following report of Ho Chi Minh City, the area of new housing construction in 2010 only reached 4.05 million m2; lower than the average of about 6 million m2 per year in 2008 and 2009.
- Housing market in 2010 has no dramatic fluctuations such as those in 2006 -2007. By considering both two aspects: firstly, the supply – demand is showing signs of imbalance; secondly, financial markets - which plays important role to housing market – are in the situation that can be not supported as before.
- In 2010, the total supply of housing in HCM City real estate market is over 12,000 units, far exceeding demand. Supply over demand trend is expected to last for 2015. Meanwhile, the housing market of the neighboring provinces such as Ho Chi Minh City, Binh Duong, Dong Nai is emerging and competes strongly with the housing market in Ho Chi Minh City to attract investment.
- Conclusion and Forecast in 2011
The most impressive thing about the housing market in Ho Chi Minh in 2010 is that the keywords “purchasing power”, ie the number of how many buyers and their ability to pay anywhere. These are factors which have led the market in 2010 and will continue to lead the market in the coming years. More than ever, in 2010 was the year the market has candidly acknowledge the problem - Who will be the end-use and affordability of this object is like? It is really big move. In the period 2006 - 2007, most housing development project in Ho Chi Minh have achieved certain successes, whether their project is really excellent or not. But in this stage, 2010, investors must be careful in the decisions and develop their own funding. They have to answer for their market segment participation is, who your customers are and what products the investors can be developed to best satisfy the legitimate requirements of target customers. Only when this issue was identified, new investors started to implement the project. So, after two years to cope with the impact from the economic crisis, there are positive things, is the real estate market has been purged of audience participation. Stand in the market over the period of crisis is the real estate developers are not only factors such as economic potential and strong management capabilities, but also must know what we can offer and provide for who ...
Year 2011 will remain difficulties, the problem may be solved by the market in 2010 will continue to be "dissected" in 2011. But the housing market in Ho Chi Minh City will develop more professional. The macro-economic issues in the country and the impact from the world economy is not stable will make certain to impact the real estate market. Policies related to real estate market, especially policies on land planning and mobilization of capital will be the variable that investors must be "read" carefully. Investors will have to solve the target audience toward the project, develop unique ideas and capital.
The housing projects for condominiums policy of Ho Chi Minh City has caused a major hit in public opinion, creating the trust and hope of the people on the housing development policy of the Government . Range of social housing policy for the other subjects were also deployed a powerful and admirable results.
With these results and business investment in housing in Ho Chi Minh in 2010, with more flexible mechanisms, transparency, and encouraging market development in the right direction, the viability of this industry in 2011 will certainly promises much hope for a new breakthrough.
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Cushman and Wakefield’s statistic.