Outstanding loans for real estate businesses will grow by approximately 27% during the first 11 months of 2023 as compared to 2022.

According to official State Bank of Vietnam data, outstanding loans for real estate businesses were 1,022,532 billion VND as of November 31, 2023, up 28,614 billion VND from the previous year. Outstanding loans for real estate businesses will grow by approximately 27% during the first 11 months of 2023 as compared to 2022.

Cash flow pressure

Outstanding loans for real estate businesses have steadily increased over time. However, loans only grew for project developers, while financing for houses remained extremely low.

Home loans have dropped and show no indications of rehabilitation as a result of an inadequate supply structure, concerns about the likelihood of rate rises beyond the preferential period, and declining income in a challenging environment.

Specifically, the outstanding loans to purchase land use rights in the first eleven months of 2023 total 68,694 billion VND, accounting for just one-fourth of the outstanding loans for urban area construction investment projects and housing development projects.

The Vietnam Association of Realtors (VARs) predicts that real estate enterprises will continue to struggle to get bank loans in 2023. Although interest rates have declined considerably, commercial bank loan rates have only reduced by more than 2% each year since the end of 2022.

In truth, credit contracts are mostly focused on enterprises with strong financials, large land funds, and lawful initiatives. Because many real estate enterprises' collateral does not match the standards, banks are more cautious in making loans and prefer to choose customers who accept high interest rates, resulting in an increase in bad debt risks.

Solutions to funding

VARs proposed many solutions for the said issues:  First, Government authorities must work heavily on reducing legal barriers, while also producing thorough documentation directing the execution of the modified Land Law to eliminate legal bottlenecks for projects to be resumed, so providing a foundation for local authorities to approve new projects.

It is also important to strengthen social and affordable housing projects, which promote liquidity, assist companies in repaying debt, balancing finances, and allowing cash flow to circulate.

Second, it is critical to investigate a preferred credit package designed exclusively for affordable housing developments, with the primary purpose of encouraging developers to engage in projects while increasing purchasing power for households with average or near-average earnings.

Third, state governments should look at laws to boost information openness and encourage the issue of corporate bonds again. In particular, credit rating operations must be promoted with the goal of managing rating organizations' capacity to provide adequate credit ratings that appropriately represent company risks.

Credit ratings can assist investors in assessing potential risks when investing in companies through bonds.

Fourth, in addition to bank loans and corporate bonds, rules are required to enable the successful functioning of capital sources derived from various products (real estate investment trusts-REITs, Housing Savings Funds, real estate securitization, etc.) or other channels.

Furthermore, the recovery of the real estate market presents an excellent chance for REIT development. This will provide a consistent supply of financing for the development of real estate projects.

At the same time, investing in a REIT may help individuals protect their investments by using the expertise of professional management.