Investors tip-toeing around real estate risk
Investors tip-toeing around real estate risk
Vietnam is moving towards developing a balanced capital market and reducing the pressure on capital supply for banks – a process that requires dealing with internal problems such as corporate bond issuances as well as land-right auctions.
Financiers’ fears of losing investments partially eased last week, as Tan Hoang Minh Group announced it would refund a total value of around $435 million from the nine bond issuances cancelled with Decision No. 181/QD-UBCK from April 3 of the State Securities Commission (SSC).
However, the group is still required to pay mature debts in 2022 and 2023.
The SSC’s announcement on April 4 stated that nine bond offerings from July 2021 to March would be cancelled, affecting Tan Hoang Minh Group’s Viet Star Real Estate Investment Co., Ltd., Winter Palace JSC, and Soleil Hotel Service and Investment JSC.
Excluding the payables collected from the bond issuances, these three companies had liabilities of more than $634 million, as of December 31, 2020.
High interest
Corporate bonds continue to be an attractive financial tool in real estate, even if they come with high risk.
According to the Vietnam Bond Market Association, in the first two months of 2022, the market recorded eight issuances of corporate bonds to the public, with a total value of nearly $240 million, as well as 26 separate issuances with a total value of around $965 million.
The total value of corporate bonds issued privately was four times higher than the value issued to the public, with real estate alone accounting for nearly 60 per cent of the value and volume.
On financial websites, bonds of many real estate businesses always maintain high interest rates of around 10-11 per cent per year. In 2021, the companies under Tan Hoang Minh Group were mobilised with interest rates of up to 12 per cent per year – nearly three times higher than common bank interest rates.
The debt burden of real estate businesses in Vietnam threatens to impact the national economy if companies remain unable to repay or at least mature. The latest report from credit rating company FiinRatings shows that the outstanding bond balance of real estate businesses that must mature in the next 2-3 years amounts to about $6 billion.
About 73 per cent of these must meet the maturity point between 2022 and 2024. This not only creates great debt repayment pressure on the businesses but also affects the liquidity risk of distribution agents that commit to buying back bonds, which are financial institutions, securities companies, and banks.
Worse still, debts in VND are not the only problem. According to FiinRatings, outstanding loans in foreign currencies, including bonds of listed Vietnamese real estate companies, stand at around $4 billion. This number could have a significant impact on the economy and the overall growth of the industry.
FiinRatings warned that the situation could also affect Vietnam’s score in the international capital market, resulting in higher interest rates and reducing the competitiveness of domestic enterprises in relation to foreign-invested ones.
At the end of 2021, the scale of the bond market amounted to around $10.4 billion, accounting for only 2.16 per cent of total profitable assets and 2.63 per cent of the total outstanding credits of commercial banks in Vietnam. Based on these figures, FiinRatings believes that the current events in the market are unlikely to impact the credit quality of the commercial banking system.
However, many investors are increasingly worried and more focused on the debt repayment capacity of real estate businesses.
A representative of a local firm, who wished to stay anonymous, said, “Many companies bet on the increase of real estate prices, especially those that rely on loans and overpayments in land auctions.”
Low financial health
Nguyen Thi Thanh Tu, senior analyst at SSI Securities JSC said, “Difficulty in accessing credits is one factor driving the demand for capital mobilisation through bond issuances for many real estate companies.”
The number of issuing real estate companies increased from 141 enterprises in 2020 to 193 enterprises in 2021.
“The quality of their collateral is usually not high and they must maintain better interest rates than other sectors to attract investors,” Tu said.
In 2021, real estate bonds had an average interest rate of 10.36 per cent per year, down 0.3 per cent from 2020. The average maturity period in the last two years was 3.5-4 years. Therefore, the pressure to repay the principal gradually increases in the 2023-2025 period.
SSI’s data for 2021 shows that only about 27 per cent of real estate businesses participating in the bond market were also listed on the stock exchange, nearly three times lower than the average of other industries (70 per cent).
Meanwhile, the financial health of most unlisted enterprises remains at a low level. The proportion of enterprises issuing unsecured bonds is also relatively high, accounting for about 15.8 per cent of all issuers.
