Vietnam’s castle in the sand

13:57 | 26/07/2010

Entering the second quarter of 2010, Vietnam’s real estate market has seen rapid development in line with the country’s economic growth. A real estate fever has become a focus at the moment.

Apart from the achievements recorded, there are a number of weaknesses that need to be addressed in the local real estate market that have been highlighted by the Central Steering Unit for Housing and Real Estate Market policies.

Failure  to control the market

In spite of a number of strict measures to control the real estate  market,  prices  are  increasing  sharply  and  seemingly out of control. This state of fact presents any potential market management  endeavor  and  efforts  to  provide  houses  for low-income earners with a major challenge.

According to a current survey, real estate prices, especially for houses, are extremely high compared to the average income, the country’s economic growth rate, and far exceed the real value of the assets. The construction cost to build a 20-25 storey apartment is around VND16.5 to 17.5 million per sq.m at 2009 prices, which include all associated expenses and ensure a fair level of investor’s profit. However, actual selling prices for the same project are not less than VND28 million per sq.m.

There are a number of reasons for the sharp increase in real estate prices and its consequence, a widening gap between the average income and the cost of housing.

First of all, the cost of construction has increased and there is a scarcity of completed projects. Secondly, the prices are unregulated and a herd mentality in the investment pattern can drive prices to unrealistic levels.  Additionally, the failure to prevent illegal trading practices and a lack of education in real estate matters have led people to buy at any cost with a lot of risk. Also and importantly, the range of real estate products currently available is quite limited. In particular, there is a clear shortage of projects suitable to the majority of people in terms of scale and prices and there is a very limited supply of apartments for lease. It is said that the segment of apartments for rent accounts for only 6.3 percent of the total market.

Delay in project completion

In order to attract foreign investors, the Government of Vietnam has been implementing for years a number of measures to improve administrative procedures and enhance policies to create a better business environment. However, the construction of real estate projects in recent years has been quite slow, due in particular to site clearance and land acquisition requirements subjected to continual policy changes.

According to a recent report from the Ho Chi Minh City’s People Committee, the total floor area for housing constructed in 2009 was 4.05 million sqm, much lower than the average figure of 6 million sq.m of 2007 and 2008. In Hanoi, construction started only on a few large-scale ‘’new urban areas’’ in 2009 due to the overall review of projects by the local authorities to assess compliance with the new master plan for Hanoi city.

Lack of professionalism in real estate activities

Due to the lack of a comprehensive policy with regards to the real estate market’s management, its growth has been at the best of times disorganized. This has hindered the overall sustainability of the market.

Both foreign and local investors have been instrumental in this growth. Large-scale corporations and groups have formed their own real estate trading businesses. Banks are following the same trend. A lot of businesses without an adequate level of financial capabilities and experience have entered the market. Individuals attracted by the idea of a quick dollar are also playing the game.

Real estate trading centers have been on the rise in numbers but often without an adequate level of service. In future, proper policies should be made so as to improve and enhance the quality of real estate trading services. Broker, consultant, cost appraisers should improve their knowledge and skills so as to enhance their professionalism.

Dependence on the banking sector

Although the real estate market sees strong growth and attracts the participation of many different kinds of investors, it can be said that the market still depends very much on the banking sector.

For instance, it should be remembered that during the first and second quarters of 2009, as soon as banks started to disburse the interest rate subsidy stimulus package, the real estate prices rose immediately. In the third quarter of 2009, since the market was waiting for the Government’s decision on the continuation of the stimulus package, there was no major move at all. The fourth quarter of 2009 saw some small improvements due to the positive signals from the banking sector. By the end of the fourth quarter, the market was mostly at a standstill.

In addition, there are a number of outstanding issues in capital lending. For instance, the bank lending rates are amongst the highest in the world. Fixed mortgage rate in the US is currently around five percent per annum for loans with maturity of 20 to 30 years. By comparison, Vietnam banks offer a 13 percent per annum rate. However, the actual rates in the real estate market are much higher. Such high level of rates combined with cumbersome loan procedures have hindered people from having access to bank loans for real estate purchase.

This has also discouraged foreign investors to invest in Vietnam and caused concerns about the overall market stability.

Wrong-doing in capital mobilization

The trading in deposits from secondary investors contains latent threats to Vietnam’s real estate market. The deposit and payment in installments is the most widespread form of real estate purchase in the world, especially in emerging market without sufficient housing products to meet the people’s demands.

However, most investors handover to their customers late against the schedule, without the quality originally agreed to and often with a price increase on the contract price. Some investors actually received payments from buyers for years but eventually stopped their project altogether due to price escalations which made the project apparently not feasible any longer.

Inaccurate information

Control of the Government over the real estate market has so  far  come  up  short:  the  information  system  with  regards to housing and the real estate market is quite limited and unreliable and the role of the Government in the management of the real estate market is still unclear, especially when major fluctuations appear and there is a need to stabilize the socio- economic situation.

At present, as analyzed by real estate experts, there are a number of ministries participating in the management of the real estate market. They include the Ministry of Construction, the Ministry of Finance and the Ministry of Environment and Natural Resources. This has led to a lack of consistency in issuing policies which guide the performance of the real estate market. At the same time, the administrative units at provincial and district level have not taken form yet. Knowledge and skills of Government’s staff working in this field are quite modest due to improper application or lack of training programs.

The  information  databases  available  in  the  real  estate market do not provide good information with regards to the ownership and usage of real estate properties in the market. The information sources are mainly processed through the media without official release from a Government authority. The lack of a national database has made it hard for the authorities to understand and manage the real estate market properly.

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