Apartment complex in HCM City. Over the past five years, Vietnamese developers have pursued aggressive growth through debt financing, leading to higher leverage ratios. (Photo: VNA)A recent survey by S&P Global Ratings sheds light on the heavy reliance ofVietnamese developers on short-term funding. This reliance leaves themsusceptible to liquidity and default risks when access to funding becomesrestricted. For example, Novaland has encountered difficulties in meeting itsdomestic debt payments and is currently seeking to restructure its foreign debtobligations.
As of December 31, 2022, short-term debt for Vietnamese developers exceededtheir cash balance, surpassing 100%.
Over the past five years, Vietnamese developers have pursued aggressive growththrough debt financing, leading to higher leverage ratios. The reporthighlights that they often resort to debt to finance working capital forhigh-rise condominiums and capital expenditures for land acquisitions.
The government's tightening of developers' access to funding, including bankloans and the local bond market since June 2022, has constrained liquidity andled to project construction and handover delays. Buyers' sentiment has alsodecreased as developers can no longer provide sales incentives, and access tomortgage loans has diminished.
However, some early signals of easing appeared in early 2023, as the countrytook steps to reduce financial stress in the property sector. The recent policychanges aim to support the affordable segment of the market while discouragingproperty speculation, ultimately promoting more sustainable growth in the propertymarket, the report said.
Additionally, investor-buyers accounted for approximately 86% of propertypurchases in Vietnam between 2020 and 2022, with overseas buyers contributing45% of the total, according to CBRE Group. The high proportion ofinvestor-buyers in Vietnam leads to greater sales fluctuations due to theirsensitivity to economic cycles and market sentiment.
“In Vietnam, we expect aggregate residential sales to decline by 15 to 20% in2023 after experiencing growth of 25 to 30% in 2022.”
Developers in Vietnam also tend to have higher off-balance sheet liabilities.These include debt-like obligations such as sales incentives. For example, somedevelopers subsidise the mortgage interest expense for customers during theinitial stage of project construction. Additionally, they provide guaranteedrental returns for a certain period after handing over the units (more commonfor hospitality-related projects).
The report said although such incentives are common in the Vietnamese industry,the disclosure of their extent and commitment period is limited underVietnamese Accounting Standards. Consequently, developers' actual liabilitiesand cash flow burdens may be understated.
Additionally, Vietnam’s developers face key-man risk, as they are oftencontrolled by the founding family either directly or indirectly. Somedevelopers have complex corporate structures involving multiple business linesand joint ventures. Debt obligations may be concentrated at the parent company,with debt servicing relying on dividends from operating subsidiaries and jointventures. This complexity makes it challenging to track the flow of funds andassets.
Despite some challenges, the report also pointed out opportunities for Vietnam'sgrowth, driven by rising disposable incomes, increased foreign directinvestments, a young population (over 70% under the age of 45), robust GDPgrowth, and ample room for further urbanisation./.
VNA
