Financing Solutions For Vietnam's Real Estate Market
Financing Solutions for Vietnam's Real Estate Market Ho Chi Minh City, 5 June 2022 Vietnam Economic Forum 2022 Nguyen Quang Thuan Chief Executive Officer FiinGroup JSC
Agenda 1 Financing Sources for Residential Real Estate Developers 2 Key Challenges 3 Solutions and Recommendations Financial Information Business Information Market Research Credit Ratings 2
Overview of residential real estate developers in Vietnam Exhibit 1: Vietnam’s Real Estate Sector Structure Exhibit 2: Mainly in HCMC, Hanoi and other high urbanization rate provinces Hotel Others 23% Office Dong Nai Province 3% Vietnam Real Estate Sector Apartment Residential RE Villas & Townhouse Quang Ninh Province 3% Binh Duong Province 3% Ho Chi Minh City 56.39% Serviced Apartment Retail Industrial Hanoi City 11.94% Source: FiinGroup Note: Data compiled from 3200 residential real estate companies and based on address registered at the Agency for Business Registration of Ministry of Planning and Investment The distribution of residential real estate enterprises is mainly concentrated in Ho Chi Minh City (2086 enterprises). Hanoi (325 enterprises) and the remaining large cities also have high urbanization rates. Although a real estate business can have many projects in different localities, the locality in which the business is established and located shows the attractiveness of the investment environment as well as the policy implications. Out of a total of more than 3200 residential real estate businesses, there are currently about 1000 businesses focusing on apartments from high-end to affordable housing. Of which, there are about 100 listed companies. Financial Information Business Information Market Research Credit Ratings 3
What are their main sources of financing? Exhibit 3: Credit structure of the real estate sector (Unit: VND trillion) RE companies’ main source of loan 1. Credit to developers 2. Credit to home buyers 3. Local currency corporate bond Exhibit 4: Capital structure of listed residential real estate company (Unit: VND billion) Balance on 31/12/2021 (VND billion) Bank loans, 62,368 , 14% 700,0 Corporate bond, 71,921 , 17% 1.312,9 Other source, 222,584 , 51% 326,3 4. Foreign currency corporate bond 95,2 5. Borrowing in foreign currency N/A 6. Business cooperation contract N/A Source: FiinGroup, SBV Note: N/A Data not available for foreign currency borrowing and business cooperation contract. Credit to developers included corporate bonds held by banks. As of March 31, 2022, outstanding credit for the real estate sector was VND 2,240,166 billion, an increase of 7.87% compared to December 31, 2021, accounting for 20.23% of total outstanding loans; According to SBV, consumer/self-use credit outstanding (mainly residential real estate) accounted for 65.01% of credit outstanding in the real estate sector. Outstanding loans for real estate business accounted for 34.99%. Financial Information Business Information Market Research Credit Ratings Prepayment, 77,838 , 18% Source: FiinGroup. Note: Data analysed from 54 listed residential RE companies with the total market capitalization of VND 910 billion. These companies have a total debt of VND 435 billion. Other sources include foreign currency borrowing, BCC and other sources. For listed real estate companies, other sources of capital (mainly including business cooperation contracts) are also important sources, aside from bank loans and corporate bonds. 4
They still have room for further debt capacity: data sample for listed companies Exhibit 5: Listed real estate companies’ leverage and interest coverage ratios are basically under safe level D/E Interest Coverage Ratio 0.70 7.20 7.05 0.60 0.50 6.84 6.80 7.00 6.80 6.60 0.40 6.40 0.30 6.20 6.02 0.20 6.00 5.80 0.10 0.00 0.58 0.54 0.56 0.48 2018 2019 2020 2021 5.60 5.40 Source: FiinGroup Note: Data analysed from 54 listed residential RE companies with the total market capitalization of VND 910 billion. These companies have a total debt of VND 435 billion. Total debt only includes short-term and long-term debt and not include other liabilities (mainly from business cooperation contract with customers and partners) The decreasing Debt/Equity Ratio of listed real estate companies along with the rising interest coverage ratio reflect the borrowing and repaying capacity of these businesses to be relatively stable. However, the prolonged pandemic and the real estate’s legal issues have bottlenecked their projects’ progress, making financing through channels more difficult. Financial Information Business Information Market Research Credit Ratings 5
Banking credit: under measures to control credit risks at some segments Exhibit 6: Bank credit are mainly allocated to homebuyers, thus the risk are dispersed Credit to home buyers (VNDtrn) 2,000 Credit to developers (VNDtrn) YoY growth Credit to developers (VND trillion) 36.5% 634 37.6% 1,500 35.3% -1.9% Nghìn tỷ VND 31.9% 1,000 462 2018 38.6% 16.3% 12.0% 522 21.4% 12.9% 2019 10.5% 2020 1,112 500 735 1,163 64.7% 65.2% 2018 2019 2020 2021 1,313 51.4% 31.7% 68.1% 2021 Credit to homebuyers (VND trillion) 10.0% 61.4% 700 12.8% 4.6% 0 2018 2019 2020 2021 Source: FiinGroup SBV is currently strictly controlling credit for the real estate sector, especially the real estate business. It encourages focusing the capital sources to low-cost commercial housing, social housing, and housing for workers to meet the real demand. As 65% of bank credit is for homebuyers, the risk factor mainly depends on the homebuyer's income/savings and the home loan interest rate applied by the bank. Financial Information Business Information Market Research Credit Ratings 6
Corporate bonds: who are main bondholders/buyers? Exhibit 8: 2021 C-bond primary market’s investor base Exhibit 7: Issuers and investor profile in the c-bond primary markets in 2021 (VND trillion) Investors Issuers Banks Real estate Other financial institutions Others Total Banks 2020 Securtiies Domestic Foreign Individuals comp. íntitutions institutions N/A* 47.1% Total 62.9 94.4 41.0 - 10.6 21.9 230.8 59.3 52.5 65.3 2.5 11.5 58.9 250.0 2021 30.8% 30.5% 20.2% 16.4% 8.1 1.6 5.2 0.8 7.1 11.1 33.8 34.1 35.3 47.8 5.3 7.2 37.4 167.0 164.4 183.7 159.3 8.5 36.4 129.2 681.5 Source: FiinRatings, HNX Note: Data compiled from 1077 corporate bonds issuance in 2021. These figures do not include USD 1.43 billion of foreign currency bond in 2021. * “/A” due to undisclosed information of issuers In 2021, real estate bonds are mainly invested by domestic institutions, securities companies and commercial banks. With significant policy changes (Circular 16 for banks and Decree 153 for private placement bonds), it is important for real estate companies to consider expanding access to other Institutional investors, including insurance companies, and changing form of issuance to public offerings. Financial Information Business Information Market Research Credit Ratings 13.0% 2.7% 1.5% Securities companies Banks Domestic íntitutions Individual investors 1.2% 0.5% Foreign investors Source: FiinRatings. Note: The figures were estimated based on issuance value, except bank bonds. Banks and credit institutions are not in clided in the Domestic institutions. Individual investors has decreased their exposure after the regulation on professional investors in Decree 153 took effect in early 2021. There was also a strong participation of securities companies in the primary market and then distribute the bonds to professional individual investors on the secondary market. 7
Agenda 1 Financing Sources for Residential Real Estate Developers 2 Key Challenges 3 Solutions and Recommendations Financial Information Business Information Market Research Credit Ratings 8
1 Real estate developers are under macroeconomic headwinds Exhibit 9: Rising inflation and interest rate causing rising input and capital cost CPI Exhibit 10: The investment cost structure of a sample project Core inflation Land fee 4.00 3.53 4.6% 9.6% 3.54 3.23 27.0% 2.8% Construction fee (5% contingency cost included) 2.79 Steel 2.31 2.01 1.41 1.84 15.0% 1.92 2021 1.48 0.81 Cost of design consultancy, supervision consultancy, and project management 0.81 41.0% 2017 2018 2019 2020 2021 1Q2022 Interest expense 2022e Source: FiinGroup Sales & Marketing expenses, general management Source: FiinRatings, GSO, Institute of Construction Economics Inflation is considered to have bottomed out and will increase due to the rising pressure of prices of basic commodities, and world geopolitical tensions leading to higher energy prices. Despite being strictly controlled, experts and international financial institutions believe that Vietnam's inflation in 2022 will reach around the 4% target set by the Government and the National Assembly. Financial Information Business Information Market Research Credit Ratings Steel costs account for a large proportion of real estate development projects, ranging from 15-20% of total investment costs for each project. Raw material prices and particularly steel prices have jumped recently, which increase the costs for investors significantly. Steel prices in April 2022 have increased by 46% compared to 2019, corresponding to the 7% increase of average cost of equipment. 9
2 Low liquidity due to COVID-19 causing slow project implementations Exhibit 12: Contracted sales outstanding/Inventory ratio of listed real estate firms Exhibit 11: Total number of apartments sold in Hanoi and Ho Chi Minh City in 2007-2021 Market recovery and stabilization 100,000 41% 36% Apartments 80,000 64,000 60,000 COVID-19 pandemic impacts 31% 31% 25% Market downturn caused by high inflation and interest 40,000 17% 32,000 25,591 20,000 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Source: FiinRatings compiled from CBRE, Savills, VARS 2016 2017 2018 2019 2020 2021 Source: FiinRatings Notes: Data calculated from the financial reports of 50 listed residential real estate companies Slow project implementation due to COVID-19 social distancing and project legal procedures is shown by a sharp decrease in the Contracted Sales/Inventory index. Sale rate dropped sharply at 30% - compared to the highest record in the market recovery and stabilisation phase (only in Hanoi and HCMC - which accounted for about 60% of the national scale). Real estate credit in difficulty: Bank credit with the State Bank’s Circular 16 and recent developments in corporate bond channel (Draft Decree Amending Decree No. 153); policy changes after the Thu Thiem land auction. Financial Information Business Information Market Research Credit Ratings 10
Debt coming due in the context of the credit tightening 3 Exhibit 13: Corporate bond maturity schedule of Vietnam Real Estate Issuers by Value (VND trillion) Listed Exhibit 14: Operating cashflow of listed residential real estate companies that issued bonds in 2021 (VND billion) Unlisted 70,000 250 60,000 192.7 200 57,857 187.5 50,000 150 40,000 109.1 106.9 100 77.1 88.0 26,423 30,000 18,727 20,000 39.2 50 39.9 16.5 7.6 14.0 10,000 0.2 - 2022 2023 2024 2025 2026 5 years Source: FiinRatings, HNX. Note: Data compiled from 3905 bond issuance of 633 issuers 2019 2020 2021 Source: FiinRatings. Note: Data calculated from 26 listed real estate companies’ financial statements that issued bond in 2021 (except for VinGroup as VinHomes was included). The total bond outstanding of Real Estate sector is VND 487 trillion as of the end of April. Our data showed that 63% of this value, which is VND 305 trillion, will mature in the next 3 years (2022 – 2024). The decreasing operating cashflow of the listed RE companies due to the pandemic showed their weakening credit health. Financial Information Business Information Market Research Credit Ratings 11
4 Weakening credit strengths especially unlisted companies Exhibit 15: Debt/EBITDA of listed real estate companies that issued bonds continue to rise in 2021 Listed Exhibit 16: The residential real estate sector expected to have modest earnings growth in 2022 Unlisted 9.0 2018 8.1 Profit After Taxes Growth 2019 2020 2021 2022F 8.0 Real Estate and Building Materials 7.0 Resident 158.3% 39.2% 4.2% 34.3% 2.1% 6.0 Industrial 16.3% 24.2% 3.2% 1.3% 64.1% Construction -15.7% -6.7% -9.4% 33.4% 36.4% Steel -16.6% -13.3% 88.6% 163.1% -8.5% Building Materials 0.6% 11.6% 2.5% -13.3% 20.6% Non-financial 6.1% 4.6% -12.5% 46.1% 12.7% TOTAL 14.1% 12.6% -0.7% 42.8% 21.1% 5.3 5.3 5.4 5.0 3.8 4.0 3.0 3.0 1.9 2.5 2.2 2.0 1.0 2017 2018 2019 2020 2021 Source: FiinRatings. Total debt Short-term debt Long-term debt – Cash – Short-term financial investment The credit capacity of unlisted enterprises is much weaker than that of listed ones. Financial Information Business Information Market Research Credit Ratings Source: FiinPro Platform. 2022F is forecasted figured, derived from forecasts of securities analysts and target planned and approved at shareholders’ meetings. While non-financial enterprises in the whole stock market are forecasted to maintain positive profit growth, the profit outlook of listed real estate units is forecasted to be "flat". 12
Agenda 1 Financing Sources for Residential Real Estate Developers 2 Key Challenges 3 Solutions and Recommendations Financial Information Business Information Market Research Credit Ratings 13
Summary of Recommendations We propose 3 solutions to maintain the sustainable development of the Residential Real Estate Sector in Vietnam while ensuring the goal of strengthening credit risk control: Establish an openaccess national database of residential real estate projects Enhance transparency of bond issuer and bonds Consider amending legal regulations towards flexibility As credit institutions and bond buyers are "risk-averse" due to the lack of information Due to the lack of information for decision-making and risk management For the true function of the c-bond market and the high investing demand of people Financial Information Business Information Market Research Credit Ratings Information on land ownership Project legal information (licensing and transfer) Development progress and commercial activities Improve issuing documents: Standardised OC form that all issuers must use, etc. Apply and improve the public credit ratings. Information disclosure through out the bond’s cycle Limit the use of technical criteria, such as financial results and leverage ratio Improve the supervision on issuers, iunderwriters/advisors, sales agents and collateral asset managers Expand the domestic and foreign investor base 14
Preliminary idea for the national open-access database on residential real estate projects Analysis/syn thesis Centralised database Information system on housing and real estate market (Ministry of Construction) Data sharing between Ministries Land information system (MONRE) Real estate information system (relevant ministries) Real estate information system (VNREA) Standardise data to help search for real estate projects as well as its legal status Sharing and connecting ministries Open access for people and specialist to search for project legal status for investing purposes. Land ownership database Legal status of real estate projects database Database on mortgaged real estate Database on real estate project implementation Integrated Land Information Service (INLIS) – integrated land database: ownership, legal status, etc. of Singapore Land Authority. Singapore Real Estate Information System (REALIS) – one-stop portal on real estate information of Singapore’s Urban Redevelopment Authority. Financial Information Business Information Market Research Credit Ratings 15
Applying credit ratings: improve information transparency; support credit risk control; and manage cross-default risks Exhibit 18: Meaning of credit rating scales for real estate developers Exhibit 17: Relative raking of listed Real Estate companies and FiinRatings’ official ratings of several issuers 14 12 12 10 12 9 8 Credit quality 9 Large and clean land bank in several cities and central areas, with diversified products and sources of income. Strong reputation and proven project implementation capability. Good funding capability and low financial leverage. Strong and above Intermediate to Modest [bbb] Above average scale with central city land bank. The implementation capability and feasibility is proven. Below average financial leverage. Adequate to Strong Intermediate to Modest Land bank in cities, vicinity or others. Higher financial leverage. Moderate to Adequate Significant to Aggressive Small to average size. Higher risks regarding the implementation capability. Higher financial leverage. Below Moderate Aggressive to Highly Leverage 6 3 2 2 1 1 0 aaa aa aa aa- a a a- bbb bbb bbb- bb bb bb- b b b- Source: FiinRatings Important Note: Except for issuers with names and logo shown on the Exhibit, this is not the final results of FiinRatings. To carry out rating actions, we would need to perform qualitative analysis, including interviews with the companies’ management, due diligence and assess characteristics of each particular business model. The promotion of credit rating will help not only individual investors but also commercial banks in selecting, evaluating and lending credit in line with risk appetite and the State Bank’s directive: strictly control real estate credit risks. Help "synchronize" information on bond credit quality and bank credit, thereby supporting crossdefault risk monitoring of the credit market in general. Financial Information Business Information Market Research Credit Ratings Financial Risk Profile [a] 7 4 Description Business Risk Profile [bb] [b] Source: FiinRatings 16
This document is prepared by FiinGroup Joint Stock Company for reference purposes only. This is not a Credit Rating Report and does not recommend buying, selling, or holding any stock or any other particular transaction. The information contained in this Report, including FiinGroup's data, figures, tables, analysis, and comments, is used for reference only at your own discretion and risk appetite. FiinGroup will not be responsible for any loss or consequences that may result from the use of the information contained in this report. FiinGroup Joint Stock Company holds the copyright on this report and all the content in this Report. This report is copyright protected under the law on copyright in Vietnam and other countries under international copyright conventions and treaties that Vietnam is a member.
real estate) accounted for 65.01% of credit outstanding in the real estate sector. Outstanding loans for real estate business accounted for 34.99%. For listed real estate companies, other sources of capital (mainly including business cooperation contracts) are also important sources, aside from bank loans and corporate bonds. Source: FiinGroup.
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