High-yield realty bonds allure investors but experts warn of risks

September 20, 2021 - 07:32

Fledgling property-backed bond market is tempting investors into the wager for its inviting high yields but experts still warn investors of potential risks of the products.


Sun Marina real estate and entertainment complex in the northern city of Hạ Long developed by Sun Group. — Photo Sun Group

HÀ NỘI — The fledgling property-backed bond market is tempting investors for its inviting high yields but experts still warn investors of potential risks of the products.

Thuỳ Chi, an individual investor from Hà Nội’s Thanh Xuân district, told Việt Nam News Agency she had spent a total of VNĐ2 billion (US$87,400) to buy realty bonds.

“Bank deposit interest rates are currently at a low level, only 5-5.5 per cent per year for a 12-month term, while realty bond yield rate is about 8-10 per cent per year, some businesses even offer an interest rate of 18 per cent per year, making bonds very attractive for individual investors,” Chi said.

In the middle of last year, Chi decided to buy bonds from a real estate company with an interest rate of 12 per cent per year. Although there were other bonds with higher interest rates, according to Chi, it was necessary to assess business productivity, collateral and legality.

In the context that bank credit for the real estate sector is squeezed, many realty businesses have shifted to mobilise capital through bond issuance to supplement capital projects.

In the first two quarters of this year, the real estate businesses raised a total amount of VNĐ67 trillion via bond issuance, accounting for 33 per cent of the total amount of bonds issued in the market.

The average interest rate of real estate bonds in the period was 11.5 per cent per year, up 1 percentage point compared to 2020 while the average maturity is 4.16 years.

However, in the face of massive issuance by realty companies, there were potential risks related to land speculation, said National Assembly Deputy Vũ Hồng Thanh, chairman of the National Assembly's Economic Committee.

Land speculation typically involves the purchase of undeveloped land to hold for an indefinite amount of time, with the hope that a future economic event will dramatically increase the value of the land.

In the first months of 2021, many localities witnessed soaring demand for land, land speculation, and disturbance of land planning information, especially in the suburbs of large cities.

“Statistics show that risks in corporate bonds are increasing,” said Cấn Văn Lực, chief economist of the Bank for Investment and Development of Việt Nam, a member of the National Financial and Monetary Advisory Council.

“Excluding bonds issued by banks and financial institutions, many corporate bonds are issued without collateral, accounting for about 28 per cent,” he said.

The government has mapped out a plan to develop the bond market in order to diversify medium and long-term capital sources for businesses. But the size of the market is still low, currently equivalent to about 11-12 per cent of GDP, compared to the regional average of 20-25 per cent of GDP.

“However, high profit is often associated with high risk. Therefore, investors should pay attention to the issuance transaction, interest rate, collateral, principal and interest payment, and transfer conditions when deciding on investing in bonds,” he said.

“There are businesses offering interest rates of up to 18 per cent per year, it is often not a fixed interest rate for 1 year, but rather the maximum and may actually be lower,” he said.

“In order to make the market transparent, Việt Nam needs to soon establish a credit rating organisation so that investors can consult and make decisions,” he said.

Currently, investors can invest in real estate in three ways, directly buying products is the traditional method. In addition, investors can choose to buy bonds or shares of real estate businesses.

Analysing the cases, many experts believe that direct buying real estate products will be more risky but will also bring more profits.

Indirect investment through buying stocks and bonds helps the buyer receive a stable interest rate or dividends. — VNS