Việt Nam’s stock market is now overestimating the impact of recent tightening of credit conditions for the country’s real estate developers. — VNA/VNS Photo

HCM CITY — Concerns about the ability of Vietnamese companies to access credit have been severely weighing on the VN-Index, but the issue is mostly restricted to the property sector, Michael Kokalari, chief economist at investment fund VinaCapital, has said in a note.

The demand for new housing units in Việt Nam is still strong and prices are still affordable, and so the prices of real estate stocks are likely to recover if and when the Government takes action to ease credit conditions. 

The market recently got the first inkling that such an easing could be in the works, which sent stock prices soaring.

November 16 was a dramatic day for the Vietnamese stock market. The VN-Index plunged by more than 4 per cent soon after opening but ended the day up over 3 per cent on hopes that the credit crunch concerns, which made Việt Nam one of the worst performing markets in the world this year, could be abating.

Fears that the credit problem affecting developers could spread to other sectors hammered the index, which fell by as much as 42 per cent for the year as of last week.

It was driven by declines of 50 per cent in real estate stocks and 40 per cent in bank stocks, given that the combined weightage of the two sectors in the VN-Index is 55 per cent.

The VN-Index dramatically underperformed its regional peers in Indonesia, Malaysia, Thailand, and the Philippines owing in part to concerns about the ability of property companies to pay over US$5 billion of maturing debts in 2023.

“We believe Việt Nam’s stock market is now overestimating the impact of recent tightening of credit conditions for the country’s real estate developers. It is important to note that real estate development contributes less than 10 per cent of Việt Nam’s GDP in contrast to nearly 30 per cent in China.”

VinaCapital analysts directly canvassed several industrial companies and concluded that the current credit crunch primarily impacts property and some smaller companies. 

But large industrial companies seemingly continue to have access to credit albeit at higher interest rates.

“Our canvassing of companies in a variety of industries leads us to believe that large, high-quality companies outside the real estate sector are not facing difficulties rolling over their outstanding debts.” 

That said, banks have become more selective in their lending and the State Bank of Vietnam’s recent tightening of monetary conditions - it hiked policy rates by 2 percentage points to 6 per cent - plus its use of foreign exchange reserves to support the đồng are constricting overall credit conditions.

Việt Nam’s GDP is on track to grow by 8 per cent in 2022 and by around 6 per cent in 2023, while corporate earnings are on track to grow by 17 per cent this year and next. 

The combination of falling stock prices and growing earnings caused the 2022 P/E multiple for the VN-Index to plunge from above 17x at the beginning of 2022 to 9x now, and the market’s 8x 2023 P/E is 40 per cent below the forward P/E valuation of the country’s regional peers.

Understanding real estate developers’ credit crunch

Vietnamese real estate developers do not have access to sufficient long-term funding to support their “land banking” activities. 

From the time a developer buys a plot of raw land to the time it has been rezoned for residential use and the final apartment building/housing units are constructed generally takes five years. 

Until the land has been rezoned for residential usage and project approvals have been secured, developers cannot use it as collateral to secure bank loans.

Property developers are also limited in pre-sales funding since they can only collect payments from home buyers after the building foundation is laid.

The net result of all this is that developers began to depend on the corporate bond market in recent years, causing issuances to skyrocket from $12 billion in 2019 to $32 billion last year. 

Developers faced less restrictive covenants on bonds they issued, or they essentially disregarded the covenants (which has been the main thrust of the Government’s recent regulatory crackdown on the country’s nascent bond market), primarily because many of the bonds were sold to retail investors. 

The bonds that retail investors bought typically have a two- to three-year maturity and pay 10-12 per cent coupon rate as against 7 per cent on 18-month bank deposits in 2021.

The first problem with this situation is that developers face a major asset-liability mismatch since they need to repay, or roll over their outstanding debts every two years, but the land they purchased will not generate cashflows until well into the future.

The history of finance is littered with examples of a modest credit tightening causing solvency problems for companies and financial institutions as a result of such mismatches. 

The second problem is that the time it takes to rezone raw land has been getting longer in recent years due to various bottlenecks in the approvals process, limiting developers’ ability to refinance their maturing corporate bonds with bank loans in a timely manner.

There are three important points investors need to understand: the Government could easily resolve the situation by encouraging banks to lend to real estate developers (by reducing the capital charge on loans to developers, for example), it can expedite the approval process for new projects to alleviate developers’ asset-liability mismatch issues, and new housing units continue to have very strong demand and remain affordable to a wide range of middle-class buyers. 

In other words, Việt Nam’s real estate market is still fundamentally healthy (in stark contrast to China’s, for example), despite facing immediate liquidity issues. — VNS