Published November 27, 2012

Vietnam property dreams crumble

Projects run out of funding as economy slows, reports NICK HEATH

[HANOI] FROM afar, the gleaming metal and glass edifices of Hanoi's EVN Tower illustrate Vietnam's rapid economic development. Up close, the rubble-strewn entrance and missing windows tell another story: one of loose lending and property speculation that now hangs over the country's banks.

State-run monopoly Vietnam Electricity began construction of the 33- and 29-storey dual-tower development in 2007, a year when 54 per cent credit growth helped fuel the fastest economic expansion since 1996. Now, the economy has slowed, banks are struggling with an increase in bad debts, and unfinished property projects, empty offices and lower rents risk adding to the pile of non-performing loans.

"Banks were far too eager to lend and a lot of the projects that have been built haven't been well-thought through," said Stephen Wyatt, managing director for real estate broker Knight Frank Vietnam in Ho Chi Minh City. "A number of developments are on hold, purely because they have run out of funding. Banks are no longer willing to fund these massive developments."

Vietnam's economy, which the communist government opened up in 1986, expanded at a 4.7 per cent annual rate in the third quarter, after exceeding 7 per cent from 2002 through to the first quarter of 2008. After a lending binge fuelled the fastest inflation in Asia, policy makers raised interest rates in 2010 and 2011 and restricted lending. Among the casualties are many of the nation's inefficient state-owned enterprises, which had diverted cash to property developments.

"When the developer is a state- owned enterprise and is using the money it should be using for say, power generation, airlines, shipping or banking, that's where the oversupply has come," said Marc Townsend, the Ho Chi Minh City-based managing director of CBRE's Vietnam unit. "They all felt they could make easy money by being a property developer."

State firms' so-called non-core investments, such as property and stocks, account for as much as 12 per cent of their registered capital, Deputy State Auditor Le Minh Khai said in July. The Communist Party's Central Committee on Oct 15 called on state-owned enterprises to end non-core investments.

Office and retail rents in Vietnam's two largest cities have slumped as a wave of supply entered the market at a time when slowing economic and retail-sales growth curbs demand for commercial real estate. The Hanoi market added more office and retail space since the start of 2011 than in the previous four years combined, according to property broker CBRE.

The average asking rent for top-grade central business district office space in Hanoi was about US$47 per square metre per month in 2009, more than double the levels for the same grade space in Bangkok and Kuala Lumpur at that time, according to CBRE data. The rate was 11 per cent lower at US$42.01 per square metre in the third quarter.

Average asking rents for Grade B office space in the capital's western district, where some of the nation's largest state-owned enterprises have their headquarters, have fallen 39 per cent since the first quarter of 2009, and slid 22 per cent in the city's central business district.

"I have never seen rents decline this fast in the market," said Son Nam Nguyen, managing partner at Vietnam Capital Partners, an investment bank in Ho Chi Minh City. "If real estate rents and values continue to decrease as we've seen in the past three months and six months, the biggest risk is we will see developers walk away from projects and banks' bad assets will increase very rapidly."

Real estate loans totalled 203 trillion dong (S$11.9 billion) as of Aug 31, of which 6.6 per cent were classified as bad debt, Minister of Construction Trinh Dinh Dung told the National Assembly on Oct 31, citing a State Bank of Vietnam report. A broader category of real estate-related loans, including property-backed debt, account for 57 per cent of total outstanding borrowing, or about 1,000 trillion dong, he said.

Average office occupancy in Hanoi fell 2 percentage points to 79 per cent in the third quarter from the previous three-month period, according to data from broker Savills plc, while average rents dropped 4 per cent. The number of new leases signed in the period slid to the lowest this year.

Office occupancy rates in Ho Chi Minh City, the country's commercial hub, rose 1 percentage point to 87 per cent in the third quarter from three months earlier, while average monthly rents fell 2 per cent to about 540,000 dong per square metre from the April-June period, with almost a quarter of buildings lowering their rates, according to Savills.

Almost 16 per cent of available Hanoi retail space was vacant at the end of the third quarter, according to CBRE, with most free space to be found in shopping centres, which had an occupancy rate of 82 per cent.

"Newer projects, especially those in fringe areas, are expected to experience a rather difficult time in the first two or three years, due to fiercer competition and limited consumer spending that might linger on," CBRE said in its third-quarter review of the Hanoi market. Almost 650,000 square metres of retail space is expected to enter Hanoi from the end of the third quarter until the end of 2013, adding pressure on existing projects, it said.

Retail-sales growth slowed to 17.1 per cent year-on-year in October compared with the same period in 2011, the lowest level of expansion since at least January 2005.

Many of Vietnam's 1,300 state-owned enterprises are reportedly facing losses because of their recent forays into property, said Alfred Chan, director of financial institutions at Fitch Ratings in Singapore.

"It is not obvious, if you were just to look at the disclosure, what the potential risks to the banking sector are if you just look at the real estate sector," Mr Chan said. "Some of this exposure could well come from non-real estate companies that have ventured into that sector." Non-performing loans at banks are "significantly understated" and could be three or four times higher than official estimates, Fitch Ratings said in a March report.

The central bank chief, Nguyen Van Binh, said in April the level of bad debt at some lenders may be "much higher" than reported. Bad debts in Vietnam's banking system may have accounted for 8.82 per cent of outstanding loans at the end of September, Nguyen Van Giau, head of the National Assembly's economic committee, told legislators on Nov 13.

Office rents may decline by as much as another 15 per cent in the next three years, said CBRE's Mr Townsend, particularly if economic growth remains subdued and direct foreign investment fails to recover. Pledged foreign-direct investment fell 25 per cent from a year earlier in the first 10 months of 2012, the Foreign Investment Agency said on Oct 25. - Bloomberg