PhD. Nguyen Tri Hieu: Tightening credit and real estate bonds is reasonable

Economic expert PhD. Nguyen Tri Hieu said that the SBV warned commercial banks about buying bonds from real estate businesses as appropriate and necessary. PhD. Hieu said this would affect the development of the real estate market but "hard currency is a smart currency" and limit the risk of bubbles.

From credit squeeze...

At the beginning of the year, the State Bank of Vietnam (SBV) issued a regulation to reduce the ratio of short-term capital for medium and long-term loans from 45% in 2018 to 40% in 2019, raising the risk ratio for buying houses loans with the value of over VND 3 billion from 50% to 150% has greatly affected the real estate market.

Mr. Le Hoang Chau, Chairman of Ho Chi Minh City Real Estate Association (HoREA) pointed out a series of difficulties real estate businesses encountered when the SBV implemented credit tightening; businesses will have difficulty in finding other capital sources to replace a part of credit capital.

Many real estate businesses that have not been converted into joint stock companies are listed on stock exchanges. The country has more than 10,000 real estate businesses, but only about 65 are listed on the stock market, so the stock market is not really a capital channel for the real estate market.

In addition to expanding cooperation with foreign enterprises (FDI), or seeking capital on the stock exchange, real estate businesses are choosing solutions to issue corporate bonds to supplement capital, Mr. Chau gave out the analysis in his reports.

The real estate market is greatly affected when the State Bank tightens credit. (Photo illustrating: Hong Phong).

...To tighten bonds

According to the Ministry of Finance, in the first 6 months of 2019, the total amount of corporate bond issuance was 116,085 billion VND, increasing 7.4% over the same period in 2018. In particular, commercial banks issued 36,700 billion VND VND (36%), real estate enterprises were VND 22,122 billion (19%). Even real estate businesses have issued bonds with very high interest rates up to 12-14.5%/year, doubling the interest rate savings.

Specifically, there are many notable names such as: Hung Thinh Land has just issued VND 1,000 billion bonds with an interest rate of 11%, Novaland total VND 1,900 billion bonds issued, Van Phu Invest also issued VND 1,080 billion. At the same time, TNR Holding also issued 991 billion dong of bonds.

Recently, the State Bank has issued a written request to domestic commercial banks to control risks in corporate bond investment activities. The SBV said that through the state management of banking activities in the first months of 2019, it showed that the investment activities of corporate bonds of commercial banks in general still had many potential risks.

In particular, a number of banks with corporate bond investment accounted for a large proportion of total assets and continued to grow rapidly. The balance of investment in bonds in the field of construction and real estate is large when this market has not recovered firmly, production and business activities of enterprises still face many difficulties...

From there, the SBV required commercial banks to strictly control bond investment activities with the purpose of investing in programs and projects in the field of real estate business or increasing the capital size in order to limit risks.

Hard money is smart money

Talking to reporters about the SBV's continuous tightening of cash flow into real estate sector, economic experts. Nguyen Tri Hieu said: "Bonds are a form of borrowing different from bank loans. When normally borrowed, the bank will appraise the financial statements, and decide whether to lend or not and issue it. Bonds via the public and private issuance will be very risky because they do not have to be appraised, especially for real estate companies, the risk is higher, therefore, the SBV advises and warns banks. When buying real estate bonds is reasonable."

"Credit tightening is needed to make the real estate market healthier and more stable" - PhD Nguyen Tri Hieu.

Mr. Hieu also analyzed, there were companies that offer interest rates twice the normal bank interest rates, the higher the interest rate will go with certain risks. For those companies that do not have financial statements or those who are not old, bonds are more risky, therefore, in order to attract investors, they will pay high interest rates.

"It is not bad for banks to buy bonds of real estate businesses, but when buying, be careful, especially for risky bonds." PhD Nguyen Tri Hieu

Mr Hieu said: "The credit squeeze and bond tightening will limit the loans for real estate, but this is reasonable. If the money is too easy, when going into real estate businesses , these businesses go bankrupt or business losses do not have bank repayments leading to bad debts, banks have to raise new capital to offset the amount of money spent to buy bonds, this will affect the whole banking system like 10 years ago.”

The expert analyzed that the limited cash flow into the real estate market will affect the development of the market. However, it will make this market more healthy. The hard currency is the smart money, it will flow where it is needed. Easy money will run rampant and create an effect that pushes up real estate prices, and can lead to real estate bubbles.

"However, the tightening of credit for real estate businesses is not entirely detrimental to real estate businesses. For large enterprises, with stable capital, good relations with banks will be favored by banks and easier to borrow money than small businesses" Mr. Hieu said.

According to Doi Song Phap Ly