Don't throw good money after bad

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Government should support homebuyers instead of backing moves by property developers that have gone wrong


  Unfinished villas are pictured at a development project on the outskirts of Hanoi. Property firms should rescue themselves by cutting prices, experts say. Photo: AFP

The Ministry of Construction and property firms have been seeking greater government support to revive the real estate market, but experts say developers should act on their own to get out of the prolonged slump that they are responsible for in the first place.

Tran Dinh Thien, director of the Vietnam Economics Institute, said Hanoi and Ho Chi Minh City alone had a combined stock of 70,000 apartments that would take up to seven years to clear.

This is the consequence of an investment trend that saw many companies pouring a lot of money into residential projects without thinking about real market demand, he said.

Economist Vu Dinh Anh said capital began to flow into the real estate sector at a fast pace in 2005, particularly in Hanoi and HCMC.

The problem was that most developers focused only on building luxury homes while demand grew strongly in the low-end segment. Most people would need 20 years to save enough money for a low to mid-end apartment, so luxury homes were just completely out of their reach, Anh said.

"Housing inventory expanded as the market was driven by speculation, while the real demand of homebuyers was not met," he said.

Pham Sy Liem, vice chairman of the Vietnam Construction Federation, said the government has taken measures to improve the property market, but without good results. The State Bank of Vietnam has eased credit policies for property firms this year, while the Ministry of Construction has pushed for the development of housing for low-income earners to revive the market.

Despite these measures, banks are being very cautious about lending to property firms for fear that bad debts could expand. And given the stagnant market, many firms are not keen on taking out more loans, he said.

"Property firms should rescue themselves by cutting prices and reviewing their product portfolio, instead of waiting for support from outside," Liem said.

The Ministry of Construction last month proposed a series of measures to boost the market, including extending loan payment deadlines and reducing interest rates for developers.

Accept lower profits

Many firms have reduced their prices of their property products by 20-50 percent over the last 12 months or so.

But although property prices have fallen sharply, they are still very high, Liem said.

"Property firms should cooperate with banks that financed their projects earlier to offer homebuyers five to ten year low interest loans, so that the housing inventory can be cleared."

Liem said developers should also divide and convert large apartments into smaller units, so that they can be bought more easily.

Doan Nguyen Duc, chairman of property firm Hoang Anh Gia Lai, said the only way developers can help the property market turn around is to lower prices and accept smaller profits.

In fact, the government cannot offer more support to property firms because of limited resources amidst the economic slowdown, he said.

His firm has announced that it would sell 620 apartments in HCMC this quarter at VND20 million (US$950) per square meter, 30-50 percent lower than the prices of similar projects.

An expert said the government should not provide real estate firms with cheap loans now, as they struggle with huge debts and a sluggish market.

"If the government pumps more money into property firms, housing supply would continue to rise, and local people would still find it hard to buy homes.

"Therefore, the best way to improve the real estate market is to support the buyers. The state should subsidize banking interest rates for buyers. Then people can access low interest loans for terms of 10-20 years to buy houses," he said.

No early recovery

Liem said the prospects for any market recovery until early next year were not bright, as the economy is yet to recover.

The government has said Vietnam's gross domestic product, the broadest measure of the economy, grew 4.73 percent in the first nine months compared to a year ago, more than a percentage point less than the 5.77 percent growth recorded in the same period last year.

"In the current context, what we can do is to think of ways to help real estate firms overcome the slowdown and stay in business. We cannot hope for a strong recovery now."

Economist Tran Kim Chung said that if the macroeconomic situation does not worsen, the market's liquidity may improve, especially in the low-priced and small-sized apartment segments.

He even suggested that the market may have already hit the bottom and will recover slowly in the coming months. The real estate market, over the past decade, has seen the cycle of strong growth and slowdown every two years, he said.

However, Chung said, some companies are not likely to last longer than this year and others will have to accept losses when selling homes at low prices in order to service maturing bank loans.

A recent survey by market research firm Nielsen said the health of the economy has become the top concern of Vietnamese consumers.

Worries over the economy have led to consumers tending to save 15 percent of their income while investing only 1 percent, which might limit funds available for real estate purchases, said property research and consulting firm CBRE Vietnam.

The wait-and-see attitude also remains common among potential buyers, which is further intensified by their herd mentality, it said in a recent report.

Looking ahead, in the current buyer's market, the buyers' purchasing power and mentality will drive market recovery. The dim economic outlook through 2013 will further dampen their confidence, and the flight to safety will strengthen savings at the expense of investments, the report said.

Cash is available, but does not flow into real estate, it said.

"Consequently, the market is expected to pick up when the economy shows clear signs of improvement."

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