High interest rates discouraging investment: Vietnam developers

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The Ho Chi Minh City Real Estate Association says high interest rates have stopped local developers from investing in new projects.

"Lending interest rates of around 18 percent a year are too high and businesses do not dare to take loans to develop new projects," Le Hoang Chau, chairman of the association, told Thanh Nien.

"There should be a plan to lower interest rates to 0.85-1.1 percent a month (10.2-13.2 percent per year) so that the property market can have a stable growth."

In late February this year, the central bank allowed banks to offer more loans at negotiated interest rates. Previously, rates on all loans except for consumer loans were capped at 1.5 times the central bank's benchmark base rate. Following the deregulation, lending rates have surged sharply.

"For a five-year project, if the profit rate is 30 percent, foreign investors are still willing to accept dollar interest rates of 4-5 percent a year," Chau said.

But if local developers take dong loans at 17-18 percent a year, total interest payment in five years would almost equal the loan, he said.

"No company can afford such loans. As a result, forming joint ventures with foreign companies becomes an option for local businesses to solve their capital problems."

The association said the government should complete a legal framework for bond issues and for the formation of a Real Estate Investment Trust (REIT) to help developers raise funds for their projects. REIT is a security that sells like a stock on the major exchanges and invests primarily in real estate through properties and mortgages.

Dang Hoang Vu, general director of Thanh Binh Real Estate Company, said it's very important to improve the legal system for property projects.

There is no company in the sector that has enough capital to invest in a whole project. If borrowing costs are high, end users of property products will have to bear the burden, he said.

In such cases the money cycle will slow down and supply on the market will fall, he said.

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