Chinese ownership demons stalk Vietnam – The Washington Post


You can earn a high salary, but only real estate can create wealth – for decades, this has been the Chinese mentality. Real estate accounts for around 70% of Chinese household wealth and up to 30% of its economy. But the China Evergrande Group’s debt explosion, along with falling house prices and subsequent mortgage boycotts, has thrown the economy into its deepest twist since the Cultural Revolution. The Chinese have doubts.

Evergrande’s spectacular fall should also serve as a warning to Vietnam. From the love of real estate to the practice of pre-sales to the corporate governance of developers, Vietnam shares too many similarities with China to be comfortable.

Already, the Southeast Asian nation is littered with developer scandals. In March, the government arrested Trinh Van Quyet, chairman of the FLC group, for stock market manipulation. Quyet had ordered his relatives to open 450 securities accounts; they traded often, artificially creating trading volume and driving up the stock price of the companies in his portfolio. The following month, Do Anh Dung, chairman of another promoter, was arrested for luring investors with false financial information. Dung had raised more than 10 trillion dong ($427 million) through the sale of privately placed bonds.

These are familiar tactics deployed by Chinese developers. The likes of Evergrande were always looking for ways to borrow, to grow their business a bit more. To circumvent Beijing’s regulatory scrutiny, promoters raised funds from private bond sales structured to be off-balance sheet during audit season. The stock prices of their portfolio companies can also mysteriously skyrocket and dip. It didn’t end well. Over the past year, 28 of the top 100 developers have either defaulted or sought extensions from their creditors.

But the mother of all scandals was committed by Alibaba – nothing to do with the Chinese e-commerce giant – but Alibaba Real Estate Corp., based in Ho Chi Minh City. Alibaba in Vietnam had sold small empty plots of land, telling thousands of buyers they were getting a piece of a major development site near the mall. He scammed investors out of over $100 million.

It was a sign of how chaotic and unregulated the real estate market can be – what Alibaba in Vietnam sold was farmland that could not be used for residential housing – but also a reflection of a state cultural mindset that prioritized land above all other assets.

Despite the Alibaba scandal in 2019, the Vietnamese are undeterred. Land remains the real estate investment category with the highest added value, followed by land properties such as villas and townhouses, then condominiums. In the second quarter, land properties in Ho Chi Minh City were worth $6,913 per square meter, a 48% jump from a year ago, according to data provided by CBRE, a real estate agent.

Much like China, pre-sales, where apartments are bought long before they are built, dominate Vietnam’s main residential market. At VinGroup JSC’s subsidiary, Vinhomes JSC, the country’s largest residential developer, most units are sold immediately after the government approves the documents for commercial land use and construction of the project begins, the buyers to pay at least 30% of the total purchase price. The rest is collected as construction progresses.

Pre-sales could be mutually beneficial, especially in a growing market like Vietnam. It helps developers get cash returns faster, while homebuyers are able to lock in current prices before units are completed, often two years later. However, as Chinese consumers are discovering, they are taking substantial risks. Recent mortgage boycotts stemmed from buyers’ frustration that developers took their money but couldn’t complete construction.

The approach has already caused headaches in Vietnam. In 2019, a luxury residential project jointly developed by Novaland Investment JSC, one of the country’s largest builders, said it was unable to deliver all 187 apartments in Ho Chi Minh City. The land was seized by the government following anti-corruption investigations.

Last year, the city’s Palm Garden project, jointly developed by Keppel Land Ltd. of Singapore, refunded the 10% deposit it had collected from over 600 buyers. The developers “had yet to receive approval to begin construction” two years after launch and were “unable to determine when” they might begin, according to a termination letter sent to buyers and seen by Bloomberg Opinion. Palm Garden’s buyers were lucky – their developer was one of the few to quickly repay the deposits.

The Vietnamese government is clearly worried. To avoid a housing bubble, the central bank has asked its commercial lenders to tighten credit. In June, outstanding loans to the real estate market, which represented about 20% of the total loan portfolio, increased by 14% compared to the previous year, faster than the average credit growth of 9.4% in the economy.

Consumers are now struggling to get mortgages approved. Only 20-30% of buyers can get home loans these days, compared to 50-60% in the past, according to real estate agents in Ho Chi Minh City. But the verdict has not yet been given on whether this credit crunch can curb speculation. Speculators have rarely approached banks for mortgages anyway, they say.

Like China in the past, Vietnam is in a hurry. As soon as they have finished the basement, the developers want to sell all the planned units and move on to another project. Consumers also want to move up the middle class quickly and become proud homeowners before homes become too expensive. This rapid turnover sows the seeds of trouble in the future. While the Vietnamese economy still has plenty of room for growth, its real estate market already seems to be flourishing.

More from Bloomberg Opinion:

• Vietnam posted growth of 7%. It can do much better: Shuli Ren

• In New York, London and Hong Kong? Moving On: Anjani Trivedi

• Can China course-correct on Covid – like Vietnam? : Shuli Ren

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. A former investment banker, she was a markets reporter for Barron’s. She holds the CFA charter.

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