There are three main sources of capital for developing real estate projects: stockholder equity, bank loans and capital raised from clients. Of these, according to Dr Tran Kim Chung from the Central Institute for Economic Management, bank loans are most important in developing real estate projects.

In 2009, the total outstanding loans to real estate projects accounted for 11.76 percent of all outstanding loans. Those in Hanoi were just equal to ¼ of that in HCM City. In 2010, banks tightened real estate loans and the State Bank of Vietnam encouraged banks to focus on loans for production and business, and not stock and real estate investments.

According to Pham Thanh Hung, General Director of The Ky Company, a real estate valuation service provider, it is very difficult to access bank loans now. Lending interest rates are between 15 and 17 percent, while bank doors are not open widely to all real estate projects.

The director of a Hanoi real estate company that invested in the 30 floor building in Xa La new urban area in Ha Dong district, related that his company has used 150 billion dong of capital from partners. He does not even “dream” of borrowing money from a bank. He contacted many commercial banks previously, but all of them refused to grant a loan by explaining that the projects were unfeasible.

“They (commercial banks) only prioritise loans to fund real estate projects located in advantageous positions,” the director claimed.

Le Duc Tho, Deputy General Director of Vietinbank, explained that real estate prices are over-priced and do not reflect actual values. If banks continue injecting money into real estate projects, the market will heat up and prompt higher speculation, thus leading to unsustainable development. When prices jump, businesses may become insolvent and fail to repay debts to banks.

“Banks need to set limits to control risks,” he noted. “However, banks must be ready to provide loans if they find real estate projects feasible.”

An estimated 90 percent of Vietnamese enterprises are small and medium (they have only 20-30 percent of capital needed). Unable to borrow capital from banks, real estate developers must mobilize capital from secondary investors through the capital contribution contracts.

Besides these options, real estate projects can theoretically find obtain capital through foreign investment. Yet foreign investors focus on only specific segments of the real estate market, including trade centres, hotels and restaurants

Hung cautioned that real estate developers should think carefully about capital. “Small cats should aim to catch small mice,” he proposed, meaning that investors with limited capital should develop small projects rather than aiming for giant profits.

Source: VnExpress