Bank for Investment and Development of Vietnam JSC (BIDV) and Japan’s Sumitomo Mitsui Trust Bank (SuMi TRUST) jointly organize a seminar on “Managing the real estate market and the role of financial institutions: Japan’s experience and policy implications for Vietnam” in Hanoi on August 6, 2014.

The seminar is a forum for experts, researchers, government bodies, financial institutions  and real estate companies and associations and other concerned parties to meet and share updated information, their views on the solutions and upcoming policy orientations, the role of financial institutions to the real estate market. It will also be a forum for Vietnamese parties to learn and to discuss the Japan’s experience to tackle the serious bad impact of the bubble economy as well as in dealing with NPL created in the bubble economy. Those experiences will certainly contribute to the process of building management policies for the real estate market in Vietnam.

​The main contents presented at the seminar are (i) Overview and current conditions of the Vietnam’s real estate market and recommended solutions; (ii) Management and development policy orientations for the Vietnam’s housing and real estate market; (iii) The role of financial institutions in developping the real estate market in Vietnam; (iv) Japan’s experience in tackling the serious bad effects of the bubble economy from government viewpoint, and (v) The experience of Japanese commercial banks in dealing with bad debts and controlling risk related to property.

The real estate market is critical to the economy due to both its size and its impact. Though the real estate market in Vietnam was just established in early 1990s, some remarkable achievements have been recognized: (i) The legal framework has been built and gradually improved; (ii) Products have been more and more diversified (especially the residential housing segment); (iii) Prices and transactions are conducted on a market oriented basis; (iv) Attracting a huge amount of FDI into the market (according to Vietnam’s MPI, so far there have been 407 projects with about USD 49 billions registered capital, accounted for 21% total registered FDI); (v) Participants in the market have been gradually identified.

However, thare are many shortages in Vietnam’s real estate market. First, it is still unstable, witnessing periods of too hot or freezing status. Second, RE investment  lacks good planning, transparency and professionalism. It might be useful to apply discount cash flow method (DCF) to evaluate value of the properties, which focuses more on cash flow to be generated by each property. DCF is regarded as trustworthy approach in advanced real estate markets. Third, real estate prices are too much higher than the social incomes. It can be happening if an investment transaction is going to be made based on investors’ expectation without rationale evaluation. Fourth, the management, control and plan of the real estate market is still weak, making the demand-supply imbalanced.Fifth, the market’s product  structure does not match with the market demand that leads to supply-demand gap. Moreover, the global economic recession (2007-2009) together with the country’s tight monetary and fiscal policies have partly forced the real estate market into a   freezing status with rising inventory. Until the year 2013, there was suplus supply in most of the market segments that resulted in falling prices with many social and economical consequences. Sixth, the legal framework is still overleft, changing and unconsistent. Seventh, the real estate finance is still underdeveloped and undiversified. Lenders should develop proper risk assessment method and real estate finance products to govern the risk associated with real estate and real estate market. Actually, financial institutions have been playing an important role that provides financial sources for the market, but also under the market adverse effects especially from the soaring NPLs and the declining credit growth rate. In Vietnam, banks provide major capital sources while other financial institutions (investment funds, pension funds, insurance companies… ) provide  rather limited funding. As of the 31st December 2013,  outstanding real estate loans amounted at around VND 262 trillion, accounted for 8% total outstanding loans to the economy, while the budget spending for basic constructions stood at VND 77trillion. Though the banks’real estate loans have not been significant, a majority of collateral (65%) were real estate. Furthermore, the spillover effect of the real estate market is large and related to many economic sectors (construction, material manufacturing, design consultation, labor, households …) despite that its market value accounted for just 5.4% of Vietnam’s GDP in 2013. With all of these market features, an effective and sound management toward the RE market is critical for Vietnam’s economy.

Japan stands as the third largest economy in the world and has been remarked as “the Japan miracle” in economic development. However, in early 1990s, Japan witnessed its bubble in real estate prices that forced the economy into a stagnant decade with soaring NPLs and many social, economic consequences. Vietnam treasures Japan’s experience in tackling the serious bad effects of  the bubble economy as well as those in magnifying the role of financial institutions in developing the market.

After analyzing the factors that have led to real estate bubble economy, its crash and the prolonged economic crisis in Japan, from a macro aspect (government agency) and a micro aspect (financial institutions), Japanese speakers recommend Vietnam to withdraw certain lessons and experiences as follows:

1.     Understand the market features well: a bubble economy does not last for long time, it would definitely burst. Excessive optimism should be avoided, and never believe that the market would continuously go upward so that borrowers keep borrowing with the hope for rising profit from prices rising. The lenders should not believe that prices keep rising to avoid over-pricing the real estate collaterals.

2.     It is important to analyze the economy with neutral and macro point of view because people seldom recognize a bubble economy when it has not bursted. So a neutral and macro point of view could help identify issues and take proper, timely adjustments.

3.     It is necessary to improve assessemnt of business cash flows which are the most important sources of repayment.

4.     At financial institutions,  it seems not so easy to identify and take prompt actions regarding the RE bubble from a “bottom-to-top” approach; in such cases, the “top-down” approach is more effective. 

5.     To improve the credit monitoring mechanism: experiences show that a low standard on NPL and lack of minitoring and transparency  were among factors that have led ineffective monitoring. 

6.     To have an insolvency mechanism for banks: Japan used to have a principle of noinsolvency for banks so that no one prepared for it. Besides, a legal framework for bank insolvency should be created to enhance the role of related parties (deposit insurers, debt resolution and recovery agencies…) 

7.     Borrowers’ restructuring is anNPL solution when the bubble economy has bursted. The restructuring plan should be clear and feasible with an insolvency mechanism and an empowered role of the related agencies (deposit insurers, debt resolution and recovery agencies..).

From the Vietnamese side, the Vietnamese speakers recommend the following solutions:

1.     To complete the legal framework for the market (enact the revised Housinglaws and Real estate business laws, Regulations on Collateral handling);

2.     Provide conditions for a proper development of real estate products and finance: REIT, MRA (Malaysia model); to securitize real estate business projects;

3.     To establish an independent centre/valuer for asset (including real estate) pricing; and Centre for real estate market information & forecast;

4.     To improve investment environment and reduce administrative procedures; expand room for foreign investors, including in the real estate sector;

5.     To develop the capital market to provide long–medium term capital and have a well balanced- financial market;

6.     To modify or remove obstacles to the credit packages (e.g, the VND 30  trillion package…);

7.     To accelerate NPL resolution (to create an NPL market and remove collateral handling ostacles), and speed up procedures for public investment disbursement;

8.     To modify risk weight for real estate loans; banks should design more suitable credit products and services for the real estate market;

9.      To manage the RE market more professionally through tax and fee policies and improve capacity of the market participants;

10.  To study Japan’s experience in RE market management and finance.

For further information, please contact:

The Consultancy & Int’l Cooperation Dept., BTS, Tel. (04)39320303 or Ms. Lê Thùy Linh, Tel. 0946228818, Email: linhlt8@bidv.com.vn.