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China’s Property Demons Stalk Vietnam

One may earn a high salary, but only real estate can build up wealth — for decades, that’s been the Chinese mentality. Real estate accounts for roughly 70% of China’s household wealth, and as much as 30% of its economy. But China Evergrande Group’s debt blowup, with the tumbling home prices and mortgage boycotts that followed, have sent the economy into its deepest spin since the Cultural Revolution. The Chinese are having second thoughts. 

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 developers’ corporate governance, Vietnam shares too many similarities with China for comfort. 

Already, the Southeast Asian nation is peppered with developer scandals. In March, the government detained Trinh Van Quyet, chairman of FLC Group, for stock market manipulation. Quyet had directed his relatives to open 450 securities accounts; they traded often, artificially created transaction volume and boosted share prices for his portfolio companies. The next month, Do Anh Dung, chairman of another developer, was arrested for luring investors with false financial information. Dung had raised more than 10 trillion dong ($427 million) from selling privately placed bonds.

These are familiar tactics deployed by Chinese developers. The likes of Evergrande were always looking for ways to borrow, to expand their business just a bit further. To circumvent Beijing’s regulatory scrutiny, developers raised money from private bond sales structured to be off-balance-sheet during the auditing season. Stock prices of their portfolio companies can also soar and plunge mysteriously. That has not ended well. In the past year, 28 of the top 100 developers have defaulted or asked their creditors for extensions. 

But the mother of all scandals was one committed by Alibaba — nothing to do with the Chinese e-commerce giant — but Alibaba Real Estate Corp., based in Ho Chi Minh City. Vietnam’s Alibaba had sold small empty plots of land, telling thousands of buyers that they were getting a piece of a major development site near the commercial hub. It scammed investors of more than $100 million. 

It was a sign of how chaotic and unregulated the real estate market can be — what Vietnam’s Alibaba sold was agricultural land that could not be used for residential housing — but also the reflection of a cultural mindset that prized land above all other assets.

Despite the 2019 Alibaba scandal, the Vietnamese are undeterred. Land is still the category of real-estate investing that has shown the biggest capital gain, followed by landed properties such as villas and townhouses, and then condominiums. As of the second quarter, landed properties in Ho Chi Minh City were worth $6,913 per square meter, a 48% jump from last year, according to data provided by CBRE, a realtor. 

Just like China, pre-sales, where flats are bought long before they are built, dominates Vietnam’s primary residential market. At VinGroup JSC subsidiary Vinhomes JSC, the nation’s largest residential developer, most units are sold immediately after the government clears the paperwork for commercial land use and project construction has broken ground, with buyers required to pay at least 30% of the total purchase price. The rest is collected as construction goes along.

Pre-sales could be mutually beneficial, especially in a rising market like Vietnam’s. It helps developers get cash returns faster, while home buyers are able to lock in the current prices before units are completed, often two years later. However, as consumers in China are finding out, they do take on substantial risks. The recent mortgage boycotts stemmed from buyers’ frustration that developers took their money but were unable to finish the construction. 

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

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

The Vietnamese government is clearly worried. To prevent a property bubble, the central bank has asked its commercial lenders to tighten credit. As of June, outstanding loans to the property market, which accounted for about 20% of the total loan book, rose 14% from a year earlier, faster than the economy’s average credit growth of 9.4%. 

Consumers are now struggling to get mortgage loans approved. These days, only 20%-30% of buyers can get home loans, versus 50%-60% in the past, realtors in Ho Chi Minh City reckon. But the verdict is still out on whether this credit tightening can dampen speculation. Speculators rarely went to the banks for mortgages anyhow, they say. 

Just like China in the past, Vietnam is in a hurry. As soon as they finish the basement, developers want to sell out all the planned units and move on to another project. Consumers also want to climb the middle-class ladder quickly, and become proud owners before homes get too expensive. This fast turnover sows seeds for trouble in the future. While Vietnam’s economy still has a lot of room to grow, its property market already feels bubbly. 

More From Bloomberg Opinion:

• Vietnam Is Growing at 7%. It Can Do a Lot Better: Shuli Ren

• Over New York, London and Hong Kong? Move On: Anjani Trivedi

• Can China Correct Course on Covid — Like Vietnam?: Shuli Ren

This column does not necessarily reflect the opinion of the editorial board or 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 is a CFA charterholder.

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