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Bank guarantees bolster confidence

Released at: 09:57, 14/07/2015

Bank guarantees bolster confidence

Mr. Marc Townsend, Managing Director of CBRE Vietnam, tells VET about the impact of new regulations requiring bank guarantees for property projects built in the future and also about the market's recent performance.

Developers of residential projects must be guaranteed by financial institutions from July 1 when selling under-construction residential houses. How will the regulation impact on the real estate market in general and on homebuyers’ confidence in particular?

The new law marks the first time that regulations on guarantees for the sale of future constructions have been part of the law. These regulations will help purchasers feel more secure in their transactions, help identify capable investors, and eliminate the improper appropriation of purchasers’ monies when construction progress lags, as has commonly occurred in the past. It will also help to increase transparency and mitigate risks to buyers, and opens up two approaches for real estate enterprises. In the first approach, before they can sell or lease out/sell residential houses that have yet to be built, investors must be guaranteed by credit institutions licensed to operate in Vietnam for such sale and lease out/sale. In the second approach, without a guarantee from credit institutions, real estate enterprises must finish project construction before selling residential houses.

The number of transactions is expected to increase, leading to higher market liquidity due to buyers gaining confidence about their secured rights. However, it is noted that requirements to be guaranteed by credit institutions will be extreme and regulated according to the credit institution itself. In common practice, banks will accept to guarantee a project when 20 per cent of its units are committed to buy with completed legal procedures. Below this proportion, the project may be rejected for a guarantee by credit institutions.

Do real estate developers and banks face challenges in implementing the regulation?

When signing such a guarantee contract, banks face pressure themselves. On behalf of the investor, banks will guarantee all buyers’ interests. In particular, banks will refund the advanced payment and other payments to buyers according to the contract conditions for the delayed time. Hence, to be on the safe side, banks may provide guarantees only to traditional and strategic partners.

After the prolonged crisis, most real estate companies suffered losses. Most developers do not meet the strict conditions of the underwriting process due to large bad debts and inventories. This can keep their sales activities delayed.

Are there any additional comments you would care to make about the new regulation?

Specific guidelines on guarantees for selling future built houses should quickly be put in place and flexible in terms and conditions to meet the actual situation. The underwriting process may add costs to the property price that will be paid by the future built house’s buyer. Another drawback of this guarantee provision is that it applies equally to both reputable and incompetent or ill-reputed or even fraudulent developers. Treating all developers the same way may incur unnecessary costs.

There are some concerns about overheating in the residential sector after the market experienced a long period of crisis. What are your thoughts on this?

It’s too soon to worry about the larger-than-normal supply in the high-end category. What concerns us more is prices and whether these remain affordable for the mass market. Incremental price increases of 3 to 5 per cent quarter-on-quarter were reported at some particularly well-located projects by reputable developers with improved infrastructure and high potential for buy-to-let tenants. However, this did not happen across the board. Certain high-end condominium projects managed to increase prices in their later phases, as these later phases benefit from previously developed facilities as well as a relatively well-established residential community. But instead of a quick sharp surge, they cautiously stepped up the price with incremental increases, being fully aware of the real affordability of potential buyers. With such minor changes, everything is still under control.

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