A new requirement for property developers to have bank guarantees will provide more security to buyers but may trigger higher prices.
In the middle of June the Saigon Thuong Tin Real Estate Co. (Sacomreal) signed agreements with OCB, ACB and HDB banks over the provision of guarantees for its property projects in Ho Chi Minh City. OCB committed to guarantee Sacomreal’s Jamona City project in District 7 while ACB and HDB will guarantee the Jamona Riverside project in District 7 and the Carillon 3 project in Tan Binh district, respectively, which are to be launched in the third quarter.
“Sacomreal’s signing with banks prior to Article 56 taking effect expresses our strong commitment to buyers regarding project quality and progress,” said Mr. Pham Nhat Vinh, Chairman and General Director of Sacomreal. “The Article ensures that developers are financially viable and greater security is provided to buyers.” Many other real estate developers in Vietnam are seeking to come to terms with banks over guarantees for their future projects, as Article 56 of the amended Law on Real Estate Business takes effect on July 1.
Under Article 56, developers are only able to sell or lease residential products that will be completed in the future if such products have guarantees provided by financial institutions operating in Vietnam. In developers then fail to hand over finished products as agreed in the sales contract, the purchaser or lessee purchaser can ask the guarantor to return any advance and other payments made to developers.
The guarantees are expected to help the development of a more transparent and sustainable real estate market, according to Mr. Jonathan Tizzard, Director of Research & Valuation at Cushman & Wakefield Vietnam. Developers will not begin construction of projects until they have a guarantee in place, as required by law, and it could also have the effect of reducing supply as underfunded developers are forced out of the market.
If developers cannot find credit institutions willing to guarantee their projects the only option they have is completing construction prior to conducting sales. “This legal development should force real estate developers to run their businesses more systematically while also increasing their accountability and credibility in the market,” Mr. Tizzard said.
In the past, many developers ceased construction after running out of money or used purchasers’ payments for other reasons. Many purchasers fell foul of incompetent developers after parting with billions of Vietnam dong (tens of thousands of dollars). Long-lasting disputes constantly appear in the media, negatively influencing the real estate market’s liquidity.
Thanks to positive signs in the property market and restored confidence among homebuyers, the Housing and Real Estate Market Management Department under the Ministry of Construction (MoC) estimates there will have been 14,000 successful real estate transactions around the country during the first half of the year. The estimate is based on Hanoi being expected to record around 7,500 successful transactions, a 2.5-fold increase against the first half of 2014, while in Ho Chi Minh City transactions in the first half should reach 7,050, for a 2.8-fold increase year-on-year.
According to insiders, banks must have a thorough understanding of the financial capability of real estate developers, their capacity to implement projects and the feasibility of the project. Banks may simply take the safer route of only choosing to guarantee traditional and strategic partners.
The law may benefit larger and better capitalized developers and could force out smaller operators but is expected to benefit purchasers as a result. Mr. Le Hoang Chau, Chairman of the Ho Chi Minh City Real Estate Association, confirmed the necessity of the Article in protecting homebuyers but believes it shouldn’t apply to all businesses. “It should be used for newly-established companies, those who have violated legal regulations in the past, or those who have not successfully built prestigious brand names,” he said.
At a regular government meeting held recently in Hanoi, Minister and Head of the Office of the Government Nguyen Van Nen said that the level of guarantee fees will depend on the capacity and prestige of each developer. This government opinion comes after concerns were expressed by developers and buyers about the detailed guidelines and exact percentage regarding bank guarantees to be paid on future projects. The State Bank of Vietnam is currently framing guidelines that provide greater detail. “These guidelines will be sent to related departments shortly,” Mr. Nen said.