Real estate business requires medium-term and long-term capital, so in developed countries, investment funds and securities market are the main sources of capital supply, but for Vietnam, real estate businesses depend greatly on bank capital and customer deposits.
In fact, all real estate products are financed by specific financial resources, either from the self-accumulated capital of individuals/entities, or from bank loans, or loans from other individuals/entities, etc. Therefore, real estate products and real estate market are constructed from different financial sources in society, most of which are from the financial market. On the contrary, in many cases, real estate products are the basis for creating new financial sources using pledge, mortgage, guarantee, etc. In developed countries, these operations are quite common. In Vietnam, real estate market is based mostly from financial source; while with the second option that real estate is the basis of the financial market, it has not achieved.
The main sources of funding for the current real estate market in Vietnam include: banking capital, investment capital in the market, capital from the stock market, Foreign Direct Investment (FDI) capital. The characteristics of real estate business require medium and long-term capital, so in the developed countries, investment funds and securities market are the main sources of capital for real estate market. With Vietnam’s real estate market, real estate businesses depend heavily on bank credit and deposits from customers. Thus, the monetary policy of the State Bank of Vietnam (SBV) will have a great influence on the fluctuations of the real estate market.
From 2019, when commercial banks can only use up to 40 percent of short-term capital for medium-term and long-term loans, including real estate, and the risk factor of loans for real estate business is 200 percent (stipulated under Circular 36), banks’ real estate loan balance will be narrowed, credit sources for real estate projects are controlled. This will have a significant impact on the market. However, the gradual reduction of dependence on bank credit is necessary. Accordingly, businesses need to actively approach other sources of capital other than bank credit, improve business efficiency, financial capacity, and concentrate on segments with high and sustainable liquidity, participate in home development programmes.
The roadmap to gradually reduce dependence on credit source by SBV is very positive and has created pressure on real estate businesses to seek additional sources of capital, first of all from the stock market, corporate bonds, and FDI capital.
In order to reduce the dependence of the real estate market on the banking system, the author thinks that the following issues need to be taken into account:
Firstly, monetary policy should be operated flexibly, consistently, with equal allocation plans to ensure stable and quality credit growth, thereby improving the stability and quality of credit capital into the real estate sector. Besides, the regulation on non-production credit limit (including real estate) should not be equal for all credit institutions, and should clearly identify non-production factors in real estate credit, or else, the situation of restructuring of real estate loans in credit institutions will occur and only make the financial system distorted, the real estate market more unstable.
Second, to reduce dependence on capital from the banking sector, the diversification of external capital into the real estate market, e.g. FDI, Foreign Indirect Investment (FII), is a long-term solution. The flow of FDI should be encouraged to develop key projects with large scale. The investment funds shifting from simple traders to combining doing businessinvestmentmanagementmarketing projects helps the real estate market become more professional, increase financial resources, and manage experience real estate strategy and vision. With the inflow of FII, it will attract foreign investors to buy shares of domestic companies through information transparency (state management mechanism, supervision and sanctions); establish organised investment channels (e.g. open investment fund); strengthen the role of organised investors; enhance the effectiveness of the public service system; accelerate the process of appraisal, approval of investment projects as well as the disbursement process.
Thirdly, mobilise capital from the population through the establishment of real estate trust funds and house savings funds. The recommendation includes regulating the legal framework and synchronous monitoring and management mechanism for these types, ensuring the rights and obligations of the participants, especially of small investors and households having medium and low income with housing needs.
Fourth it to develop the corporate bond market through solutions such as: encouraging the participation of prestigious credit rating agencies; encouraging credit institutions to participate in guarantee and discount for corporate bonds (market makers); diversifying types of corporate bonds; encouraging the participation of investment funds in corporate bond market.
With the above, the capital flows into real estate market in the near future will change a lot, and the dependence of the real estate market on the banking system will be reduced. This trend is also necessary to gradually move towards the sustainability of not only the capital flows into the real estate market but also the sustainable development of the whole banking system.
