How the Real Estate Rollercoaster Impacts Construction?

11 August 2023

The Vietnamese real estate market has been on a rollercoaster ride. The sector soared in the decade following the 2008 financial crisis as both consumers and construction companies rode a wave of cheap credit, urbanization, and economic growth, with short-term speculation adding further fuel to the fire.

However, like all speculative bubbles, sooner or later, the bubble will burst. House prices started to drop in 2022 and remain stuck in an economic and legislative quagmire. Global interest rate rises, tightening domestic credit, and uncertainties over the revision of regulations like the Law on Land, Law on Housing, and Law on Real Estate Business have put the brakes on growth.

Meanwhile, an over-development of high-end residential real estate has flooded the sector with prime properties at a rate which far out-paced demand. This, together with a lack of investment in social or affordable housing, has created an imbalance in the market.

In 2023, the positive sentiment and consumer confidence that spurred real estate growth and speculation has gone into reverse. Investors who over-leveraged during the boom, anticipating permanent price rises and quick profits, are now struggling to keep up with the costs of a growing debt burden thanks to rising interest rates even as their assets fall in value and it becomes more difficult to sell them on.

In cities like Ho Chi Minh and Hanoi, as well as provinces such as Hai Phong, Dong Nai, and Ba Ria – Vung Tau, real estate prices have fallen from 30 to as much as 50 percent. Even though some developers are offering huge off-plan discounts, lots of high-end residential properties remain unsold as consumer confidence struggles to rebound and the market struggles to recover. So much so that transactions are at a half-decade low, projects under construction are about half the levels seen in 2021, and real estate companies are letting staff go as a result.

Some major real estate projects have stalled mid-construction as developers suffer from cash flow problems. For this reason, some potential customers are concerned that their real estate investment will amount to little more than an architect’s blueprint or an artist’s impression in a marketing brochure. Investors also risk losing their capital altogether if the developer goes bankrupt in a bear market.

What does this mean for construction companies?

The downturn in real estate has an obvious ripple effect, not least for construction companies as well as enterprises in other, related sectors and industries such as design, architecture, and suppliers of raw materials.

If new real estate projects remain stuck in the planning pipeline or bogged down in legal uncertainties, if credit problems continue, or if consumer confidence remains weak, then the construction sector as a whole suffers.

Compounding this has been the rising prices of raw materials such as iron, steel, cement, sand, and stone. Bricks alone rose 10 percent in the first quarter of 2022, according to the Vietnam Association of Construction Contractors. Steel prices saw an even steeper rise over the same period.

These rising input prices are putting profit margins under pressure throughout the construction value chain and increasing costs to the consumer. Likewise, further upstream, the increasing cost of gasoline and transport is adding even more to the cost of construction. The fact that Vietnam imports a significant portion of its raw materials from overseas further complicates the issue.

How is the government supporting the real estate sector?

in front of People Committee's building of HCMC

However, there is light at the end of the tunnel. First, the government is alive to the issues in the real estate sector. So much so that it held an online conference earlier in 2023, gathering together a host of senior ministers and other stakeholders to promote the safe and sustainable development of the market. Second, one month later, the State Bank of Vietnam – Vietnam’s central bank – cut rates for the first time since October 2020 in an effort to unlock credit and clear the bottleneck.

Third, the government issued Decree 08 which aims to address real-estate-related issues in the bond market. The bonds set to mature in 2023 will put pressure on real estate developers who used them to finance projects but who are now unable to restructure their debt obligations. Decree 08 will allow them to prolong their bond terms for up to 24 months. This, in turn, will give the developers some short-term breathing space until consumer confidence returns.

The government has also created a VND 120 trillion support package to fund social housing and low-cost homes for workers – those that were lacking during the boom period. This should help to get shovels in the ground and kick-start new construction projects.

What’s next for the real estate sector?

Those in the sector think that residential real estate will take some time to recover. Some predict that the current market correction could continue throughout 2023 and into 2024, as potential purchasers wait for the market to bottom out. Even so, the broader real estate market remains attractive to international investors. Government figures show that the real estate sector attracted the second-highest amount of foreign direct investment (FDI) in 2022, worth more than USD 4.4 billion or 16 percent of total FDI.

Meanwhile, the 2023 ‘Asia-Pacific Investor Intentions’ report from CBRE Vietnam found that both HCMC and Hanoi are among the top-10 most attractive destinations for foreign investment. So, even if the sector’s short-term prospects are uncertain, the long-term fundamentals of a growing, urbanizing, and developing population point to a bright future for real estate in particular and construction in general.

This article is part of CCIFV magazine "Connect #11: Building Vietnam's Tomorrow: Challenges and trends in Construction"