Closed credit circle solves 'deadlock' for real estate market?

After four reductions in operating interest rates since the beginning of the year, the State Bank of Vietnam (SBV) has signaled a policy reversal from cautious to controlled easing. However, for real estate businesses, the interest rate issue is not as important as whether or not they can access capital.

circle of trust close-knit gourd for real estate market shape 1 — Economist, Dr. Nguyen Tri Hieu

Recently, there has been a proposal to promote real estate credit in the form of a “closed circle”. Accordingly, the banking industry can study and implement real estate credit packages for certain price segments (mid-range and below). Credit will be disbursed in a closed circle with the bank controlling 100% of the cash flow (bank - home buyer - investor - bank).

With this solution, investors will have to suffer a little loss when reducing selling prices, but will release inventory. This solution is said to help solve the housing problem of people with much potential and capital space, helping banks to disburse credit selectively, with risk control...

However, economist Dr. Nguyen Tri Hieu said that it is necessary to re-examine the reality of the real estate market in terms of the relationship between the three parties: banks, investors and home buyers. He pointed out that in the US, banks only lend to home buyers after the project is completed, and the bank can appraise the value so that customers have money to pay investors.

“In Vietnam, it is more creative but somewhat dangerous, that is, investors call on home buyers to deposit and pay according to progress. That means investors have borrowed from banks to develop future projects, but at the same time still collect money from home buyers. When there is a lot of money, investors use it to finance other projects. Investors who ‘fish with both hands’ will cause the risk of the project not being completed, while home buyers have already paid,” the expert analyzed.

Accordingly, Dr. Nguyen Tri Hieu raised the issue of how to control the cash flow so that in the end, home buyers have a house, the bank receives the money, and the investor completes the project and makes a profit. He said that in reality, in Vietnam, there is still no mechanism for a closed credit cycle, because there are many problems that arise when doing projects.

“The simple solution is that for each project formed in the future, when home buyers pay, they will have to pay directly to the bank to deduct from the project investor’s outstanding debt. Although the project owner has the collateral as the project formed in the future, it will gradually decrease in value when the asset is sold to home buyers and deducted from the original asset held by the bank. Therefore, the bank only accepts the decrease in the value of the collateral when the outstanding debt decreases accordingly,” the expert said.

Dr. Nguyen Tri Hieu commented that the current problem of real estate credit “blockage” is because banks cannot control cash flow, so they do not dare to lend in the context of the frozen real estate market. Accordingly, he proposed 3 solutions to unblock real estate credit.

First, do not lower the current standards for real estate lending. Businesses still have to calculate and ensure cash flow, profit ratios, and financial leverage ratios.

Second, borrowing businesses must restructure their financial systems and cash flows to be able to repay their debts.

Third, there should be a special loan program to support social housing like the 30,000 billion VND package that was implemented, supporting businesses to provide products that meet the needs of the majority of society.

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