Viet Nam builders halt projects to avoid bankruptcy

Monday, May 19, 2008
Accelerating inflation in Viet Nam has caused builders to halt residential property projects that they no longer view as economically viable, reported a branch of the US financial services firm Morgan Stanley.

Viet Nam’s year-on-year inflation rate reached 21.4% last month, the highest since at least 1992, according to government figures.

Construction costs in Viet Nam have risen as much as 40% since the end of 2007, Melissa Bon and Brian Wee of Morgan Stanley Asia (Singapore) Pte. said in a report.

“Some contractors are delaying construction work to avoid the risk of facing bankruptcy,’’ Bon and Wee wrote in a report following a visit to Ho Chi Minh City.

“With costs of construction materials escalating, contractors have opted to forgo construction, break contracts, and instead accept fines.’’

Residential property projects are also struggling to find financing in a tightened credit environment, the report said.

The International Monetary Fund said in March that tightened monetary conditions would be needed to slow Vietnamese credit growth that reached about 50% last year.

The government should also deploy macroeconomic tools instead of focusing on draining liquidity from the banking system and the central bank should allow more forex flexibility.

“In an effort to fight inflation, the government has told local banks to tighten credit for construction loans and has imposed a capital gains tax of 25% on all property transactions from January 2009 onwards,’’ Morgan Stanley said.

“These steps have likely contributed to the reduction in expectations for the residential market, particularly among speculators,’’ Bon and Wee wrote, citing a drop of as much as 40% in Ho Chi Minh City residential prices since the end of 2007.

Supply shortage

Vietnamese inflation may worsen a shortage of property supply in the country by making it more difficult for developers to carry out projects, said fund manager VinaCapital Investment Management Ltd. in a report this month.

Recent increases in borrowing costs and instructions by the State Bank of Viet Nam to local banks to increase their cash reserves have caused a slowdown in the residential property market in HCMC, said the Viet Nam unit of CB Richard Ellis Group Inc. in an April newsletter.

“Exceptionally high’’ growth in company earnings in Viet Nam last year was driven in part by “corporate speculation’’ in the property market, said the UK-listed fund Viet Nam Holding Ltd. in a note this week.

The real-estate market’s poor performance this year suggests that some publicly traded companies may report losses as a result, Viet Nam Holding said.

Constraints in the real-estate market present opportunities for well-capitalized developers, with foreign property companies able to position themselves for “the next up-tick in the cycle,’’ the Morgan Stanley report said.

Keppel Land Ltd., Allgreen Properties Ltd., and CapitaLand Ltd. have the largest exposure to Viet Nam among Singaporean property developers, according to the report.

With construction costs up 40% since 2007, builders would rather take fines, says Morgan Stanley. (Bloomberg)