The main problems hindering the development of real estate business in Vietnam

for many years throughout the 70s and 80s until the early 90s, then fell sharply for many years until now. The core problem of increasing real estate prices is the psychology of expecting real estate prices to increase over time without relying on the profitability of real estate.

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Figure 2.3: Chart of commercial land prices in Japan from 1985 to 2005 (land price index in 2000 is 100) 20

In the formula for determining real estate prices, there are two future sources of income that make up the current real estate price: the expected rent and the sale of real estate at the end of the exploitation period. The expected rent can be determined relatively accurately, but the sale of real estate at the end of the exploitation period can be determined high or low based on the judgment about the prospect of the real estate price level in the future. Investors who simply rely on past statistics to speculate on the law of future price movements will often have optimistic predictions about the real estate price in the future if the real estate price has always increased in the past (that is the current Vietnamese real estate market or the Japanese real estate market in the 70s and 80s) and therefore will accept to pay a high price for real estate in the present. The serious consequences of real estate prices being too high are only

20 [45].

The potential risk in Vietnam has become a reality for the Japanese economy when over the next ten years, real estate prices in Japan decreased and are now at the same level as in the 70s, leading to the collapse of many credit institutions and many large enterprises.

2.5. CURRENT STATUS OF CAPITAL SOURCES IN REAL ESTATE BUSINESS ACTIVITIES.

2.5.1. Sources of loan capital for real estate investment.

In addition to the investors' own capital, currently in Vietnam, loans for real estate business activities mainly come from credit institutions, a small part from insurance companies. As of 2005, the whole country had 5 state-owned commercial banks, 1 policy bank, 36 joint-stock commercial banks, 4 joint-venture banks, and 28 foreign bank branches.

In the document "Investment attraction policy in Vietnam's real estate market" conducted by the Central Institute for Economic Management under the Ministry of Planning and Investment in 2005, some assessments were made on the current status of capital supply for real estate business activities as follows:

- Outstanding loans for real estate business capital needs by the end of 2004 accounted for about 18% of total outstanding loans. Loans for housing construction by the end of 2004 increased 4.8 times compared to the end of 1998 and loans for infrastructure construction, high-rise buildings, and factories for lease by the end of 2004 also increased 4 times compared to 1998.

- In real estate investment projects, the participation of own capital is still low, only at 30%, the rest is borrowed capital. For lending to individuals to build houses, the participation of credit institutions is about 50% of the total investment capital.

- Credit institutions apply quite strict lending conditions, using assets formed from loan capital and customers' own capital to secure loans, with the overdue debt ratio below 5%.

- The rate of real estate investment lending increased by over 20% in 2003 and 2004 and began to decrease in the first 6 months of 2006 when the real estate market tended to freeze.

- Outstanding medium-term loans (from 1 to 5 years) account for 82%, long-term loans (over 5 years) account for 18%.

- Regarding credit structure, loans for buying, building, and repairing houses have the largest proportion but are on a downward trend. Loans for building infrastructure, urban areas, industrial parks for lease, and office buildings for lease have a smaller proportion but are on an increasing trend.

Table 2.16: Growth rate of outstanding loans for real estate business in cities.

(Source: State Bank. Unit: %)

Location

2003	2004	June 2005
Hanoi	21	24.4	11.2
Ho Chi Minh City	30	31.9	12.9
Hai Phong	25	23	8
Danang	25.5	23.8	12.3
Can Tho	23	24.9	13.5

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Table 2.17: Percentage of total outstanding loans for real estate business

(Source: State Bank. Unit: %)

2003	2004	June 2005
Loans for home repair and purchase	65	60	58
Loans for construction of infrastructure, urban areas, industrial park for rent	23	25	25
Loan for construction of office for lease	12	15	17

Real estate that households often buy is residential real estate, while the investment objects of enterprises are often residential real estate, commercial real estate and public real estate.

These are large urban areas consisting of independent houses or apartment buildings, office buildings, commercial centers, hotels, industrial parks, factories, warehouses, etc. Due to the characteristics of scale and durability of real estate, loans to buy real estate are often large and often long-term. Practice in developed countries shows that loans to buy residential real estate usually have an average term of 10-20 years and a long term of 20-30 years. For businesses, loans to invest in real estate often require a period of about 10-15 years. For businesses, that is the time needed to recover real estate investment capital. For households, they also need a long time for borrowers to be able to pay off all the principal and interest arising from their monthly income while still ensuring income for other essential needs such as food, health care, education, transportation, etc. However, the current capital situation of credit institutions does not meet the long-term nature of loan needs in the real estate sector. This is clearly shown in the above statistics when the proportion of medium-term loans from 1-5 years accounts for 82%. The first obstacle is that their current mobilized capital is mostly short-term capital, so these capital sources are not suitable for long-term loans. In terms of institutions, the State Bank also stipulates that only a certain proportion of short-term loans are allowed to be used for medium and long-term loans to ensure the safety of the credit system. Therefore, the limitation of long-term lending capital will lead to credit institutions having to carefully consider long-term lending for investment projects in the commercial and industrial sectors or lending to households to buy houses.

2.5.2. Current status of real estate mortgage to secure loans.

The current mortgage mechanism is applied by credit institutions according to the provisions of Decree No. 178/1999/ND-CP dated December 29, 1999 on loan guarantees of credit institutions and on the basis of the provisions of the Land Law and the Civil Code.

and other relevant documents. To become collateral at credit institutions to secure loans, real estate must meet the following conditions:

- Be owned and/or used by the party guarantor of the loan in accordance with the provisions of law, demonstrated by the Land Use Rights Certificate and house ownership rights on the land.

- There is no dispute over the ownership or use rights of the guarantor at the time of signing the guarantee contract.

- Real estate can be legally sold to a third party and the land use rights and ownership of constructions on the land can be transferred to the third party.

- The value of the mortgaged property including land use rights and ownership of constructions on the land must be sufficient to secure the loan. The valuation of the mortgaged property is agreed upon by the parties.

In general, after the promulgation of legal documents in the field of mortgage, this activity has increased significantly. Also according to the document "Policy to attract investment in the Vietnamese real estate market", by the end of 2003, the proportion of loans with mortgages of land use rights and real estate had increased 3 times compared to the end of 1998. The proportion of outstanding loans with mortgages of real estate by the end of 2003 accounted for 25% of the total outstanding loans. The quality of credit loans with mortgages of real estate has improved significantly, showing that bad debt decreased from 12.3% at the end of 1998 to 4% at the end of 2004.

The implementation of the real estate mortgage mechanism to secure loans has created motivation for both credit institutions and customers in need of loans. Credit institutions have been able to be more bold in lending capital once it has been mortgaged with valuable real estate. Customers in need of loans also have a basis to convince credit institutions through their proposals. Factors

This has contributed significantly to increasing the total outstanding debt of credit institutions in recent times, including outstanding loans for real estate business.

Table 2.18: Real estate mortgage loans at credit institutions

(Source: State Bank. Unit: %)

2003	2004	6 months 2005
Mortgage loan delinquency rate	2.8	4.05	4.1
Real estate mortgage outstanding debt ratio:	25.1	31	33
- Mortgage by land use rights	10	14	14.6
- Mortgage by land use rights and attached assets	15.1	17	17.4

However, due to the newly formed legal framework, there are still many obstacles that need to be further resolved in the coming time, namely:

- In fact, many residential real estates currently do not have sufficient legal ownership documents at the time of transaction, so they cannot be mortgaged. For example, residential real estates of households that have been used and are waiting to be granted land use right certificates and house ownership rights. Real estates in new urban areas such as unfinished houses or apartment buildings are currently often bought and sold right during the project establishment phase, meaning that buyers must pay in stages when the real estate has not been fully formed and therefore cannot have a legal ownership certificate, so mortgage procedures cannot be carried out. Many state-owned enterprises manage a large amount of real estate but do not have sufficient legal ownership and usage documents to be able to mortgage.

- The provisions of the Land Law on dispute settlement, land reclamation... make this activity highly risky. Many disputed plots of land have not been resolved for a long time. There are plots of land that have been mortgaged but because the user does not carry out construction within the permitted time, they may be repossessed...

- The law on property ownership registration has not been issued while there are regulations that mortgaged property must be registered, so this is also an obstacle caused by the lack of uniformity in the legal system.

- For mortgaged real estate, in many specific cases when the borrower fails to make repayments according to the loan contract, the recovery and sale of mortgaged property is also very complicated, sometimes prolonged, causing significant impacts on the operations of credit institutions. In many cases related to land, the court transfers the case to the People's Committees at all levels for settlement according to their authority or there are cases where the Economic Court and the Civil Court issue contradictory judgments in the same case, causing the dispute to drag on.

- The valuation of mortgaged real estate is also an obstacle to mortgage activities. Because real estate prices are difficult to predict, if the valuation is based on market prices, there will be many potential risks for those who execute the mortgage if the real estate cannot be sold at the set price. In the case of real estate valuation according to the State's price framework, the price will be much lower than the market price, thus limiting the amount of capital that customers can borrow.

2.5.3. Obstacles to borrowing from the perspective of households.

Currently, the capital that households use to buy residential real estate mostly comes from their accumulated income in the previous period. Up to now, the borrowing of capital by households from credit institutions to buy houses is still a rare phenomenon in Vietnam. Households in Vietnam often have low official income, so it is difficult for them to prove to credit institutions their ability to repay their debts in the long term. If only considering the official income level according to the current level, there are only very few cases that can prove the source of repayment for the loan to buy residential real estate in a medium or long term period. In today's society, in addition to official income, households may have other unofficial sources of income.

can come from trading jobs, part-time jobs or other incomes of unclear origin... therefore cannot be identified as income to repay home loans. Borrowing means having to pay interest on the principal balance in each period, so if a household's monthly income for repaying home loans is equal to or less than the monthly interest, it means that the household cannot pay off the principal and therefore will not be eligible for a loan. It can be said that the price level of residential real estate is very high compared to the income level of households, which is one of the basic reasons why very few households are eligible to borrow capital from credit institutions to buy residential real estate. Next, because the general living standards of households in Vietnam are currently low, they need to save on general expenses and especially on expenses that are not really urgent. The need for housing as analyzed in the first chapter is not an urgent need such as the need for food, transportation, health care, education... so the income for housing needs is often the remaining amount after spending on more urgent needs, so the income of households for purchasing residential real estate is not really abundant. For many households with low income, there may be no money left to buy residential real estate after spending on their essential needs. In the case that they can have accumulated income for residential real estate, the current common mentality is to try to accumulate enough money in a certain period of time to buy residential real estate themselves, avoiding having to pay interest on loans, which they consider a wasteful expense. Thus, households have to accept cramped living conditions for a long time to have time to accumulate and buy residential real estate with their own money. This consumer psychology of households in our society today is also an important cause of the phenomenon of few loan transactions of households to buy residential real estate.

The main problems hindering the development of real estate business in Vietnam - 15

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