Doing Business

Diversification of Inflows into the Real Estate Market of Vietnam

Trường Lăng

June 21, 2023

Doing Business

Diversification of Inflows into the Real Estate Market of Vietnam

Trường Lăng

June 21, 2023

Over the past three and a half decades, Vietnam has welcomed more than 36,600 valid foreign ventures with total
capital of nearly $442 trillion in various fields, as of mid-March 2023. Among the active indus­tries, real estate has well-secured its position as one of the most attractive sectors. This is clearly illustrated by the intensity of real estate investment inflows, which ranked second in registered investment capital only be­hind the processing and manufacturing sector.

The current challenges of Vietnam’s real estate market

Despite its attractiveness, the business activities of real estate enterprises in Vietnam are facing numerous challenges. The root cause of such challenges comes from raising­ interest rates to control inflation, leading to high costs of lending, which affects Vietnamese real estate companies that rely heavily on lever aged capital to finance their projects.

Along with that, the legal approval of new projects has been withheld due to sophisticated compliance procedures. Therefore, enterprises have to pay interest, operating costs, and other costs while their projects remain unapproved
and unavailable for business operations.

On the other hand, the biggest driver of the real estate market is customers. However, with recent occurrences in the market, namely involving Van Thinh Phat, Tan Hoang Minh and others, along with banks tightening the credit room, customers are losing confidence in purchasing real estate, which directly affects the outlook of this market. In addition, investors and even existing shareholders of real estate enterprises are turn­ing their backs on the business, finding an exit from the projects, and even divesting while stopping losses.

Overcoming barriers to thrive

Despite the challenges ahead, this is the crucial time for businesses to take a step back, self-assess, review, restructure their organization and effectively manage all kinds of risks in an effort to recreate a healthy enterprise even in tough times.

Viettonkin Consulting
Ways to overcome barriers to thrive

Loan risk management

Capital is the most essential factor for all real estate projects. Therefore, in order to fight against the current shortage of loans due to high interest rates, real estate businesses need to devise solutions for securing capital in bearish markets. Examples include diversifying their capital sources by calling for capital from foreign loan funds, mobilizing loans from shareholders through reasonable and innovative structures, and tightening expenses to protect the operational cash flow.

Legal risk management

Every real estate project has to be under complicated legal procedures. Therefore, before project construction, real estate businesses need to anticipate and calculate the risks by consulting with lawyers and legal experts, thereby making the most informed decisions.

Partner Management

One of the keys that can help businesses confront challenges is through their well-established relationships with partners. Through business networking, international conferences, or multilateral cooperation, among others, businesses can build a widespread network with diverse partners that will help them when in difficulties. At the same time, it is required that those relationships have to be maintained and strengthened over time. 

Customer Management

Risk management on the buyer side is also essential. In other words, real estate businesses need to take specific and decisive actions to maintain the trust of customers such as increasing transparency in real estate projects or nourishing business reputation and improving efficiency.

Diversifying FDI flows into Vietnam’s real estate market under the current context

Despite the two recent crises (2008 and 2020), RFDI capital flows into Vietnam still show positive signs. Even under the outbreak of the Covid-19 pandemic in 2020, the real estate business occupied the top 3 in FDI-attracting industries, with nearly USD 4.2 billion, accounting for 14.7% of the total FDI. This year, albeit the current global economic recession, the real estate market still reached over USD 4.45 billion in FDI, ranking second in FDI attraction.

Thus, for investors to enter Vietnam’s real estate market and for real estate businesses to overcome the existing capital bottlenecks in the market, Viettonkin offers 3 possible solutions 

Viettonkin Consulting
3 solutions to diversifying FDI inflows into the real estate market in Vietnam

Equity financing

Real estate enterprises can choose equity-financing through the M&A method. However, this means that businesses will bear several potential risks such as price squeezing due to having little negotiable power over their buyers. On the other hand, the investor also incurs significant upfront costs and commitments, which may not be suitable in the early stages of market expansion.

Debt financing

Domestic enterprises can borrow capital through foreign financial institutions, which could either finance each individual project or enter a loan contract with the whole enterprise. However, for capital borrowing, businesses have to do self-assessment, display strong revenue potential, increase transparency, and improve internal capacity.

Non-Equity Methods (NEMs)

With NEMs (Investment Law 2020), foreign investors have the option of entering into “contractual agreements” to do business with local real estate enterprises. This method has received much attention from FDI newcomers because of its high level of flexibility and lower risk.

Under NEMs, foreign investors can make an easy market entry and activate a new cross-border FDI project with speed. At the same time, regarding Vietnamese real estate enterprises, this method will help them enrich innovative know-hows, improve organizational structure and learn from the experiences of investors, thereby enhancing their competitive capability and productivity. 

Read our latest Ebook on Real Estate and Property Insights

Viettonkin FDI Intelligence

GBE model with 5 phases of FDI 

With Viettonkin’s experience and knowledge through supporting hundreds of FDI projects in Vietnam, we have built the conceptual framework of FDI Intelligence with 5 components:

  • Market Intelligence
  • Legal Intelligence
  • Accounting & Tax Intelligence
  • HR & Labor Intelligence
  • Cultural & Linguistic Intelligence
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GBE model by Viettonkin

Based on the above framework, Viettonkin has been researching and building models suitable for 2 objects:

Viettonkin Consulting
Objects of GBE model
  1. Public & Social sector: The model and methodology to attract FDI is built on the basis of the Government’s policy and strategy of international cooperation and investment, with a focus on strengths and national competitiveness with resources that can be mobilized domestically and internationally.
  2. Private sector (businesses): Viettonkin created and used the Global Business Expansion model. Accordingly, by understanding the process of successfully building and implementing an FDI project along with the lessons of success and failure, Viettonkin is proud to conclude this Model to support FDI investors in all 5 years. More importantly, the initial phase marks everything on the journey of an FDI project:
  • Market readiness assistance (MRA)
  • Initial Setup
  • Transition period
  • Operational Excellence
  • Exit or Expansion 

Viettonkin knowledge transfer

As a FDI consultant, Viettonkin put a prime focus on sharing and conveying information on investment methods, Vietnam domestic market penetration and especially foreign countries analysis (host countries of Vietnam). Therefore, Viettonkin has made great attempts to build online and available resource database in the purpose of: 

  1. Providing an information system about host country analysis in ASEAN (investors’ destination) under the perspectives of an FDI consultant who always understands and sympathizes for the pain of investors and the challenges they face on their direct investment journey. Besides, giving a thorough comparison of the competitiveness capacity of these countries in terms of FDI attraction. 
  2. Providing an objective perspective and pragmatic information about home countries (home to the FDI investors who are keen on investing into host countries as mentioned above). Meanwhile, focusing on exploiting and analyzing the needs and expectations of investors, notable outward investment trends, along with comparing the strengths and weakness of these countries regarding investment abroad with its positive impacts and benefits 
  3. Providing 100 cases studies of successful and unsuccessful FDI projects in Vietnam, Indonesia, Thailand and Singapore ( several real cases are MNC clients of Viettonkin in the past 14 years), through which analyzing the success and pitfall lessons of these projects

Stakeholder management and Professional Networking

Experiencing ups and downs and going through two times of global and Asian economic crisis, Viettonkin believes that the success factor for investors, especially in FDI projects, is the communication, connection, creation and development of appropriate and useful relationships with all parties involved. We cannot overstate the importance of stakeholder management including but not limited to:

  • Deeply understand the role and importance of each party (stakeholder) both inside and outside the organization, especially 3 groups: government, corporate, industry stakeholders inside and outside the value chain, other indirect stakeholders both domestically and globally
  • Design/build a stakeholder engagement plan in line with the goals and aspirations of the stakeholders. To achieve success, it is necessary to determine the influence of each stakeholder as well as their importance to the success of the project – What factors will cause risks for FDI projects and how to manage risks. Besides, the contingency plan (Plan B) is always essential when planning stakeholder management in particular and managing FDI projects in general.
  • Managing the implementation of FDI projects with an internal and external communication system (smoothly inside the organization and harmoniously spreading to the outside). Pay special attention to stakeholders from different countries/territories with distinguished cultural and human characteristics. The exchange of information in the common language (English) and the private language (of the stakeholders) needs to be mindful of when the parties participate in online, face-to-face and bilateral or multilateral dialogues.

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Real estate holds a pivotal position in the development of a country, not only via the spillover impacts on other economic sectors such as construction, manufacturing, tourism, finance and banking etc. but also affecting the social dynamic by mobilizing the residency and infrastructure system. Foreign direct investment in real estate (RFDI) in Vietnam has a long running history and is unique in that it is largely dominated by the private sector compared to other industries which usually still have a rather large Government involvement. International capital has consistently been selecting real estate as the destination of choice, given that RDI has always been in the top 2 and 3 for volume inflow over the last 10 years, even throughout extremely turbulent periods such as COVID-19, per the General Statistics Office of Vietnam’s (GSO) data. Find out more in this ebook edition.

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