Property enterprises head over heels in debt

Property enterprises head over heels in debt

Experts predict 2019 will be an extremely tough year for the Ho Chi Minh City’s real estate industry, since only a few projects got approval; banks tightened credit into real estate; and legal procedures of projects developed on public lands are inspected. These difficulties have made debts of property firms become bigger, with an increasing amount of inventories.
11:45, 07/04/2019

A decade ago, with only three subsidiaries and three joint ventures, Quoc Cuong Gia Lai Joint Stock Company suffered a debt of over VND1.48 trillion. Last year, the company got into trouble after buying Phuoc Kien project from Tan Thuan One Member Investment and Construction Limited Company. It was put into warning status by the Ho Chi Minh City Stock Exchange (HOSE) for violating disclosure obligation. 

According to the consolidated financial statement of Q4-2018, Quoc Cuong Gia Lai’s payables hit VND6.9 trillion, while inventory also reached VND7.4 trillion. At least ten projects have been incomplete, including residential areas under construction. Notably, Phuoc Kien project accounted most with total investment of around VND5 trillion. In contrast to the huge debt, Quoc Cuong Gia Lai’s profits were quite low with just a few billion VND.

A condo project in Nha Be district, HCMC has been unfinished after years of construction.

A condo project in Nha Be district, HCMC has been unfinished after years of construction.

FLC Group’s 2015 financial statement showed the company’s payables were around VND3.56 trillion, with an inventory of VND731 billion. This year, FLC owed VND16.9 trillion with nine imcomplete projects worth over VND3.7 trillion. The debt of FLC Faros Construction JSC reached VND4.71 trillion. Thus, the total arrears of the two firm exceeded VND20 trillion! 

Upon a recent request by HOSE, FLC provided decisions for coercive tax collection it received from 2015 until now. Last month, FLC was coerced to pay the pending tax and fines of VND28.4 billion. In particular, the amount of tax being coerced in 2016 was about VND130 billion. Regarding FLC Faros Construction JSC, in 2017, the company was fined VND15.7 billion by the General Department of Taxation for tax payment delay.

According to official statistics, payables of real estate companies exceeded VND270 trillion ($12 billion). Especially, inventories of real estate companies were extremely high. Surveys on 65 real estate companies listed on the stock market showed last year, total inventory hit over VND201 trillion.

A property expert say inventories in accord with the companies’ plans and inventories amid distribution and circulation are normal. But it is noticeable that inventory is put on sale but has not been consumed yet since it relates to liquidity of firms and credit relation with commercial banks in the matter of bad debts and credit safety.

The current property market has never developed like this before, with many projects under construction across the country, people pouring money into the sector. Since the market grows strongly  with rapid increase of land prices, realty firms’ profits should be high and debts should be reduced instead of keep rising as it is happening now.

Chairman of Ho Chi Minh City Real Estate Association (HoREA) Le Hoang Chau said real estate firms faced losses as they excessively used financial leverage. He warned that the larger financial leverage they use, the higher risk they suffer. Eventhough borrowing money for business is a normal practice, but it is essential to consider business results and the project’s feasibility. In addition, property firms grew rapidly, but corporate governance has not improved accordingly.

High interest rates also caused real estate firms to suffer losses, said an owner of a real estate firm who prefers to preserve his anonymity. He analyzed that when a project is established, it usually takes 5-7 years for compensation and site clearance, and at least another 3 years to get certificates of ownership for their buyers. 

With a regular interest rate of about 10 percent, businesses will struggle to pay interests if their project experience prolonged issues. Moreover, the biggest risk of the property market is changes in policy that businesses are unable to adapt to. When the market becomes stagnant, businesses will definitely face losses.

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