Property development & investment – A harsh winter is coming

• A meaningful decline of 40% qoq in 3Q22 presales volume saw in both HCMC and Hanoi on tighter funding regulations for residential property.
• We are not optimistic about the recovery of residential property in near-term as developer insolvency still pose the biggest risk to the sector outlook.
• We believe investors should focus on quality names with healthy financial structure and strong cash flow from previous presales like NLG.

A sharp decline in property presales in both HCMC and Hanoi since 3Q22
Presales have experienced a downturn since 3Q22 as condo sales volume sharply fell by 40% qoq/+128% yoy in both HCMC and Hanoi, according to CBRE. Together, landed hospitality presales volume nearly squeezed with 70.4% qoq/+85% yoy. We saw primary prices of ready-built landed property to decrease by 10-15% qoq on subdued housing demand in 3Q22 while condo inched up slight 1-3% qoq on average.

Multi headwinds weigh on residential property outlook
Headwinds include: (1) developers have limited refinance opportunity as tighter regulations on corporate bond issuance and credit exposure to property; (2) rising mortgage rates and to drag the housing demand and (3) a drop in new supply as the project approval process likely be delayed on waiting the amend Law of land. We estimate about VND46,145bn corporate bonds of property developers will mature in 1H23F and another VND64,185bn in 2H23F, which be a stress-test for developers’ repayment capability.

If entering a “deep-freeze”, this cycle is likely different
We see listed property developers’ financial health, currently in a better shape than period the last downcycle 2011-13, thus, we expect less damage and shorter time to ride out from this downcycle. We expect primary condo prices to decrease 5-10% yoy on average and condo sales volume down c.20% yoy in FY23F (vs. a 20-30% fall in primary prices and a 50% dwindle in condo sales volume in the 2012-13 period). We expect the on-schedule Land law 2023 affected since 2H24F to tackle the bottlenecks in the approval of new residential projects, leading housing supply to recover since 2024-25F.

Our top pick: NLG
We believe investors should focus on quality names that possess following traits: 1) huge land bank, which is already completed legal procedures as well as infrastructure to be launched in 2023F, 2) high exposure to the mid-range and affordable condo segments as these segments are driven by real end-user demand and 3) sustainable earnings growth and scalable business models with a healthy financial position (low leverage, strong liquidity) to counter the risk of tightening credit for the real estate market as discussed above. We believe NLG is on this list as they meet above key criteria.

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