Residential property sector – Waiting for more aggressive policies

• A meaningful decline of 80% yoy/63% yoy in 4Q22 presales volume was seen in HCMC and Hanoi on tighter funding regulations for residential property.
• A few developers have failed in the first stress-test on obligatory payment.
• We like NLG as its healthy financial structure, large exposure to real housing demand.

Weak 4Q22 sales volume was expected amid subdued housing demand
Dragged by negative sentiments of the property market, 4Q22 new condo supply significantly fell by 81% yoy/38% yoy, leading a sharp fall in sales volume of 80% yoy/63% yoy in both HCMC and Hanoi, respectively, according to CBRE. We saw condo primary prices in both HCMC and Hanoi to cool down by 1-3% qoq, except for mid-end segment (+2-5% qoq) in 4Q22. While 4Q22 secondary prices for landed property stayed flat in HCMC but down 8% qoq in Hanoi.

There have been positive moves, but more is needed…
After the national virtual meeting on 17 Feb hosted by The Prime Minister, the government released a draft Resolution to resolve property market risk by 1) allowing developers with liquidity issues to delay debts repayment, 2) encouraging financial institutions to lend more to quality developers, lower interest rate to support property market. Besides, the regulators have released the latest draft to Decree 65 allowing developers to reschedule their bond repayments and relax in issuing conditions. These policies, if implemented, should be able to ease developers’ liquidity pressure markedly in near term.

Default risk is high. A few developers have failed in the first stress-test
By mid-Fed, 54 corporate bond issuers have announced for late interest payment which raised concerns over liquidity. We estimate about VND23,000bn c-bonds value of these issuers will mature within 2023 (~90% are property developers). Besides, we observe that the current ratio and interest coverage ratio of current listed developers fell sharply to the bottom 2011-13 period which indicates the possibility of default risks is as high as 2011.

Our top pick is NLG
The recovery in property sales is unlikely before end-FY23F amid weak housing sentiment, high mortgage rate environment and sluggish new supply as the project approval process likely be delayed on waiting the amend Law of land. We believe investors should focus on quality names that possess following traits: 1) huge land bank, which is already completed legal procedures and infrastructure to be launched in 2023F, 2) high exposure to mid-range and affordable segments 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.

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