Can Vietnam's property developers cut home prices by accepting lower profits?

Experts believe that Vietnamese property developers can enhance housing affordability by lowering their profit expectations and focusing on meeting actual market demand. The complexities behind property pricing in Vietnam involve various cost elements as well as developers' reputations and profit aspirations. According to Nguyen Van Dinh, who serves as the Vice Chairman of the Vietnam Real Estate Association and Chairman of the Vietnam Association of Realtors, construction expenses constitute the largest portion of development costs, accounting for about 45-60%. Land-related costs, which include compensation, site clearance, and other financial obligations tied to land use, make up approximately 30-35% of the total expenses.

Additional costs include investment procedures at 10-15%, borrowing costs ranging from 8-15%, infrastructure development at 5-7%, and management costs at 2-5%. Dinh pointed out that lengthy administrative processes can lead to increased financing and operational costs, further impacting selling prices. Property prices are influenced by four primary factors: production costs, brand value, inflation-related expenses, and developers' anticipated profit margins. Brand value encompasses a developer's reputation, the design of the project, and the pace of construction, while cost increases can emerge from extended development timelines. Actual selling prices may also surpass initial asking prices due to speculative resales.

Investors typically seek returns that exceed bank interest rates plus inflation, often driven by expectations of future property price increases. When anticipated profits diverge from the actual utility value of a property, it can lead to inflated prices, making homes less accessible for genuine buyers and increasing liquidity risks if market conditions change. At a recent seminar on property pricing, Hoang Thu Hang, Deputy Director of the Housing and Real Estate Market Management Department at the Ministry of Construction, stated that the high prices of properties result from various factors and cannot solely be blamed on land costs.

Hang explained that determining land prices based on market principles, especially in an environment of already high land values, has raised land-use payments for several projects, directly affecting selling prices. Legal and regulatory challenges have also delayed project preparation and execution, forcing developers to service loans for extended periods while incurring additional financing and operational costs, which may ultimately be passed on to homebuyers. Speculation further exacerbates pressures in the property market, as some investors borrow funds to acquire properties in anticipation of price appreciation rather than fulfilling genuine housing needs. Concurrently, rising lending rates complicate mortgage accessibility for households, while leveraged property investors face increasing repayment challenges as market liquidity diminishes.

According to Hang, the elevated property prices reflect a combination of land costs, investment procedures, financing expenses, speculation, and imbalances across housing market segments. One significant contradiction in Vietnam's housing market is that while demand remains robust, there is a shortage of homes that meet suitable locations, quality, and pricing. Hang asserted that aligning property prices with buyers' financial capabilities largely depends on decisions made by developers themselves.

She urged developers to reconsider their investment and development strategies, focusing on three key priorities. Firstly, developers should restructure their housing portfolios and target market segments more effectively. Instead of concentrating on projects that promise the highest returns, companies should thoroughly evaluate actual demand before initiating new developments. Hang noted signs of oversupply in certain mid-range and high-end housing segments, while affordable homes for middle-income households remain limited. Continuing to develop properties priced beyond what buyers can afford may leave developers with unsold units, hindering capital recovery and cash flow for future projects.

Secondly, developers should shift their focus from maximizing selling prices to maximizing cash flow. Instead of maintaining high prices to secure substantial profits on individual units, companies could adopt more reasonable pricing strategies that facilitate quicker sales, enabling faster capital recovery and reduced borrowing costs. Hang illustrated this point by citing a developer aiming for a 30% profit margin on a project but facing a prolonged capital recovery period. Alternatively, the developer could accept a profit margin of around 15%, leading to faster unit sales and enabling a transition to new projects sooner. This approach could shorten the time capital is tied up in a development, lower financing expenses, and foster more stable business operations.

Lastly, developers should increase their involvement in social and rental housing, which are prioritized under government housing policies, especially for low- and middle-income households. Hang encouraged property companies to collaborate proactively with regulatory agencies and local authorities to create homes that align with the purchasing power of the population. Enhancing policy mechanisms and addressing legal barriers are also vital for increasing supply in these housing segments. Hang suggested that restructuring housing portfolios, adjusting pricing strategies, and engaging in social housing development could improve liquidity for businesses and reduce financial pressures, while also addressing the mismatch between housing supply and demand, ultimately supporting a more stable and sustainable property market.