For property developers in Vietnam and Indonesia the path to long-term growth is steep. In the next 12 months they face various hurdles. Among them are funding access and evolving regulatory policies.

Property markets in the two markets are a study in contrast. The sales cycle in their residential markets diverge, and they have different buyer profiles, an S&P Global Ratings comparative analysis shows. For Vietnam, tighter credit conditions, project delays, and a decline in sales incentives from developers will hurt buyer sentiment and likely lead to a larger contraction in sales than in Indonesia.

That said, both markets show promising growth potential. Factors supporting this view include: the rising disposable income of middle-income class; growing foreign direct investments; a population with over 70% under the age of 45; robust GDP growth; and ample headroom for further urbanization.

How We Compare Developers

S&P Global Ratings has selected seven listed residential property developers in Indonesia and two listed in Vietnam for comparison. These companies are generally large property developers, or they frequently field investor questions on their outstanding bond. We base our selection on the availability of sufficient public disclosure.

We derive insights by focusing our comparison on four aspects:

• The residential sales cycle;
• Operating conditions including regulatory environment and funding access;
• Credit characteristics of key residential property developers in the two markets; and
• Similarities and differences in corporate governance trends.

Table 1

A Divergent Sales Cycle In Residential Property

Table 2

We expect Indonesia's residential property market to remain largely stable in 2023. In our view, sales momentum will be muted this year, with aggregate sales to contract by about 5% from 2022. Customer sentiment has turned cautious amid high inflation, which has eroded purchasing power. At the same time, we don't expect further favorable policies to stimulate demand.

Nevertheless, down payment policies remain relaxed; and mortgage rates remain lower than they were before the pandemic. These factors should support overall sales.

Chart 1

For Vietnam, we expect aggregate residential sales to contract by 15%-20% in 2023; this follows growth of 25%-30% in 2022.

Since June 2022, the government has tightened developers' access to funding, via both bank loans and the local bond market. This has squeezed developers' liquidity, which has in turn led to delays in project construction and handovers.

Buyers' sentiment has further waned as developers could no longer provide sales incentives such as mortgage interest subsidies and rental return guarantees. Buyers' access to mortgage loans has also diminished.

Mass-Market Appeal And The Pandemic Effect

Over the past decade, Indonesia developers have shifted their focus to mass-market landed residential projects and away from high-rise developments in the mid to high-end segments previously favored by investors. Demand for affordable landed homes has further increased since the pandemic.

In Vietnam, investor-buyers accounted for about 86% of total property purchased over 2020-2022; overseas buyers contributed 45% of total buyers, according to CBRE Group, a commercial real estate services firm.

Key factors enticing such buyers include the steady appreciation of property values and guarantees of rental returns associated with hospitality projects. Thanks to a robust economy, rising household incomes among the middle class--resulting in more disposable income to invest in housing--have also contributed to strong sales growth.

However, the high proportion of investor-buyers in Vietnam also leads to greater fluctuations in sales compared to Indonesia. This is because investors tend to be more sensitive to economic cycles and market sentiment.

Chart 2

The average selling price of apartments in Vietnam's first and second largest cities, Ho Chi Minh and Hanoi, is about 8% and 30% higher than Indonesia's two largest cities, Jakarta and Surabaya, respectively, as of the end of 2022.

This gap occurs despite Vietnam's GDP per capita being about 30% lower than Indonesia's. We believe Vietnam's faster growth in property prices is the result of the larger share of mid- to high-end residential projects targeting foreign and local investor-buyers.

Chart 3

Chart 4

Regulatory Pain Could Support A Path To More Sustainable Growth

Table 3

Regulation in Indonesia and Vietnam will continue to evolve as their property markets develop. We view Indonesia's regulatory policies as largely neutral. The country rolled out supportive measures during the pandemic--such as reduction in VAT--to boost sales of the developers' inventory and alleviate the financial stress on the property sector. The VAT reduction has tapered off since its implementation in 2021 and in the first nine months of 2022.

In contrast, regulatory policies in Vietnam have skewed negative since mid-2022. Early easing signals appeared in early 2023 as the country took steps to reduce the property sector's financial stress. The recent easing of policies also aimed to support the affordable segment of the market and discourage property speculation. This approach may help steer Vietnam's property market toward more sustainable growth. But short-term pain is inevitable, in our view.

The Other Obstacle: Funding Conditions Remains Challenging

In Indonesia, access to the U.S. dollar bond market has been challenging since 2020 following the distressed debt restructuring of several developers. The impact on developers with a credit rating of 'B' and below has been more acute as many had relied on US dollar bond market funding for the past decade. Developers have since sought a lifeline from domestic banks, which have lower funding costs.

Indonesian banks remain supportive in granting new loans, a trend that has emerged since mid-2022, underpinned by robust economic growth; over the past 12-18 months we have noted a positive shift among domestic lenders toward developers. One sign of this is the Indonesian rupiah 8.5 billion of bank loans granted over the past 12 months to support refinancing initiatives.

Developers in Vietnam are less established in the offshore funding market because of higher funding costs. At the same time, onshore funding conditions are difficult. Sentiment among local banks remains selective. Vietnam's domestic corporate bond issuance in the fourth quarter of 2022 plunged by 92% quarter on quarter, Vietnam Bond Market Association data shows.

Chart 7

Scale And Business Concentration: A Constraint For Most Developers

The relatively small scale and geographical concentration of developers in Indonesia and Vietnam constrain their credit profiles. Their operating scale tends to be small compared with their peers in North Asia. Most of their projects focus on one to two of the most developed cities in their respective countries.

Indonesia developers are generally smaller than those in Vietnam. Presales of Vinhomes Joint Stock Company and No Va Land Investment Group Corporation are 6x-10x larger than the largest Indonesia developers such as PT Bumi Serpong Damai Tbk. and PT Ciputra Development Tbk.

Indonesia developers, however, have more diversified revenue streams. Their revenue comprises mainly landed residential homes and land sales, supplemented by income from retail and commercial assets, healthcare (PT Lippo Karawaci Tbk.), and infrastructure services (PT Kawasan Industri Jababeka Tbk.).

All sampled Indonesia developers have 10%-65% of non-property related revenue, compared with less than 5% of Vietnam developers. However, whether such diversification is beneficial to their credit profile will depend on whether the non-property segment can channel cash flow upstream to support debt servicing at the holding company level, where the majority of debt sits.

Furthermore, Indonesia developers typically have lower working capital requirements and shorter inventory dates. This is because they focus on landed house development, which has a shorter development cycle and faster cash collection than high-rise.

In contrast, some Vietnam developers have increased their hospitality developments near tourism hotspots such as Halong Bay and Phu Quoc. We believe, this exposes their earnings to a more volatile and cyclical demand.

Chart 8

Chart 9

We assess the business profiles of Bumi Serpong and Ciputra Development as modestly stronger than their Indonesia peers. Supporting this view are the larger scale of operation and relatively more resilient sales performance. Ciputra Development's more diversified footprint in Indonesia also underpins its stronger business profile.

PT Pakuwon Jati Tbk. has the highest proportion of recurring income from its retail and commercial property portfolio. This diversification tempers its small scale and geographic concentration risk. We anticipate the recurring income will act as a buffer against riskier high-rise residential and integrated project developments.

Vinhomes' business profile benefits from its leading market position and higher margin due to its focus on mid to high-end development. Its operating scale compares favorably with peers in both markets. Constraining the company's business profile is a higher country risk relative to Indonesia. Vietnam's regulatory policies are evolving, driven by highly centralized decision-making.

Vietnam: Debt-Funded Growth, Reliance On Short-Term Debt Underpin Developers' Financial Risks

We believe Vietnam developers will face higher financial risk over the next six to 12 months, owing to the tight onshore credit conditions, limited alternative funding channels, a higher proportion of short-term debt relative to cash, and what we expect will be a decline in property sales.

Developers in Vietnam have higher reliance on short-term funding than their Indonesia counterparts. Over the past 12 months, this has exposed Vietnam developers to liquidity and default risks when access to funding tightened. For example, No Va Land had missed several domestic debt obligations and seeking to restructure its foreign debt obligations, Reuters reports.

As end of Dec. 31, 2022, short-term debt for Vietnam developers exceeded 100% of the cash balance, compared with an average of about 35% for Indonesia developers.

Chart 10

Vietnam developers have pursued more ambitious debt-funded growth in the past five years (see chart 11). Such ambitions have led to a more volatile and upward trend for leverage ratios. Developers generally used debt to fund investments in working capital to support a longer development cycle for high-rises condos and capital spending to replenish land.

On the other hand, the average debt-to-EBITDA ratio among Indonesia developers has remained steady (see chart 11), as their sales growth was relatively flatter than that of their Vietnam peers. Developers are under less pressure to replenish land thanks to a sufficient reserve, which could support 10 years of development.

Chart 11

Chart 12

Governance And Transparency: Watch Out For Corporate Structure And Off-Balance Sheet Items

Chart 13

Similarities:  Most Indonesia and Vietnam developers face potential key-man risk because they remain controlled--directly or indirectly--by the founding family. Some have a more complex corporate structure with multiple business line and/or joint ventures.

Debt obligations can be concentrated at the parent company and its debt servicing reliant on dividends from operating subsidiaries and joint ventures (JV). The aggregate pre-sales of six out of nine companies include sales from co-developed projects, listed subsidiaries and JVs. Hence, the flow of funds and assets can be complex to track.

Different forms of co-development:  Some developers are heavily exposed to co-development projects to share risks and returns. In Indonesia, co-development typically takes the form of JV or joint operations whereas in Vietnam, it is mostly in the form of business cooperation contracts (BCC).

A BCC arrangement is an investment form signed between developers and investors, pledging to co-operate on a project and share profit or loss without creating a separate legal entity. This differs to a JV, whereby a separate legal entity is established.

Disclosure of JV projects is generally limited for developers. Indonesia developers typically follow the International Financial Reporting Standard.

In contrast, Vietnam developers' disclosure on BCC projects is very limited. In their income statements, Vietnamese companies recognize gains or losses of BCC projects as finance income. There is little disclosure of each party's ownership, responsibilities, or obligations.

Off-balance sheet liabilities:  Developers in Vietnam tend to have higher off-balance sheet obligations, including sales incentives, which we assess as debt-like liabilities.

• Mortgage interest support: Some Vietnam developers provide a subsidy on mortgage interest expense incurred by a customer during the initial stage of project construction.
• Guaranteed yield: This is more common for hospitality-type projects. Following the unit handover, Vietnam developers will provide a guaranteed rental return for a certain period. The yield could be 5%-15% with a period of three to five years.

It is industry norm in Vietnam to provide such above sales incentives. But developers' actual liabilities and cash flow burden may be understated. The disclosure related to the amount of such support and the commitment period is limited under Vietnamese Accounting Standards.

Despite their differences, developers in Indonesia and Vietnam face similar obstacles: access to financing; evolving regulation; market volatility, and elevated leverage positions. Still, opportunities are there in the form of urbanization, changing demographics, and potential government support. How developers seize on these will determine their long-term sales growth.

Editor: Lex Hall

Related Research

• Update On Southeast Asia Property: External Conditions Squeeze Developers, June 1, 2023