Financing Industrial Real Estate – What Must Be Done – Bloomberg Interviewing Dr. Oliver Massmann

1. What is your take on this booming trend that credit into industrial parks grows surprisingly?

[Dr. Oliver Massmann] The booming trend of credit growth into industrial parks is likely driven by several factors:

1. Favorable government policies and incentives: The Vietnamese government has issued various decrees and regulations to promote the development of industrial parks, including eco-industrial parks. Investors in industrial parks can benefit from tax incentives, land rent exemptions, priority access to investment loans, and financial support.

2. Strategic location and infrastructure: Vietnam's industrial parks are often located in strategic locations with good access to transportation networks, including roads, waterways, and airports.

3. Shift in global manufacturing: The ongoing shift of manufacturing from China to other Asian countries, including Vietnam, has driven increased foreign direct investment (FDI) into Vietnam's industrial parks. Multinational companies are establishing or expanding their operations in Vietnam's industrial parks to take advantage of the country's competitive costs, skilled labor, and supportive policies.

2. How is the current flow of credit versus capital to industrial real estate in Vietnam?

[Dr. Oliver Massmann] I think both flows are being encouraged and stable for the time being.
Regarding credit flow, the State Bank of Vietnam (SBV) has reduced the credit risk coefficient for industrial real estate from 200% to 160%, encouraging commercial banks to lend more to projects in this segment. As a result, credit for real estate development in export processing zones, industrial parks, and office leasing has continued to see high growth rates compared to other sectors, increasing by almost 9.5% year-on-year.

At the same time, Vietnam's industrial real estate industry is expected to continue its strong growth trajectory due to foreign direct investment (FDI) inflows benefiting from tax incentives. FDI into the real estate sector, particularly the industrial real estate segment and some large-scale, prime-location projects, has increased by 4.8% in 2023 compared to the same period in 2022.

3. What advantages between local banks versus foreign banks in terms of lending?

[Dr. Oliver Massmann] In terms of lending, while local banks understand the domestic legal market better, are able to provide lending to a wider range of businesses with fewer required legal procedures. Foreign banks, due to tighter lending restrictions in some domestic markets, may provide an easier path to securing financing, especially for self-employed borrowers, startups, or those looking to invest overseas. Further, foreign bank loans typically have maturities that are up to 33% shorter than domestic bank loans, which can be 2-3 months shorter on average.

4. What blocks mostly industrial real estate developers from bank credit?

[Dr. Oliver Massmann] First of all, due to the global economic recession after COVID 19, the assets securing loans for most real estate enterprises do not meet the requirements as banks are more cautious in disbursement and prioritize customers accepting higher interest rates.
Further, regarding legal challenges, real estate enterprises face significant difficulties in accessing bank credit, as credit agreements are only concentrated on enterprises with strong financial situations and large land reserves with clean projects. This is due to the fact that the legal framework on industrial real estate projects remains obscure with different regulations scaterring in different legal instruments, making it difficult for developers to navigate. Legal problems of some major players in the real estate industry also play an important part in this matter.

Also, a significant amount of commercial real estate loans are now mature for refinancing in the next few years. However, with higher interest rates and lower property valuations, many borrowers may struggle to refinance these loans on favorable terms. This can create a "refinancing cliff" that could lead to more defaults and further tightening of credit for commercial real estate developers.

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Please do not hesitate to contact Dr. Oliver Massmann under omassmann@duanemorris.com if you have any questions or want to know more details on the above. Dr. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.