VinaCapital Vietnam Opportunities (VOF ) has been dealt a double blow by the real estate sector as it suffered the stock market fallout from corporate fraud and arrests and is now fighting the default of its private funding of developers.

The £710m single country fund has seen its underlying portfolio decline 0.4% in the year to the end of June, which despite the issues it has faced has proved to be a resilient result versus the VN Index, which dropped 6.1% over the same period.

While a downturn in global sentiment and a slowdown in both US and European economies weighed on Vietnamese exports over the period, the biggest domestic problem has been in the spiralling problems in the real estate sector which saw the arrests of business leaders, including billionaire Madame Truong My Lan who has interests in both real estate and banking.

The billionaire was accused of illegally issuing bonds to raise trillions of Vietnamese dong from investors during 2018 and 2019, and misusing the funds raised.

Andy Ho, manager of the trust, said the ‘surprising arrest’ of Lan ‘exacerbated the market decline, particularly in the real estate sector’, which makes up almost 20% of the VN Index.

A crackdown on corporate bond issuance followed which impacted both the real estate sector and stock markets more generally. The far-reaching anti-corruption drive saw two deputy prime ministers replaced and in January this year, Vietnam’s president Nguyen Xuan Phuc resigned.

The misuse of bonds in the real estate market increased the cost of debt in the country ‘causing significant difficulties for corporate issuers to access new funding or roll-over expiring debt’, said Ho.

On top of this, the government also revised the rules around bond issuance, making it more difficult for private investors to invest. Ho said in November 2022, the yields for some corporate bonds in the real estate sector were driven up to 30-40%.

‘Most issuers had to step in either to purchase their outstanding bonds and/or renegotiate existing terms and tenors,’ he said.

‘This liquidity crunch particularly impacted real estate developers as well as hitting overall market confidence.’

The resulting pressure saw large share price falls in real estate developers such as Novaland and Phat Dat Real Estate, which are both held in the trust. 

He also had two outstanding loans to Novaland – whose shares have shed 80% over the past year – which defaulted at the end of 2022. Ho said he had taken measures to protect the trust’s position ‘as both a creditor and shareholder including rescheduling the payments and taking security in the form of real assets’.

He is still working with parent company NovaGroup to ‘recover the full value of the investment cost and returns that are owed to the company’.

Ho was also a minor investor in Nova Consumer Group, another subsidiary of NovaGroup, that failed to list on the stock market at the beginning of this year as per the terms of the investment agreement.

While Ho tried to ‘put the shares back to NovaGroup’ he said the company ‘failed to honour its commitment to buy’.

‘We are seeking to enforce the contract and to protect our investment returns through a negotiation of payment terms and an asset swap, under which a portfolio of food and beverage outlets, restaurants and cafes that were owned by NovaGroup was transferred to IN Holdings, another investment in our private equity portfolio in June 2023,’ he said.

On entering into private funding, Ho said he had negotiated ‘downside protections’ in the form of put options but ‘with the turmoil in the real estate market at the end of 2022…it was not clear how these protections would take effect in the event of a default’.

The challenges in the real state sector may not yet be over and Ho said there could be ‘further changes and investigations’ but rather than being detrimental to the economy and stock market, he said they ‘should be positive for the investment environment and the economy over time’.

The real estate sector contributes 10% of GDP in Vietnam and a ‘recovery in the real estate sector would make a significant contribution’ to economic growth However, this is will be ‘slow and gradual’, and Ho predicted ‘may commence in the second half of the year, and then continue in 2024 and 2025’.