Investment and business activities in general, and in the construction sector in particular, both carry various unforeseeable risks that can potentially harm a business. One of these risks is the occurrence of uncontrollable or difficult-to-recover bad debts for the enterprise. In this article, TNTP’s lawyers will present the main reasons leading to the occurrence of bad debts for businesses in the construction sector.
1. Objective Causes
a) Market Influence
Up to the present time, even after the Covid-19 pandemic has passed, the real estate market in Vietnam remains nearly stagnant, with many projects being launched but very few buyers due to the apprehensions of many investors. A series of real estate businesses have ceased operations, or dissolved due to legal violations, or poor business performance.
These factors can be seen as the inevitable consequences of the real estate bubble in Vietnam for more than 10 years, with an imbalanced supply-demand market and speculative waves from real estate businesses, investors, and brokers pushing property values beyond the actual societal demand. After the Covid-19 pandemic, the frozen real estate market has also led to many bad debts from businesses related to the real estate market, as they cannot maintain cash flow from business operations.
b) Legal Regulations
Although there have been many revisions to real estate laws in Vietnam to better align with the market, many limitations arise due to laws not meeting the market’s demands. The Land Law of 2013 has been in existence for over 10 years and still contains many unresolved shortcomings. Property forms such as Shophouse and Condotel have not been specifically regulated in legal documents, leading to difficulties in legal procedures and licensing for these real estate types. This also causes delays or suspensions of projects as they do not meet the legal requirements. With influences from both the market and legal procedures, projects cannot be executed on schedule, resulting in a series of additional costs for investors, contractors, brokers, and even investors.
When a project cannot be completed due to legal issues, businesses cannot recover the capital they have invested. This is also the reason for the emergence of debt when the company’s profits are insufficient to offset the expenses incurred in maintaining project-related costs.
2. Subjective Causes
a) Business Strategy and Orientation of Real Estate Enterprises
As mentioned earlier, the partially frozen state of the real estate market is partly due to oversupply compared to actual demand. Many real estate businesses have focused on segments and product structures that are inappropriate, and not in line with market preferences, financial capabilities, and the needs of buyers. This directly affects the business operations of these enterprises.
A clear fact is that businesses have been unbalanced in building a diversified real estate market, with continuous construction and sale of high-end properties in prime locations at high prices. Meanwhile, properties suitable for middle-income and low-income individuals (which make up the majority of society) have received little attention. The strategies and orientations of businesses in the real estate sector have led to the consequence that when high-end properties cannot be sold, these businesses have limited options to generate profit since they have “put all their eggs in one basket.”
b) Neglect of Debt Management
Debt management involves a business taking measures to monitor, classify, and identify its debts in preparation for necessary recovery actions. Debt management must be carried out periodically and in parallel with the debt recovery process to ensure the ability to collect debts.
One of the reasons leading to the occurrence of bad debts in construction businesses is the lack of emphasis on debt management or the absence of debt management procedures. This can result in businesses not being able to allocate resources to handle important debts and missing favorable debt recovery opportunities. In such cases, businesses will face significant challenges in successfully recovering debts, leading to a cash flow shortfall. This can even result in the business becoming a party that generates bad debts because it cannot repay debts owed to other partners.
Above are some analyses provided by TNTP’s lawyers on the topic: ” The main reasons leading to bad debt arising in the construction industry.” We hope that this article brings value to our readers.