Abstract: The article focuses on the advantages of forward contracts—a type of derivative security - in relation to the requirements for improving liquidity and hedging risks in real estate business activities, both for real estate enterprises and property buyers, through the description, analysis, and evaluation of relevant provisions under the current laws of Viet Nam. The research results show that the development of forward contract instruments will help minimize price risks for real estate buyers. For real estate enterprises, the mandatory requirement that project-based real estate transactions be conducted through real estate trading floors will provide a foundation for determining the value of the underlying assets of real estate forward contracts.
Keyword: Forward contract; Underlying asset; Real estate; Real estate trading platform.
It can be affirmed that the emergence of derivative securities and the establishment and operation of the derivatives market demonstrate, in practice, the depth and professional maturity of the securities market. At the same time, they help diversify existing investment instruments and provide tools that enable investors to hedge against future risks that cannot be fully anticipated through analysis and evaluation. In other words, developing the derivatives market “is the next step towards completing the structure of the securities market, supporting the sustainable development of the underlying securities markets (the stock market and the bond market), contributing to promoting the growth and strengthening the role of the securities market within the financial market in particular and the economy in general. It will turn the securities market into a safe and long-term capital mobilization channel serving economic growth, while diversifying traded products in accordance with the development process of the financial market and meeting investors’ and issuers’ needs for investment and risk management”.
According to Vo Thi Phuong, the development experience of derivatives markets worldwide generally follows one of two trends: (i) the organization of a centralized derivatives market established on the basis of inheriting an over-the-counter (OTC) derivatives market that has developed for hundreds of years; and (ii) a centralized derivatives market developed through active government intervention alongside an underdeveloped OTC derivatives market (typical examples include Korea and Thailand). Unlike these countries, Viet Nam has chosen to establish a centralized securities market, meaning that the derivatives market is organized as a unit under the Stock Exchange. The establishment and official operation of the derivatives market mark a step toward completing the structure of Viet Nam’s securities market.
After six years of operation, the derivatives market has experienced stable growth, active trading, and increasing investor participation, becoming an effective risk-hedging tool for investors. This is evident in the fact that when the underlying securities market fluctuates sharply - especially during significant declines - existing futures and forward contracts help investors maintain stability in their investment sentiment, preventing panic selling in response to market movements. As a result, the market remains more balanced, thereby helping to mitigate the downward momentum of the underlying market indices.
Derivative securities are financial contracts whose value depends on the value or rate of return of another asset, referred to as the reference asset or underlying asset. The underlying assets of derivative securities include commodities, stocks, bonds, stock indices, interest rates, or exchange rates. Although derivatives are relatively new products in the financial market, they not only perform well in their risk-hedging function but have also become investment instruments alongside traditional securities such as stocks and bonds.
According to the current Securities Law of Viet Nam, derivative securities “are financial instruments in the form of contracts, including options contracts, futures contracts, and forward contracts, which define the rights and obligations of the parties regarding the payment or transfer of a certain quantity of underlying assets at a predetermined price within a specified period or on a specified date in the future”.
Derivative securities products comprise various instruments, depending on each country’s regulatory and market preferences. For example, in Singapore, there are four main types of derivative contracts based on the underlying objects: equity derivatives, commodity derivatives, interest rate derivatives, and foreign exchange derivatives. Based on the prevalence of derivative securities, Nguyen Thi Hoai Nhi and Nhu Trong Bach identify four main product groups: Forward contracts (Forwards), Futures contracts (Futures), Options contracts (Options), and Swap contracts (Swaps), among which the forward contract is considered the most basic form of derivative security. A forward contract is essentially an agreement to sell a specific asset at a predetermined price, to be executed after a specified future period.
Under the current Securities Law of Viet Nam, a forward contract “is a type of derivative security traded through negotiation, confirming the commitment between the parties to buy or sell a certain quantity of underlying assets at a predetermined price on a specified date in the future.” The distinguishing feature of a forward contract lies in the fact that the transfer of ownership of the underlying asset between the buyer and the seller does not occur at the time the contract is concluded but at a specified future date agreed upon by the parties. To establish a contract, the parties meet and negotiate matters relating to the underlying asset, price, and term of the contract. The determination of the contract term depends on the nature of the underlying asset. Upon maturity, the buyer and the seller make direct settlement with each other; therefore, both parties may face certain risks. Specifically:
- For the seller, if the buyer becomes insolvent, the performance of the contract (payment obligation) may be unfeasible.
- For the buyer, due to the “forward” nature of the contract, legal risks may arise concerning the contracting party’s status (for example, if the seller is declared bankrupt or dissolved) or in relation to the underlying asset itself - particularly where such asset involves investment projects transferred to other entities.
In Viet Nam, the real estate market began to take shape when the State promulgated the Land Law, which allowed land users to exercise the first property rights of a private nature. These provisions served as the foundation for the gradual formation of the real estate market. Depending on the type of real estate being traded and the purpose of participating in real estate transactions, housing and land - the main objects of such transactions - can serve various functions: for residential use, for speculation, as an investment instrument, a means of wealth preservation and a safe-haven asset, a form of insurance against risks and for old-age preparation, and, in some cases, branded real estate even serves merely as a symbol of social status for a certain class of people.
Nevertheless, participants in the real estate market also face a wide range of risks, from legal risks to market risks. For real estate enterprises, in addition to coping with a multitude of laws, they are also affected by administrative procedures and the conduct of competent officials, which may vary according to political terms or the personal discretion of leaders. These factors pose significant challenges for enterprises, resulting in informal costs and frequent changes in project life cycles. For real estate buyers - who, ultimately, bear all the costs of property development - the burden of establishing a place to “settle down and build a career” becomes precarious. Given their current income levels, it is extremely difficult for them to secure housing.
Alongside bearing the additional costs incurred in the process of property development by real estate enterprises, real estate buyers - due to limited financial resources for acquiring real estate - must also incur loan expenses from commercial banks. Moreover, owing to the prevailing uncertainty and unpredictability, buyers may face situations in which land developers unilaterally prepare a wide range of contract templates, commitments, and receipts in advance. Buyers, especially individual ones, are often in a position of information asymmetry and have very limited capacity to manage their own risks.
Contract templates for deposits, priority purchase rights, capital contribution agreements, and finally, contracts for the sale and purchase of real estate products generally do not conceal such asymmetry. Even in cases of violations - regarding project progress, quality, standards, or legal documentation of real estate products - developers usually have more opportunities to evade contractual liability than homebuyers. This situation has been a major cause of prolonged disputes.
The above analyses indicate that the prevention and control of future risks associated with contracts in the real estate business are considered one of the most effective methods to manage adverse situations for both real estate enterprises and property buyers. This can be explained by the fact that the establishment of land funds for real estate projects requires considerable time, costs, and compliance with numerous procedures. This is evidenced by the fact that a real estate enterprise “carrying out a land development project still follows general habitual patterns as described above. To secure land, obtain projects, legal dossiers, mobilize capital, and implement projects, the enterprise proactively promotes project formation, actively drives the conversion of land use purposes, and seeks all means to legitimize the accumulation of land in accordance with investment, bidding, or auction laws. Legal dossiers may sometimes be incomplete, yet the project may have already been transferred (for example, through the sale of controlling shares), or financial mobilization from homebuyers (deposit contracts, capital contribution contracts, joint venture contracts) has already been carried out,” which is identified as the root cause of numerous legal risks faced by land development enterprises.
Recent practices in Viet Nam’s real estate market have shown that many real estate enterprises, even when projects have not been approved or are still awaiting approval, have already conducted marketing and sales activities. Many real estate buyers, due to a lack of information regarding the project’s status, have established related transactions. This has resulted in potential risks for participants in real estate transactions. Therefore, the development of forward contracts in real estate transactions contributes to mitigating information asymmetry risks, prevents the lack of transparency in real estate transactions, and ensures the rights of property buyers in cases of changes in project ownership - such as division, separation, consolidation, or merger - as well as in cases of project transfer.
In addition, the issues of real estate inventory, the unbalanced development of market segments, and the domination of the market by a small group of investors - particularly in the luxury and resort real estate segments in Viet Nam - have been major problems that need to be addressed. Meanwhile, the demand for mid-range market segments, which cater to the majority of the population - especially in rapidly urbanizing localities - or real estate serving the housing needs of workers in industrial zones, appears not to have received consistent attention from the competent authorities responsible for planning industrial zones in conjunction with residential planning for workers, nor from investors. According to the report analyzing corporate cash flow pressures and policy recommendations at the end of 2023, along with some follow-up directions by the Private Sector Development Research Board (Board IV under the Advisory Council for Administrative Procedure Reform of the Prime Minister), “the average inventory days of real estate enterprises in Q1/2023 reached 5,662 days, with some enterprises having inventory days as high as 54,334 days, meaning that, under current sales conditions, it would take 149 years for enterprises to sell their inventory,” which is a truly alarming signal and is inconsistent with the population’s housing needs. Weak liquidity is one of the critical weaknesses that needs to be addressed in strategies for restoring and enhancing liquidity in Viet Nam’s real estate market. Therefore, the development of forward contracts has a direct impact on improving liquidity and hedging risks in the real estate business. Specifically:
Firstly, forward contracts assist real estate enterprises in two ways: they help identify customers with housing needs while simultaneously seeking potential investors through the execution of transfer contracts (land use rights) or apartment sale contracts at prices agreed upon for the future. This is an effective measure to avoid real estate inventory accumulation, thereby contributing to more efficient exploitation of land value in a market economy and enabling real estate enterprises to proactively plan investment in new projects.
Secondly, for real estate buyers, forward contracts help hedge against risks arising from fluctuations in real estate prices. Unlike other business investment projects, the duration of real estate projects is typically long and subject to the influence of other markets (such as the construction materials market) and the progress of infrastructure planning serving human needs (such as shopping, dining, schools, hospitals, etc.). Therefore, real estate price fluctuations are often difficult to predict, as they depend on market signals and macroeconomic policy changes implemented by the government. By choosing forward contracts, homebuyers can avoid price risks compared to participating in contracts for the sale of real estate formed in the future.
Thirdly, forward contracts establish a new investment channel, thereby contributing to the promotion of liquidity in the real estate market, since forward contracts are transferable securities.
Theory and practice have demonstrated that real estate is an essential and highly important component of an economy. Housing, a common type of real estate, is not only a place of residence but also the largest source of wealth and savings for the majority of households worldwide. To develop a certain area, government authorities must take the lead in planning housing, shopping and dining locations, and employment opportunities. In other words, this is facilitated by infrastructure systems serving human needs. Activities such as retail, schools, tourism, commercial real estate, and residential housing, as well as production facilities, generate the impetus for development. Real estate also creates numerous stable jobs through the construction of new assets and the maintenance of existing ones. However, like other types of markets, the real estate market also faces risks, among which real estate bubbles often become the “trigger” for potential market failures, particularly in related markets - most notably the financial market - because a substantial portion of credit and capital is channeled into real estate.
Real estate business, under the provisions of the current Law on Real Estate Business, “is the investment of capital to carry out activities of construction, purchase, acquisition for sale, transfer; lease, sublease, lease-purchase of real estate; provision of real estate brokerage services; services of real estate trading platforms; real estate consultancy or real estate management with the purpose of profit,” in which activities of investing capital to carry out construction, purchase, acquisition for sale, transfer; lease, sublease, lease-purchase of real estate typically have long durations, linked to the duration of the real estate investment project. The objects that can be brought into real estate business include:
- Existing houses and construction works are houses and construction works that have completed construction and have been put into use.
- Houses and construction works formed in the future are houses and construction works currently under construction and not yet accepted for use.
- Types of land permitted for transfer, lease, or sublease of land use rights, according to the provisions of land law, are allowed for business of land use rights.
- Lease-purchase of houses and construction works is an agreement between the parties, under which the lessee pays the lessor a sum of money in advance and is entitled to use the house or construction work; the remaining amount is calculated as rent; after full payment of the lease-purchase price, the lessee becomes the owner of the house or construction work.
The operation of the real estate market in recent times has revealed numerous shortcomings and limitations, resulting in an unbalanced market structure that does not accurately reflect the value of real estate due to speculative factors. Real estate buyers often face risks related to property prices, and in many cases, project developers fail to adhere to the project schedule, affecting the rights of property buyers. Meanwhile, the real estate business law still contains many inadequacies and limitations. In other words, the legal framework and market practice have not effectively established high-quality real estate as underlying assets, which serves as a prerequisite for the development of forward contracts in the real estate sector.
Firstly, it is necessary to strongly innovate the legislative approach to the Law on Real Estate Business. In other words, this is a “golden” opportunity to ensure the consistency of laws governing real estate transactions. The essence of this solution is to answer the question: “What content must be included in the Law on Real Estate Business?” and to identify unclear points, risks of overlap, or “fragmentation” among related legal fields regarding real estate business, which have been highlighted through practical law enforcement, and to address them more thoroughly. In addition to reviewing to avoid overlapping provisions in the amended Law on Real Estate Business compared to other relevant laws, legislators also need to focus on ensuring the quality of real estate as an important underlying asset to promote derivative products in the real estate sector. Accordingly, the draft Law on Real Estate Business should allow real estate enterprises and property buyers to enter into forward contracts to buy and sell real estate at future prices, alongside the current practice of purchasing housing formed in the future. Allowing the establishment of forward contracts in the real estate sector will help property buyers avoid risks arising from price fluctuations and enhance market liquidity, as analyzed above.
Secondly, measures need to be strengthened to ensure the real estate market develops transparently, especially regarding information about real estate involved in transactions, including real estate formed from investment projects. Accordingly, the amended Law on Real Estate Business should require that transactions of real estate formed in the future must be conducted through real estate trading platforms to enhance transparency and ensure the quality of underlying assets, thereby facilitating the development of derivative products, specifically forward contracts, in the real estate sector.
The requirement that real estate transactions be conducted through real estate trading platforms is a necessary regulation, as it contributes to enhancing the liquidity of real estate, given that real estate transactions still need to be facilitated by real estate brokers, who are responsible for connecting property buyers and sellers.
From a historical perspective in Viet Nam, although regulations on real estate trading platforms did not yet exist, real estate brokerage companies such as the real estate company of ACB Bank (headquartered on Mac Dinh Chi Street, District 1, Ho Chi Minh City, operating from 1993 to 2013) or the real estate trading platform of Saigon – Cho Lon Real Estate Company (RESCO), established in 1997 in District 5, Ho Chi Minh City, contributed to the perception at that time that many people often equated these business models of ACB Bank and RESCO with real estate brokerage companies or real estate business companies. This led to a misunderstanding of the nature of real estate business enterprises, which have stricter establishment conditions compared to companies operating in the real estate service sector.
Real estate trading platforms in Viet Nam were legalized with the enactment of the Law on Real Estate Business 2006 by the National Assembly, which came into effect on January 1, 2007. According to Article 59 of the Law on Real Estate Business 2006, organizations and individuals engaged in real estate business, when selling, transferring, leasing, or lease-purchasing real estate, must conduct transactions through a real estate trading platform. The State encourages organizations and individuals not engaged in real estate business to carry out real estate transactions through real estate trading platforms to ensure transparency and protect the rights of the parties. However, when the Law on Real Estate Business 2006 was replaced by the Law on Real Estate Business 2014, effective from July 1, 2015, real estate of project investors was no longer required to be transacted through real estate trading platforms, as previously stipulated under the 2006 Law. Project investors were granted the discretion to decide whether to sell, lease, or lease-purchase real estate from their projects through real estate trading platforms or not.
In addition, the Law on Real Estate Business 2014 and its implementing documents have standardized the conditions for establishing real estate trading platforms, including that each platform must have a minimum area of 50 m², the transaction location of the platform must be stable for at least 12 months, and the legal representative and the managing director of the platform are primarily responsible for the platform’s operations...
The summary of the implementation of the Law on Real Estate Business shows that “there is a phenomenon of platforms colluding with each other for profit, which distorts the market and does not accurately reflect supply-demand relationships or prices. Therefore, the requirement to conduct real estate transactions through platforms carries the risk of being exploited for monopoly or collusion, affecting market transparency and the rights of parties in real estate business. Platforms are only one of the methods for conducting transactions, so parties should be allowed to choose whether to transact through a platform or not.” This provides the basis for the regulation that real estate transactions may be conducted through real estate trading platforms or outside of them.
However, according to Tran Huynh Thanh Nghi, “at the present time and in the near future, over the next ten years, it is necessary to regulate that real estate of project investors be transacted through real estate trading platforms. This is because it is an effective legal tool to protect small individual buyers in Viet Nam. Requiring public disclosure of the legal status of real estate, together with a specific time limit for such disclosure, will allow buyers to verify on-site whether the real estate they are purchasing is legally secure, thereby limiting the common practice observed in recent times where project investors sell real estate using spectacular project renderings on drawings, while in reality the actual assets do not exist as depicted on the drawings.
It can be affirmed that choosing to mandate that real estate transactions be conducted through real estate trading platforms is consistent with the actual situation in the Viet Nam real estate market, given that the legal knowledge of real estate among the majority of Vietnamese people is not as advanced as in other developed economies worldwide.” We concur with this view, because real estate transactions conducted directly by project investors, due to limitations in transaction information, even if regulations on disclosure obligations and pre-transaction information provision are complete and strict, cannot fully mitigate risks for real estate buyers.
Therefore, the requirement that real estate formed in the future by project investors must be transacted through real estate trading platforms is a necessary condition for the development of derivative securities in the real estate sector, thereby contributing to enhancing transparency and safety for buyers of real estate formed in the future.
Thirdly, the Ministry of Natural Resources and Environment, in coordination with the Ministry of Finance, should develop implementing guidelines to determine the standards and conditions of real estate as the underlying asset to establish the value of derivative securities in the form of forwards. This measure needs to be implemented promptly, as the value of a forward contract depends on the determination of the underlying asset’s value.
In the real estate sector, particularly for project real estate with highly volatile prices - especially from the point when a project is approved by competent state authorities or according to the progress of project completion related to infrastructure, project completion time, and the delivery of real estate according to the schedule agreed in the contract - when entering into a forward contract, real estate companies and buyers must anticipate the potential price fluctuations of real estate to make appropriate choices and avoid future risks. When the underlying asset is real estate for established forward contracts and can be traded on the derivatives exchange, it not only enhances the credibility of the real estate company but also allows buyers to profit from the price differences of the listed derivative securities.
A forward contract is a type of derivative security whose value depends on the value or profitability of an asset. In the real estate sector, the development of derivative securities, including forward contracts, still faces many difficulties due to numerous inadequacies and limitations in the Vietnamese real estate market. The legal regulations related to determining the value of real estate as a basis for pricing derivative securities remain unclear, particularly regarding real estate transactions directly arising between project owners and buyers (for real estate formed in the future); real estate trading platforms have not fully performed their intermediary role or enhanced transparency; the real estate lease-purchase market has not yet developed; coupled with the issue of large inventory, these are obstacles to the development of forward contracts in the real estate sector. To establish derivative securities in the real estate sector, it is necessary to promptly complete the institutional framework for the operation of the real estate market, among which the effective control of real estate transactions to determine the value of real estate as the underlying asset of derivative securities is an urgent issue that must be addressed.
REFERENCES
1. Law on Securities 2019.
2. Law on Real Estate Business 2014.
3. Decision No. 366/QD-TTg dated March 11, 2014 of the Prime Minister on Approving the Scheme for the Establishment and Development of the Derivatives Securities Market in Vietnam.
4. Vo Thi Phuong (2016). “Development of the Derivatives Securities Market: Experience from Asian Countries.” Accessed June 2, 2016 at: https://tapchitaichinh.vn/phat-trien-thi-truong-chung-khoan-phai-sinh-kinh-nghiem-tu-cac-nuoc-chau-a.html.
5. Nguyen Son (2018). “Derivative Securities: A Step Toward Completing the Structure of Vietnam’s Securities Market.” Accessed February 22, 2018 at: https://tapchitaichinh.vn/chung-khoan--sinh-buoc-hoan-thien-trong-cau-truc-thi-truong-chung-khoan-viet-nam.html.
6. M.P. (2023). “Vietnam Derivatives Securities Market Shows Stable Growth.” Accessed August 15, 2023 at: https://dangcongsan.vn/tai-chinh-va-chung-khoan/thi-truong-chung-khoan-phai-sinh-viet-nam-tang-truong-on-dinh-644147.html.
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