The real estate market across the country, and particularly in Ho Chi Minh City, faces significant pressure due to a series of regulatory policies from the government. The impact of the 2003 Land Law, Decree 181/CP, and other subordinate legal documents requires real estate businesses to possess substantial capital and demonstrate flexibility in business operations. Additionally, the government's management of this market remains inadequate—on one hand, there are overly complex regulations, while on the other, the government struggles to control and regulate underground transactions.
In basic construction activities, project execution timelines are often extended, and acceptance and handover are carried out in stages. In Vietnam, the disbursement of funds tends to be slow, and the process of completing construction documentation and reaching consensus on final settlement approval between investors and contractors typically takes considerable time. As a result, this has significantly impacted the financial status of construction companies, particularly regarding receivables, payables, and operating cash flow.
Furthermore, the prices of input factors in the construction sector, especially steel, are highly volatile. Currently, steel prices are at a high level and are expected to rise further, affecting company costs and increasing the cost of goods sold. However, the economy is experiencing strong growth, with rising demand for housing, office leasing, and infrastructure investment. Moreover, the company has established a solid reputation in the industry, gained experience in bidding, and maintained a loyal customer base. Therefore, achieving the planned revenue and profit targets remains feasible.
The value chain of the Construction industry is composed of three main elements:
- Input factors: Construction materials (steel, cement, bricks, stone, etc.), labor, and construction machinery.
- Construction process: Includes stages such as design, bidding, foundation work, structural construction, and finishing.
- Construction market: Comprises three main markets: residential, industrial, and infrastructure.
a. Input factors
The cost of a typical construction project generally includes 60-70% material costs, 10-20% labor costs, and 10-20% machinery costs. Among the materials, steel accounts for 60-70%, cement makes up 10-15%, and HSE costs constitute approximately 3% of the construction material structure.
- Steel: Due to the characteristics of the industry, domestic steel prices are heavily influenced by global prices. According to the latest forecasts from reputable organizations, construction steel prices are expected to decrease in the near future as input materials such as iron ore, HRC, and scrap steel have recently seen price reductions. Additionally, domestic competition pressure remains significant, coupled with risks from imported steel. Therefore, the steel industry is projected to face considerable challenges in the coming years.
- Cement: In the near future, the demand for cement is expected to be quite high due to the substantial implementation of infrastructure and real estate projects. However, key input costs such as coal and fuel prices are showing a downward trend, while the imbalance between supply and demand persists. As a result, cement prices are predicted to remain stable in the upcoming period.
- Labor: Currently, the construction sector employs approximately 3.2 million workers, making it the fourth-largest sector in terms of labor force nationwide. According to the Vietnam Association of Construction Contractors (VACC), about 80% of construction workers are employed on a seasonal basis, lacking formal training, expertise, and professionalism required on job sites. Compared to neighboring countries in the region, Vietnam's labor productivity is only half the average level of Southeast Asia. Furthermore, when compared to other industries, the construction sector ranks 16th in terms of labor productivity, leading to lower income levels for workers in this field compared to many other economic sectors and regional counterparts.
- Labor costs: According to the Landong Seah organization, labor costs in Vietnam are expected to rise significantly in the near future, as the current labor prices in the country are relatively low compared to other nations worldwide. Labor costs will be heavily influenced by the annual increase in the basic salary. During the period from 2013 to 2015, the basic salary in Vietnam rose by an average of 14% per year, and this growth rate is expected to persist in the coming years.
- Equipment and Machinery: Each year, Vietnam imports about 15,000 construction machines, of which 95% are used machines, with an average import turnover ranging from 300 to 400 million USD. With the advantage of being priced at only 25% of new machines and being suitable for construction conditions in Vietnam, many small and medium-sized contractors prefer to use these used construction machines. However, using old machines also has its drawbacks, such as complicated procedures, frequent breakdowns, and lower work efficiency compared to new equipment. In addition, Circular 20, which came into effect in September 2014, introduced stricter regulations on the quality of imported used machines, which may have a significant impact on this market.
b. Construction process factors
Completing construction is the final stage that determines the aesthetic quality and convenience of the structure. Compared to other tasks in construction, finishing work does not focus heavily on structural strength but demands high standards of aesthetics. The finishing phase includes various steps such as wall plastering, floor leveling, tile installation, wall painting, electrical systems, water supply and drainage, telephone systems, and lightning protection.
- For high-rise buildings or office towers, construction is typically divided into two main parts: the Construction section and the Mechanical & Electrical (commonly abbreviated as M&E) section. The M&E section can account for 40-60% of the total project volume. M&E is generally divided into four main categories: (1) Ventilation and air conditioning systems, (2) Water supply, drainage, and sanitary equipment, (3) Electrical systems, and (4) Fire alarm and firefighting systems. Among these, the electrical system comprises approximately 40-60% of the M&E volume, depending on the project, and in some cases, it can reach up to 70-80%.
- Interior design involves finding creative design solutions for indoor spaces. This is also a crucial stage in the finishing process, as a beautiful house, office, or café not only requires an attractive exterior but also a harmonious interior space that provides comfort for occupants. Additionally, interior design can contribute to enhancing the value of the construction project.
- Construction Costs: When considering the various stages of project implementation and depending on the type of structure, construction costs typically account for the largest portion. Among these, the foundation accounts for 20-30%, the rough construction phase accounts for 20-40%, and the finishing phase accounts for 40-60%. In terms of input factors, building materials constitute 60-70% of the total cost, followed by labor (10-20%) and construction machinery (10-20%). Within the structure of building materials, steel takes up the largest share, ranging from 60-70%.
c. Market Factors
The residential construction market is significantly influenced by the housing and real estate sectors. Five key factors affecting this market include: (1) demographics (age structure, income levels, population growth rate, and urbanization rate), (2) interest rates, (3) economic health (GDP growth, unemployment rate, inflation, and consumer confidence), (4) government support policies, and (5) FDI capital sources.
According to the World Urbanization Prospects report, our country has an average population growth rate of 1.2–1.5% per year and an average urbanization rate of 3.4% per year. It is estimated that by 2030, our country will have approximately 105.45 million people, with the urban population accounting for 44.2%, equivalent to 46.6 million people—an increase of 48% compared to the present. In 2014, the residential floor area increased by 92 million square meters compared to 2013, with an average floor area of 20.6 square meters per person. The average growth rate of residential floor area is also estimated at 3–5% per year. According to estimates from the "National Urban Development Program," by 2020, the average residential floor area in urban areas will reach 29 square meters per person, representing a 48% increase compared to now. Therefore, the potential for development in the residential construction sector remains very high in the coming years.
- Loan and savings interest rates have dropped to 8% and 6%, respectively, marking the lowest levels in recent years. In addition to the direct impact of lower interest rates on home loans, which stimulates the recovery of the real estate market, this move is also expected by experts to redirect social capital flows into other investment channels, including the real estate market. However, the reduction in interest rates may not immediately affect the real estate market, as it primarily influences short-term capital sources at present. Banks continue to use a significant portion of medium- and long-term capital to finance medium- and long-term loans, and real estate credit is predominantly medium- and long-term as well. Nonetheless, in the long run, the real estate market is expected to benefit from the interest rate reduction.
- In 2014, GDP grew by 5.98%, driven by strong growth in the industrial and construction sectors. According to evaluations, Vietnam's economy in 2015 is expected to recover at a higher rate, potentially achieving a growth rate of 6% - 6.2% per year.
- Alongside the improving economic situation and low interest rates, numerous favorable regulations and policies for the real estate market have been introduced recently. Notable examples include the amended Housing Law, which allows individuals and foreign businesses to own residential properties in Vietnam; Circular 32, which promotes the disbursement of the 30,000 billion VND package; Circular 36, which reduces the risk coefficient for real estate loans from 250% to 150%; and the Real Estate Business Law, which imposes stricter conditions on real estate business operations to stabilize supply.
d. Market outlook factors for the output of construction industry groups
e. Regarding Competition
The construction and interior decoration industry has significant growth potential, attracting an increasing number of businesses to this field. With the trend of market liberalization, the Company's competitors are not only domestic enterprises but also financially strong foreign companies.
f. Regarding Integration
Vietnam's official accession to the WTO has long-term implications for the Company's business activities. The more open policies toward foreign investors during integration create favorable conditions for them to enter the Vietnamese market and become direct competitors to domestic enterprises, including Vietnam-Japan Company.
On the other hand, the Company is also presented with a major opportunity due to the strong growth in demand for housing and office spaces during integration. Additionally, there are opportunities for collaboration with foreign partners to execute large-scale, internationally significant projects, aiming to enhance construction, interior decoration skills, management capabilities, and expand production and business activities to achieve the highest economic efficiency for the Company.
Faced with these integration opportunities and challenges, HOANG LIEN SON CONSTRUCTION COMPANY LIMITED has thoroughly prepared in terms of human resources, management capacity, operational strategies, and has gradually strengthened its financial capacity to proactively seize opportunities and adapt to the new situation.
