Factors Affecting Financial Performance of a Project in Times of Economic Crisis: A Case Study of Commercial and Office Center Projects in Ho Chi Minh City

Since Vietnam joined the WTO (1/2007), it fully entered international integration. According to the foreign investment inflow to Vietnam, a lot of multinational enterprises were established and opened the prospects of office and retail area for lease. Many businesses invested in real estate in the past. Thus, a supply of leasable sector has increased sharply for two years and became saturated. Actually, it is too difficult when Vietnam is influenced by crisis of the world economy which leads to a lower growth of domestic economy, high inflation, and tight monetary policy. Business reduces the operation scale, the investors limit expansion, and demand for office and retail area reduces.

Besides, according to the investment researches of consulting firms, the potential retail in Vietnam is attracted by crowded and young population, who is dynamic, open, and potential for consumption market.

Although Vietnam population is approximately 90 million, but there are only 638 supermarkets, 120 commercial centres and more than 2,000 convenient stores. This number does not meet the needs of people. Forecast, from now to 2014, the retail sales in Vietnam will be increased 23% per year. Therefore, the potential of modern commercial business development is huge.

Consequently, in order to take the potential advantages of the Vietnam real estate as well as to help the market to overcome gradually difficulties during the economic downturn, it is necessary to consider the factors affecting the investment efficiently, especially the project’s financial performance, by which to set up the preventive plan. Develop projects, which strengthen the real estate market more stable and developing.

Ms. Hoang Quynh Anh made a case study which 2 main objectives were to: (i) research the factors that affect to the financial efficiency of the commercial real estate project commercial in the recession economy period; and (ii) give measures to minimize the effect of factors on financial efficiency of the project.

Conclusion

Each factor has a negative impact on the efficiency of investment project. According to the detailed solutions, the investors need to implement the project and in mid-2013 by using the following reasons:

- The positive signal from the government’s measures to restrain inflation, contributed to the project’s financial picture brighter, inflation falls down under 10%, the interest rate remains at 9%, economy grows slowly but it has progressed through each quarter;

-   Vietnam is a market with the great potential advantages of young population and high flexibility, rapid urbanization. Mostly investors and investment advisory companies have said that if the difficulties of the real estate market are temporary, it can be completely recovered when the economy has positive changes.

- Real estate is a high profitable sector.

Besides, the Vietnam real estate market is facing to the below challenges:

- The impact of the world economic crisis and Vietnam economic crisis are still prolong;

- The government’s solution has not brought the clear results yet;

- The competition between investors about reducing rental due to the rise of supply source of leasing area.

When the economic difficulties led to the crisis, real estate investment projects have been influenced heavily and may fail completely. In terms of the financial performance of the project, for instance, the project is not profitable for investors. The factors affect to the financial performance of the project during the period of economic crisis including exchange rate; inflation; interest rate; construction period; total capital; capital structure; occupancy rate; and rental.  When the economy is difficult, these factors are not guaranteed to initial expected value and change in bad direction, affect to the entire cash flow, financial indexes change negatively. To solve this problem, proposed solution is based on the relationship between factors and project cash flow, throughout the theories of basic financial calculation, determining the degree of change of financial performance when it has been influenced by these factors which have the solutions for each factor.

However, there are some limitations in this study. Firstly, the study does not consider the influence of some other type of real estate such as: apartments, townhouses, hotels, etc. Secondly, calculation depending on the accuracy of input data does not anticipate all risks.

Recommendations

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For the purpose of preventing harm to the financial performance of the project when the economy is difficult, recommendations are as follows:

- Surveying market and assessing demands to have the investment orientation proper in the feasibility study phase of the project.

- Completing marketing at the beginning of project, saving marketing cost by selecting the form of effective advertising such as: internet, attend exhibitions, contacting customer, attractive commission order.

- Increasing number of customer by establishing the principle contract, using memorandum of commitment after the project completes;

- Having preferential policies on rents, having convenient administrative procedures, lasting the rental period to pre-order customers, committing about quality after selling. 

- Researching the product and service properties of the same type on the market, researching demands, purchasing power and taste of customers to offer the reasonable price, adjusting price according to the volatility of the market.

- Having  financial plan, mobilization channel finance flexibility, reducing the dependence on bank;

- Taking advantage of supporting to the State policies on interest rate, tax… when the economy is difficult;

- Completing the project on the schedule for project operate quickly, early generating revenue;   

- Ensuring quality construction, do not increase cost and time due to repair of the damage, reducing maintenance cost when the project puts into operation;

- In the operation phase, it is necessary to establish management organization compact, transparency in administration, training institutions for the necessary technical personnel, saving cost.

According to the above solutions, developers should take all measures, since these solutions have been affecting to each stage of the project, and the final result is the success of the project. However, developers need to pay special attention to two factors below:

- Surveying market and assessing needs of market in the feasibility study phase of the project in order to direct the appropriate investment. This is crucial element lead to the success of the project. Therefore, the survey data must be accurate and updated, information supply must be reliable.

- Developers need to make effective financial plan to backup all risks and to reduce dependence on bank. This will help the project escapes from the difficult circumstances, because finance is an important factor for investment decisions.

 

Paying attention to two above factors, along with research methods, professional calculation will give the project approach to success.

 

For further studies the following should be analyzed:

- Making the financial plans to ensure the safety of the project, increasing the diverse capital such as issue of shares, taking advantage of customer deposits, bank debt agreement…

- Extending the study in some types of real estate such as apartment, hotel, downtown house, land…

Continue studying the influence of the factors of inflation and exchange rates which these indicators affect to the entire cash flow of the project.

Her thesis abstract is copied and posted below:

Abstract

Controlling the financial performance of a project as the economy fell to recession is very difficult, how a project can achieve profitability as planned? This is really challenging and time-consuming for the financial management of the project, since it involves to a wide range of issues within the project and the objective problems of social. To answer this question, it is necessary to determine what factors affect to the project finance in the circumstance of the economic stagnation. This final report focuses on review how the financial performance of a project changes when the input data changes, thereby determining the factors affect the financial performance. Through a case study is a construction project of commercial and office centre in HoChiMinh City, according to the basic financial calculation theories, the report points out the factors that affect financial performance of the project when the economy is difficult. Since then, giving some measures to improve the situation, maintain and develop the project.