M&As stymied by legal grey areas
M&As stymied by legal grey areas
Real estate is one of the most difficult sectors for mergers and acquisitions due to a weak legal system, opaque market, complicated procedures and differences in price evaluations.
Several merger and acquisition (M&A) deals have faltered at the last minute due to evident weaknesses in the legal framework due to overlapping and contradictory laws.
Su Ngoc Khuong, associate director of investment department under Savills Vietnam said that despite the development of Vietnam’s legal framework and efforts to better clarify the country’s laws, the country still remained complicated, lacking guidance on execution of certain commitments regarding the activities of foreign enterprises.
Khuong said the lengthy process which involves multiple approvals in terms of licensing for foreign investors was an obvious barrier to M&A deals.
“Red tape can affect returns on their M&A deals. Consequently, share purchases are far more popular than buying fixed assets,’ he said.
Meanwhile Stephen Wyatt, country director of JLL Vietnam said that even those foreign investors in Vietnam with strong track records and property development experience in the other markets, experienced and professional in-house teams and available funds, are still discouraged by the local market due to limited investment grade assets, a clean and clear legal title and ownership structure, good quality local partners, land use right certificates and compensation issues and massively over-rated land valuations.
Thuan Nguyen, chairman & CEO of StoxPlus said that foreign investors however were beginning to see better value and an improved legal framework for foreign ownership.
However, many local owners have not fulfilled their basic land tax obligations, which mean they are unable to obtain a land use right certificate. This makes it impossible for them to transfer property to foreign investors. Many deals therefore require more complications than necessary and associated increases in legal and professional fees.
The lack of land use certificates and other legal and tax entanglements remains a problem, while retail outlets, shopping centres and hotels suffer from low visitor flows and retail leasing making them unattractive. Thuan argued that “a transfer to a foreign player wouldn’t make a fundamental difference in this case”.
According to the Foreign Investment Agency under the Ministry of Planning and Investment, real estate ranked second in terms of overall FDI attraction in Vietnam in the first seven months of 2014, demonstrating that international investors continue to show interest in Vietnam. A number of big names from Japan, Korea and Singapore continue to invest in Vietnam including Lotte (Korea), Mapletree (Singapore), Aeon (Japan), Toyoko Inn Group (Japan), Keppel Land (Singapore).
Korea, Japan and Singapore are now the leading foreign investors in Vietnam and in theory should have first mover advantage. They are expected to increase their investment and lead M&A activities in real estate market in Vietnam in the coming period. JLL’s Wyatt said that considering the soft market conditions, he would expect “considerably more activity than we are currently witnessing, but the lack of deals could be attributed to the threadbare legislation around the sale of assets tied to non-performing loans.”
“If new bankruptcy legislation is enforced there is no doubt the property market shall see a dramatic increase in activity and this will unlock the stagnant market conditions,’ he said.
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