Change to Real Estate Law begets challenges
Change to Real Estate Law begets challenges
It has been more than a month since Vietnam’s Law on Real Estate Business came into effect. Investors and their legal advisers had been eagerly anticipating this law, as it sees Vietnam move towards a more transparent legal framework for the real estate sector.
However, while there are positive changes, several challenges lie ahead as certain provisions of the law remain ambiguous, and discrimination between local investors and foreign investors is still an issue. This article highlights some of key challenges that investors and their advisers should consider prior to investing in and conducting their real estate projects in Vietnam.
Foreign investor and local investor discrimination
There remains a distinction in investment treatment afforded to foreign investors and local investors in the real estate business. For example:
For off-plan properties (sites that have yet to be developed), the Law on Real Estate Business (LOREB) prescribes that local developers are entitled to collect up to 70 per cent of the property value from the purchasers prior to hand-over. However, for foreign invested developers, this amount is limited to 50 per cent of the property value.
Furthermore, foreign investors may only engage in real estate trading in two forms: (i) construction of houses or building on state-leased or state-allocated land for the purpose of sale, lease, or lease-purchase (as the case may be) and (ii) lease of buildings for sublease. However, foreign investors are not permitted to purchase buildings for the real estate business, but may only utilise them as offices or business facilities.
Legal capital for real estate business
Previously, the legal capital for the real estate business was VND6 billion ($279,069). Under the LOREB, at least VND20 billion ($930,232) is required, which applies to companies conducting real estate services (even if it will not be involved in trading).
However, under the draft decree guiding the LOREB, the required legal capital is set at VND20-50 billion ($930,232 - $2.32 million). Companies that conduct real estate services, that do not include trading, and individual brokers are not required to meet this capital requirement.
While the draft decree provides breathing room for investors intending to enter into this sector, at present, it appears that only investors with significant financial capacity are able to enter the market as a real estate business. Individual brokerages and SMEs may be driven out by this steep capital demand.
Conditions for capital mobilisation for residential housing projects
Under the former law, developers were permitted to enter into capital contribution agreements upon approval of the residential housing project, the commencement of the works, and the notification of the Department of Construction. At this stage of development, the contributors had the right to purchase houses.
The current LOREB does not provide clear provisions on the conditions in which developers may mobilise capital for housing projects. Instead, it merely provides that apartments and mixed-use buildings may be put into the market after obtaining the certificate of completion for the building’s foundation.
The draft decree attempts to rectify this ambiguity, by providing that developers may enter into capital contribution agreements after the investment project has been approved, the site clearance is completed, the minutes of handover for the project site has been provided, and the notification to the Department of Construction has been delivered. However, note that the contributors of capital are prohibited from receiving houses from the contribution.
The draft decree is more welcoming compared to the LOREB (which will ultimately take precedence), in that developers may immediately mobilise capital after the completion of site clearance. However, the provisions apply pressure on investors by limiting capital mobilisation and the right of the contributors.
Guarantee requirements
As of 1 July 2015, developers now require a bank guarantee prior to selling or leasing off-plan residential houses to secure their financial obligations to their clients in the event that the developers fail to hand over the property as scheduled. However, the amount to be guaranteed has not been clarified.
The LOREB also requires the guarantee be terminated upon the property being handed over to the purchaser. However, under Circular 07/2015/TT-NHNN governing bank guarantees, the State Bank of Vietnam requires the guarantee to be effective for at least 30 days after property handover. This has led to an overlap and conflict in the law, confusing both developers and banks on the application of the real estate guarantee.
Real estate valuation services
Under the LOREB, real estate valuation services are no longer categorised as “real estate services” and are now governed by the Law on Price. The Law on Price sets forth certain conditions required for these services, which are considerably stricter than those of the LOREB.
The LOREB provides transitional provisions to individual appraisers, but not to companies carrying out real estate valuation services prior to the LOREB’s effective date. Therefore, there should be a transitional period for such companies to meet the conditions required by this law.
It is worth noting that under the Law on Price, companies whose “corporate” shareholders (whether local or foreign) hold more than 35 per cent of its charter capital will not be permitted to provide valuation services. Such a provision restricts the companies – even the foreign invested companies – to conduct real estate valuation services in Vietnam.
It appears that the LOREB puts wind in the sails of the real estate market; however, the law still contains certain unclear provisions that may adversely impact investors, thus narrowing foreign cash inflow into Vietnam. We expect that the Vietnamese Government will promptly issue the appropriate guidance and revisions to revive the real estate market.
