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Vietnam Real Estate Market – which risk factors should not be underestimated
Vietnam’s real estate market is witnessing almost a full recovery. As an emerging and developing market, the risk factors are still unfolding but generally profits are grossly overestimated when investing in the real estate market in Vietnam. This article highlights the most globally recognised problematic factors affecting investment decisions in Vietnam’s real estate market.
In the 2000s, Vietnam’s growth rate averaged 6.4 percent per year and began to slow following the global financial and economic crisis. GDP had slightly recovered and had reached up to 6.3 percent during the first half of 2015. Vietnam’s GDP is expected to be 6.6 percent in 2016.
The Socio-Economic Development Strategy (‘SEDS’) 2011–2020 places structural reforms on the list of the most primary work to be done, which covers environmental sustainability, social equity and emerging issues of macroeconomic stability. In addition to focusing on the following areas: (1) promoting human resources/skills development; (2) improving market institutions; and (3) infrastructure development, a recent draft of the Socio-Economic Development Plan(‘SEDP’) 2016–2020 recognises ‘the challenges and opportunities associated with further deepening of economic integration since almost all tariff lines will be zero by 2020 and emphasizes the proactive integration and macroeconomic stability as other important objectives of the next five years.’
As Vietnam is ranked second in terms of foreign direct investment (‘FDI’) into Asia, an ever-increasing FDI is expected to accrue in most areas, especially textiles, construction, banking, high technology and real estate. In the First Quarter of 2016, the total of newly registered investment capital reached a peak of USD4,026 billion, equivalent to an increase of 119,1 percent compared to the First Quarter of 2015. The real estate sector is positioned as number two, the total newly registered investment capital is worth USD239,78 million, accounting for 6 percent of the total newly registered investment capital. However, investors have persevered with ongoing difficulties and challenges. According to the Global Competitiveness Report 2015–2016, the most problematic factors in respect of doing business in Vietnam (a developing economy) are as follows: policy instability; government bureaucracy; corruption; and access to finance. These problematic factors pose a likely risky for foreign investors who are investing in the real estate sector in Vietnam.
Global Financial Crisis
The CIEM Report shows that the Global Financial Crisis adversely affected Vietnam in a variety of economic sectors. Taking the real estate sector as an example, in 2008 the real estate market was frozen, the price of real estate decreased by 40 percent, real estate enterprises could not sell their products, incurring a high interest rate because of the tightening of monetary policies. According to the Vietnam Real Estate Association (‘VNREA’), before the Crisis in 2006–2007, house prices were at sky-high levels of up to US$5,000 per m2 for central city flats, but, these underwent a price reduction of 40 percent. In addition, many ongoing projects were forced to come to a halt. However, since 2014 the real estate market has recovered strongly. The year 2016 is likely to represent a breakthrough recovery of the real estate market. Vietnam (together with Indonesia and the Philippines), is one of the fastest growing countries in the world and is outperforming other countries and is on the way to further expansion. For instance, retail leasing in 2015 was driven by expansion of local and foreign brands in food and beverage, fashion and supermarkets. Retail sales are indicative of double digit growth. In general, efficient measures have been taken to cope with global crisis by deploying micro-economic policies: imposing stricter banking regulations and government bail outs have been conducted to rescue the real estate market. New rules were brought in during 2015 which opened up property markets to foreign buyers.
As an emerging market, the health of the world economy is likely to have a direct impact on the Vietnam market. Therefore, in forming a joint venture company, global crisis should be considered event of defaults or changed circumstances in the joint venture agreement.
According to the Global Competitiveness Report 2015–2016, the general competitiveness index of Vietnam has improved (it moved up from 68 to 56) compared to the report of 2014–2015. Nonetheless, policy instability is still ranked as the second most problematic factor for doing business in Vietnam. Investing in real estate projects requires a lot of capital and a well-prepared and advanced investment plan, which is mainly based on long-term and stable government policies. Issuing policies that have not been considered thoroughly might lead to confusion and mistrust of project developers.
The issue is that, in funding a project, project developers need to obtain a mortgage over their project from a bank. However, notary offices have refused to notarize mortgage agreements entered into between banks and project developers (for residential housing projects) due to a lack of detailed guidance from the related government bodies.
Since March 2016, the State Bank of Vietnam (‘SBV’) has sought public opinions on a new draft to amend and supplement Circular No 36/2014/TT-NHNN (‘Draft Amended Circular 36’) pursuant to which Draft Amended Circular 36 is intended to reduce the maximum rate for short-term loans to medium-term and long-term loans from 60 percent to 40 percent and classify real property into a property group which indicates a risk factor of 250 percent instead of 150 percent. This Draft Amended Circular 36 has attracted attention from customers, real estate companies, and credit organisations. The Ho Chi Minh City Real Estate Association of (‘HOREA’) has said that the real estate market of Vietnam mainly depends on bank loan and deposits from customers. Therefore, if the Draft Amended Circular 36 should be made into law, the real estate market might be negatively affected. Nonetheless, the SBV has confirmed that Draft Amended Circular 36 would not be able to reduce credits accrued to the real estate market. In the eyes of the public, contrasting point of views on the impact of Draft Amended Circular 36 is far from over. Draft Amended Circular 36 is still in the consultation process before it is officially adopted by the SBV. On 27 May 2016, the Draft Amended Circular was made into law (namely Circular 06/2016/TT-NHNN), which has received positive responses from the market and credit organizations by applying less restrictive provisions as set out in the Draft Amended Circular.
Mr Alex Crane, General Director of Cushman & Wakefield Vietnam has said that in order for the real estate market to develop firmly, policies must be consistent and stable and adhere to global standards. Mr Vo Sy Nhan, General Director of Gaw NP Capital, has said that it is his opinion that policies related to every development stage of the real estate market must be rigidly assured so as not to cause significant shock, other than allowing the market to be absorbed gradually. During the Prime Minister’s talk on 29 April 2016 in Ho Chi Minh City, the HOREA suggested shifting the passing of Draft Amended Circular 36 to 2017.
It is advisable that making short-term investments can mitigate the risk of policy instability. Furthermore, since the laws of Vietnam may not cover or predict actual situations in life, project developers should pay close attention to market situations which might lead the government to change related policies. In addition, while drafting up sale and purchase agreements or joint venture agreements, changes in polices/law could be narrowly defined as a force majeure event.
As the second most problematic factor is bureaucracy which is regarded as the contributing factor to the diminishing competitiveness of Vietnam. According to Cushman & Wakefield, the degree of bureaucracy is a lot poorer (two points out of five points). It may take the form of inconsistencies of the legal framework and non-transparent administrative process.
For example, land pricing usually causes projects to fail because the legal framework on land pricing is not clear, which has brought about confusion where applicable. Project developers are unable to pre-estimate land pricing when making investment decisions in Vietnam. In general, land prices are determined on the basis of market prices. In fact, it is a struggle to understand the methodologies used to measure land pricing and to go through the multiple steps taken by the authorities. In addition, the authorities reserve the right to re-determine the prices when the calculated price is different from the land use right assignment prices in normal market conditions. It is imperative that determination of land prices be conducted transparently and consistently in a timely manner.
Foreign buyers are allowed to enter the market but the law lacks implementing provisions. According to Article 159.2(b) of the Law on Residential Housing (‘LRH’), foreign individuals and organisations are only prohibited from purchasing houses in national defence and security areas. To date, there has been no further guidance on how national defence and security areas have been defined.
The regulations for investment, planning, project approval and land-related procedures on real estate investment projects are complicated and time consuming. In the case of real estate projects in which States allocate or lease out land without public auction or tendering, the foreign investor is required to convert the land use purpose and they must obtain an in-principle investment decision before obtaining the investment registration certificate. In fact, the process of obtaining the in-principle investment decision is not as straightforward as expected due to involvement of many ministries and a lack of sufficient understanding and experience in dealing with property regulations.
The law-making process should also be more efficient and timely to cope with real life situations without having recourse to interpretations of administrative bodies. Lack of workable provisions of law creates more social costs and mistrust for investors.
Since there is a close connection between bureaucracy and corruption, project developers must understand the practice and mitigate those risks the best way possible by 1i) involving the local partner in dealing with these difficulties; (2) seeking local counsel’s advice before taking action; and (3) counting on business forums (VNREA, HOREA, Vietnam Business Forum etc) to follow up and raise concerns.
According to Transparency International, Vietnam is positioned in the ranking of ‘highly corrupt’. More specifically, corruption in land management became a phenomenon and part of the customs in Vietnam. According to the Land Management Report corruption takes place in the whole process from land acquisition and land allocation by project developers.
During the process of land-use/urban plans being formulated, revised and approved by the land department for commercial plans, investors may have to pay state officials a share of the rents/profit obtained by increasing land value through conversion to other purposes. The unequal access to information on land-use planning among investors may lead to illegal payments by investors to officials in charge of land use/urban planning in exchange for information privileges.
Regulatory actions should be taken to mitigate corruption practices by making administrative formalities and processes as transparent as possible; enhancing anti-money laundering regulations and foreign exchange control; applying foreign corrupt practice acts and anti-corruption practices which are recognised and recommended globally.
In the meantime, project developers must understand the local practices and mitigate those risks the best way possible by investing in clean raw land owned by local partners via M&A activities; involving the local partner in dealing with these difficulties; seeking local counsel’s advice before taking action; and counting on business forums to follow up and raise concerns.
Money policy/access to finance
Access to finance is considered one of the most problematic factors for doing business in Vietnam. In other words, Vietnam has limited channels for raising capital, especially in the real estate market. Most sources of capital and funding of real estate projects comes from banks and customers’ deposits. Other fund-raising channels such as real estate investment funds, securitization.., etc. do not exist. Recently, as discussed above, the SBV has tended to tighten the lending regulation of banks by issuing the Draft Amended Circular 36 to seek public opinion. Any stricter lending regulations imposed on banks is likely to affect the health of the real estate market. On the other hand, interest rates are expected to rise in 2016 which may prevent the real estate market from fully recovering as it has been doing since 2008. In February 2016, the savings rate was increased up to 8 percent/year applicable to a 12-month period. It is therefore very risky for the real estate market to mainly depend on such a source of capital.
Under Articles 48.2 and 74.2 of the Law on Enterprise 2014, investors are required to contribute capital within 90 days from the date of issuance of the enterprise registration certificate, regardless of the fact that the implementation of the project may be conducted beyond this fixed period of time. In certain circumstances, such a high amount of capital contributed may not be needed at the beginning of the project, for instance in large scale projects, such as township developments and infrastructure projects. Thus, project developers must tailor a source of funding which helps to strike a balance between capital contribution and the funding needed to operate the project.
In the context of tax management, real estate enterprises are faced with inconsistencies and unfairness. In general, all types of enterprises are allowed accounting offsetting to determine profits and corporate tax obligations except for real estate enterprises. In other words, real estate enterprises must apply a separate offsetting system. For instance, an enterprise entitled to profits generated from other business sectors can offset losses in its real estate business. Conversely, it is not allowed to use profits generated from its real estate business to offset losses in other business sectors.
Even though access to finance is problematic in Vietnam, a positive sign can be seen. As the 30VND trillion bail-out was absorbed, new bail-out packages have been taken into account to keep the real estate market on track. Project developers need to diversify the source of capital available. For instance, investing in social residential housing can gain more incentives. In the transaction with customers, it is advisable to insert a provision providing that in case the banking regulations change and banks are unable to lend money to the customer, the project developer may have to continue to provide a loan to the customer and become a secured creditor.
Given the fact that local partners have easier access to finance, the selection of a local partner for participation in a joint venture can serve to mitigate many financial risks.
Oil prices have gone down, almost reaching their lowest since the peak of 2009. As a result of failure to reach agreement in Doha on 17 April 2016, the world’s oil industry has continued to be in crisis. Vietnam is an oil exporting country which accounts for 2 percent of GPD. In calculating the Consumer Price Index (‘CPI’), the price of oil is one of the fundamental factors, thereby making oil prices a contributing factor in the health of economy of Vietnam. Recently, to facilitate a better investment environment and resolve the source of crude oil processed in Vietnam by foreign-invested oil companies, the State has allowed a foreign invested-company to distribute petroleum across the country. Once oil prices go up, primary products for basic needs eventually are affected. Project developers should pay attention to the fluctuation of oil prices in valuing/assessing construction materials in construction contracts with contractors since projects take years to complete. Furthermore, it is advisable that fluctuation of oil prices can be an indicator affecting CPI used to amend/modify the rent in office lease agreements.
As an ‘infant industry’, the Vietnam real estate market remains highly competitive among multinational institutional investors with a high return on investment. The level of these risk factors are not always predictable. It is therefore best to enter the market with a deep knowledge about the practices of the local market and an advance exit strategy. However, with the complexity of the land law mechanisms and instable policies, unlike foreign project developers, local project developers still take the lead in directing the market orientation.
* This article was published on IPBA Journal September 2016.
 See CBRE Research, 2016 Vietnam Real Estate Market Outlook, p 6.
 See ibid, p 5.
 See ibid.
 See, Foreign Investment Agency–Ministry of Planning and Investment, Foreign Direct Investment in First Quarter of 2016. Available at http://fia.mpi.gov.vn/tinbai/4577/Tinh-hinh-thu-hut-dau-tu-truc-tiep-nuoc-ngoai-Quy-I-nam-2016.
 The Global Competitiveness Report 2015–2016, p 20, available at http://www3.weforum.org/docs/gcr/2015-2016/Global_Competitiveness_Report_2015-2016.pdf.
 See Central Institute for Economic Management (CIEM), ‘Report on Financial Crisis, Depreciation of the World’s Economy and Active Responses of Vietnam’ (‘CIEM Report’), p 23.
 See Asia-Pacific Rural and Agricultural Credit Association, ‘The Impact of the Global Financial Crisis on Vietnamese Economy’, available at http://www.apraca.org/news_list_detail2.php?idmulti_content=14&page_name=.
 See Ray Forrest and Ngai Ming Yip (eds), Housing Market and the Global Financial Crisis: the Uneven Impact on Households, (2011, Edward Elgar Publishing), p 176.
 See CBRE Research, n 2 above, p 6.
 See Knight Frank, The Wealth Report 2016, pp 44, 45, available at http://content.knightfrank.com/research/83/documents/en/wealth-report-2016-3579.pdf.
 See Cushman & Wakefield, Emerging and Frontier Market–Assessing Risk & Opportunity 2015, p 10.
 See The Global Competitiveness Report 2015–2016, n 6 above.
 See ‘Ho Chi Minh City, High Supply but Static Demand for Residential Housing’, The Saigontimes (27 April 2016), available at http://www.thesaigontimes.vn/145656/TPHCM-Cung-can-ho-tang-manh-cau-chung-lai.html.
 See, ‘The HOREA is asking the Prime Minister to rescue the real estate market’ (29 April 2016), available at http://kinhdoanh.vnexpress.net/tin-tuc/bat-dong-san/hiep-hoi-bat-dong-san-tp-hcm-cau-cuu-thu-tuong-3395610.html.
 See‘Amending Circular 36 does not diminish capital for real estate’ (Vneconomy , 8 March 2016), available at http://vneconomy.vn/bat-dong-san/sua-thong-tu-36-khong-giam-tin-dung-cho-bat-dong-san-20160308092026400.htm.
 See ‘Attractive 2016 real estate market but a worry of policy instability’ (Cafef, 10 March 2016), available at http://cafef.vn/bat-dong-san/bat-dong-san-2016-hap-dan-nhung-lo-chinh-sach-khong-on-dinh-20160310105938599.chn.
 See n 15 above.
 See The Global Competitiveness Report 2015–2016, n 6 above, p 20.
 See Cushman & Wakefield, n 12 above, p 46.
 See Selcuk Akcay, ‘Corruption, Democracy and Bureaucracy Empirical Evidence from Developing Countries’, p 206.
 See ‘Possibilities of Corruption in Land Management’ (Custom Newspaper, 20 January 2016), available at http://www.baohaiquan.vn/Pages/Nhung-nguy-co-tham-nhung-trong-linh-vuc-dat-dai.aspx.
 See the Embassy of Denmark, the World Bank and the Embassy of Sweden, ‘Assessing Risk Factors for Corruption in Land Management’ (‘Land Management Report’), p 7.
 See The Global Competitiveness Report 2015–2016, n 6 above, p 20.
 See SN Jehan, Thanh Nga Luong, ‘Vietnam’s Real Estate Market: Can it Sail through the Capital Puzzle’, p 97.
 See ‘Ho Chi Minh City, high supply but static demand for residential housing’ (the Saigontimes, 27 April 2016), available at http://www.thesaigontimes.vn/145656/TPHCM-Cung-can-ho-tang-manh-cau-chung-lai.html.
 SN Jehan, n 26 above, p 97.
 CBRE Research, n 2 above, p 30.
 See ‘Ho Chi Minh City, High Supply but Static Demand for Residential Housing’, n 14 above.
 See ‘Oil Prices What is behind the Drop? Simple Economic’ (New York Times, 18 April 2016), available at http://www.nytimes.com/interactive/2016/business/energy-environment/oil-prices.html?_r=0.
 See ‘Top Oil Countries Fail to Reach Deal on Production Freeze’ (CNN, 18 April 2016), available athttp://money.cnn.com/2016/04/17/investing/oil-doha-opec-producers/.
 See ‘How Will Falling Oil Prices Affect Vietnam in 2015’ (The Diplomat, 23 December 2014), available at http://thediplomat.com/2014/12/how-will-falling-oil-prices-affect-vietnam-in-2015/.