New foundations for
real estate deals - Vietnam Investment Review
The recent National
Assembly session passed the Law on Enterprise, Law on Investment, Law on
Residential Housing and Law on Real Estate Business. These new laws contain
provisions which help to create a more transparent, consistent and conducive
legal environment for domestic and foreign real estate investors alike.
These provisions should help revitalise the real estate market
by paving the way for investment and mergers and acquisitions. David Lim,
managing partner at Zicolaw Vietnam outlines the main provisions in the new
laws.
The real estate sector
has been an attractive investment field. However, it is also a challenging
sector due to restrictions and complicated rules imposed on investors and real
estate transactions. It is important to understand the new provisions in laws to
take advantage of the investment opportunities provided.
Foreigners buying real estate
Foreign individuals
and foreign invested enterprises entering into and doing business in Vietnam
are now provided with additional rights to own property. Under the current
legislation, foreign individuals are permitted to own one apartment and
foreign-invested enterprises are permitted to own multiple apartments in a
commercial residential development project.
According to the new
laws, foreign individuals permitted to enter Vietnam and foreign invested
enterprises are no longer limited to owning apartments. They will also have the
right to purchase real estate in a residential development project as well.
Note however that foreign individuals and foreign-invested enterprises can only
own a maximum of 30 per cent of units in an apartment building and 250 houses
in a local area such as a ward.
As with the current
legislation, the term of ownership remains at 50 years for foreign individuals
and the number of years of operation of a foreign invested enterprise as
recorded in the investment certificate.
Foreign ownership of completed construction works for own use
For the first time,
overseas Vietnamese and foreign-invested enterprises from all business sectors
can purchase completed buildings to use for office buildings, manufacturing and
business locations. In the current laws, foreign-invested enterprises are only
permitted to lease an office building which it has not constructed.
Presales
The right to sell real
estate prior to the completion of construction has been extended to leasing of
such properties as well. Under the current laws, developers cannot lease out
space which has not been completely constructed. The new laws however states
that a maximum of 30 per cent of the total contract value may be collected as
the first payment for sales and lease-purchase transactions. Subsequent
payments are to be collected in accordance with the construction progress.
Foreign developers are not permitted to collect more than 50 per cent of the
total contract value before the handover of the real estate property whilst
this percentage is set at 70 per cent for domestic developers. Both domestic
and foreign developers are not permitted to collect more than 95 per cent of
the total contract value before the issuance of the land use rights
certificate.
Bank guarantees for residential presales
As mentioned above,
the right to conduct presales is preserved. Note however that the sale and lease-purchase
of residential houses must be guaranteed by a commercial bank in Vietnam (which
is included in the list of commercial banks published by the State Bank of
Vietnam) prior to selling or lease-purchasing such residential houses. This has
been introduced to provide more protection to buyers who may be left without
any recourse in the case where a real estate developer runs into financial
difficulty. It is important that this scheme is implemented in an orderly and
efficient manner to fully achieve this objective.
Extended permitted business activities
Consistent with the
requirement that foreign investors invest in the construction of real estate,
foreign investors are currently prohibited from sub-leasing real estate which
they have leased. Foreign investors will be pleased to learn that such
prohibition will be lifted under the new laws. Owners of unleased space will
also benefit from a greater pool of potential lessees.
Two-step licensing procedures
Under current
legislation, foreign investors will be issued an investment certificate which
serves concurrently as an enterprise registration certificate. However, the new
laws require foreign investors in real estate projects to obtain two documents
namely an investment registration certificate and an enterprise registration
certificate. A foreign investor must first obtain the investment registration
certificate to be followed by the enterprise registration certificate. In
addition, foreign investors in real estate projects to which the state allocates
or leases out land without auction or tendering; and foreign investors in real
estate projects with a requirement for conversion of the land use purpose must
obtain an in-principle investment decision before being issued the investment
registration certificate.
These requirements are
similar to what is imposed under current laws except for the requirement of
obtaining an enterprise registration certificate. It is expected however that
this additional step will be an administrative step only with the enterprise
registration certificate to be issued within three Business Days of
application. Note further that the time for the various approvals and
certificates to be issued has been reduced substantially from around 75 days to
around 45 days. If implemented correctly, this is a substantial reduction of
time to obtain the necessary regulatory approvals to establish an enterprise to
undertake business in Vietnam.
Increased legal capital
Notwithstanding the
investor friendly provisions as mentioned above, the new legislation provides
stricter requirement in terms of minimum capital. The minimum capital for real
estate development enterprises has been increased from VND6 billion (approx.
$280,000) to VND20 billion (approx. $940,000). Existing real estate enterprises
are required to increase their capital to comply with such requirements by July
1, 2016.
At the same time,
foreign investors in M&As should be aware of the new provisions set out
below.
Clearer definition of foreign-invested enterprise
Since the Law on Investment
2005 and the Law on Enterprise 2005 were introduced, there has been a
long-standing discussion on the status of an enterprise when it converts from a
purely domestic firm to a foreign-invested enterprise. This discussion is an
important one for foreign investors since there continues to be different
provisions and conditions applying to foreign invested enterprises and domestic
enterprises. The lack of clarity in the current legislation and inconsistent
implementation by various authorities has led to confusion and in some cases,
missed investment opportunities. The new laws specify that a foreign-invested
enterprise is an enterprise incorporated in Vietnam with 51 per cent or more
shareholding held by one or more foreign investors. Furthermore, any enterprise
with shareholders holding 51 per cent or more of its shareholding being other
foreign invested enterprises or foreign investors will also be a foreign
invested enterprise.
Procedures for M&A transactions
For M&A
transactions, there are clear provisions which state that there are no
requirements in obtaining an investment registration certificate for the
foreign investment in the form of capital contribution, purchase of shares or
capital in a domestic enterprise. Where the shareholding of the foreign
investor in such a domestic enterprise is 51 per cent or more; or the business
lines of the domestic enterprise fall in the conditional sectors applied to the
foreign investors which includes real estate projects; a registration of such
contribution/purchase to the related Department of Planning and Investment is
required. The language used suggests a much simpler procedure than what is in
place under the current laws. We will need to wait for more implementation ofs regulations
on what is required for such registration.
Conclusion
On the face of it, the
new laws would increase the opportunities for foreign investors to carry out
real estate projects and at the same time and reduce investment cost.
Nonetheless, it remains crucial for an investor seeking to conduct a real
estate-related transaction to keep up with implementing regulations. Clear
implementation guidelines and action is required to ensure that the objectives
of the new laws to simplify investment procedures for investors are realised in
full.