With the adoption of the new Law on Real Estate Business 2014 (“LREB”) and the Law on Residential Housing 2014 (“LRH”), Vietnam’s real estate industry will see a higher demand in property and more investments are expected in short term because foreigners are allowed to own now for the first time. Although the LREB and the LRH are greatly welcome, there are still certain provisions that may restrict the competitiveness of enterprises in real estate industry. We will discuss below the main issues with suggested solutions.
1. Legal capital requirement
The third Draft Decree guiding the LREB requires a minimum legal capital of VND50 billion for real estate projects which must obtain in-principle approval of the authorities. However, it seems to be inconsistent with the general required legal capital (i.e., VND20 billion) for enterprises doing business in real estate in the same Draft Decree.
Moreover, VND20 billion is a bit too much for small scale projects. This requirement will then discourage investment in such real estate projects, thus negatively impact real estate sector. Considering this, it is recommended that the government should not increase the required legal capital to a fixed amount VND50 billion but a certain percentage of the total investment capital. Such requirement would ensure that only companies with sufficient financial resources can undertake large scale projects and not discourage small real estate developers. In addition, the minimum legal capital requirement should not apply to all real estate business sectors. In fact, certain real estate businesses such as office leasing or subleasing does not require high investment capital while it is certainly a prerequisite condition to carry out the businesses of real estate construction or project development. Thus, it would be reasonable to apply the legal capital requirement only on selected real estate activities after careful examination of their nature.
2. Tight deadline for capital contribution
According to Articles 48.2 and 74.2 of the 2014 Law on Enterprises, within 90 days from the issuance of the enterprise registration certificate, members of the limited liability company must contribute the capital in full. There is no exception to this requirement, either in case the investment capital amount is huge or the project is implemented within an extended period of time. Large scale real estate projects then face significant problems. On the one hand, the investment capital is too large to be contributed within such a short time limit. On the other hand, it may be unrealistic to contribute such a high amount right at the beginning of the project. Inefficient use of capital and low business competitiveness are predictable outcomes. The Government is then recommended to allow capital contribution based on project implementation period and project size.
3. Lack of transitional provisions
The new LREB does not provide a solution on how to deal with agreements signed under the old LREB but still in effect. Although the fourth Draft Decree guiding the LRH provides a transitional clause for contracts signed before 01 July, it does not address all types of contracts but only focuses on method of calculation and record of the residential housing area, warranty period of residential housing and parking plot. The question remains whether other types of contracts signed before 01 July 2015 must be amended to comply with the LREB and the LRH. However, for convenience and not to create troubles for enterprises, it is proposed that the existing agreements signed before 01 July continue to be in effect according to the old laws and no changes should be required.
4. Foreigners now have right to purchase property in Vietnam
Under Article 161.2(a) of the LRH, foreign individuals and foreign invested enterprises are able to purchase multiple properties in a residential development project including buildings and separate landed villas/townhouses. The maximum quantity allowed to purchase is 30% of the total units in a building and 250 houses in a local area. However, Article 68.4 of the fourth Draft Decree of the LRH limits that foreign organizations/ individuals may only own maximum 10% of the total number of individual housing in each residential housing project. This could be a restriction not in compliance with the LRH.
Another restriction in the fourth Draft Decree of the LRH is also introduced. While Article 159.2(b) of the LRH only prohibits foreign individuals and organizations from buying houses in national defence and security area, Article 67 of the fourth Draft Decree of the LRH does not allow them to own residential houses in areas where foreigners are prohibited or restricted from residing or traveling as stipulated under the Law on Residence and Travel.
It is then recommended that these restrictions in the draft decree be removed to ensure competitiveness of the real estate market in Vietnam with that of other countries.
5. First time foreign investors – Current draft restrictions on the right to receive a project
According to Article 15.1(d) of the Draft Decree of the LREB, an application dossier by a project transferee must include an enterprise registration certificate. From a general perspective, domestic investors or foreign investors who already have existing projects in Vietnam could easily meet this requirement. However, it could be a problem for investors who make first time investment in Vietnam with the investment project being the transferred one. We would then recommend the government to place an exception for first time investment by foreign investors to the mentioned requirement.
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Please do not hesitate to contact Mr. Oliver Massmann under omassmann@duanemorris.com if you have any questions on the above. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.
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