Vietnam: Risk And Reward In Vietnam's Real Estate As Investors Ignore Uncertainty Over Future Of Land Rights

Vietnam has emerged as an attractive destination for foreign investors looking to enter the real estate market. Driven by a fast-growing economy, high rate of urbanisation and expanding middle-class, cities like Hanoi, Da Nang and Ho Chi Minh City have become dynamic and lucrative metropolises. For those willing to shoulder the risks, the market offers substantial rewards and great potential over the coming decades.

Much of the development can be attributed to the implementation of the Land Law (No. 45/2013/QH13), Law on Housing (No. 65/2014/QH13) and Law on Real Estate Business (No. 66/2014/QH13), which effectively opened the floodgates to foreign investment in real estate.  In principle, these laws allow foreigners most of the same rights as locals when it comes to purchasing and owning real estate.  Many foreign development companies are jumping at the chance to develop new residential and commercial properties in one of the world's fastest growing economies.  Question marks remain however over the underlying rights foreign-invested developers enjoy in the land on which these buildings sit and it remains to be seen how this will play out.

Lack of Certainty 

For many developers the country's political landscape remains a hurdle. In Vietnam, land is collectively owned by the people, and administered by the State on their behalf. Under this system, property owners are denied full and legal ownership over the land. Their rights to the land are limited to 'land use rights' within the scope permitted by law.  A land user is issued a land use right certificate (LURC) that recognises the land user's rights over the property.  There are different types of land use rights possible and some come very close to being analogous to freehold ownership as many would know it in the West (use right in perpetuity, subject to reversion and compulsory public works acqusitions, right to sell, transfer, mortgage etc).

Naturally one must pay for this LURC either in the form of a one-off upfront sum, or in annual instalments that function like rent. The distinction between foreigners and locals is critical in this context, as under the current Land Law foreigners can only retain a LURC for a fixed term of 50 years, whereas locals can retain one indefinitely. At the end of fifty years the government can choose to grant a one-time extension of fifty years or take the property back (the government would presumably deny the extension only if the party failed to use the land as stipulated in the LURC, though this has not been put to the test yet).

Regardless of whether the foreign-invested developer is granted an extension, the land and its entire developed infrastructure will ultimately revert back to the government, and therein lays the risk facing foreign developers who set their sights on Vietnam.

Foreign developers are effectively gambling that the Vietnamese government will pass new legislation that will do away with the fifty-year term limit. The developers and the real estate companies, consulting firms and law firms that work on their behalf are all aware of this uncertainty, but given the favourable stance the Vietnamese government has taken towards foreign investment in recent years there is optimism that the law will change (very recently there has been talk of the 50 years extending to 90).

The uncertainty has done little to dampen sprits however, with foreign investors pledging to invest US$297.4 million in Vietnam's real estate sector in January alone this year. The sum represented 20.9 percent of all foreign direct investment inflows, including new pledges and funds added to existing projects.

Deals are expected to continue throughout the rest of 2017 with the participation of foreign investors, chiefly those from Japan, Hong Kong, South Korea, Thailand and Singapore.

At the end of June 2017, Japan's Hankyu Hanshin Holdings Inc met with the Ho Chi Minh City Real Estate Association (HoREA) to discuss the former's involvement in 197 projects, taking the form of private public partnerships. A further 120 key real estate projects were discussed within HCM City alone.

A certain kind of stalemate

Investors are clearly positive about the growth fundamentals of Vietnam's property market. Given that foreign developers continue to pay up-front fees for LURCs as wholly-owned foreign invested enterprises (FIEs) the government lacks the incentive to ease land ownership restrictions in the near future, and conversely hesitant foreign developers don't have the luxury to wait it out. The most promising opportunities are sure to be snapped up by less risk averse entities and local firms that aren't inhibited by the same rules.

Perhaps the one area of this situation where the government has shown some resolve is in their tendency to allocate LURCs to local companies as a means of incentivising foreign developers to establish joint ventures with domestic entities. The foreign developer really has no use for the local partner other than the fact they can provide the LURC free of charge, and that presumably under Article 128 of the Land Law the LURC would be transferred to the foreign developer free of any fixed term.

The downside of this arrangement is that the foreign developer now shares its profits. However, the joint venture route will provide a foreign developer an additional layer of security ­– a familiarity with the intricacies of the often opaque Vietnamese legal system. When a foreign developer partners with a local company they can at least be assured that their activities represent a favoured route, as opposed to the ambivalence shown to foreign-invested developers under the above laws.

It's certainly possible that the government will further relax legislation and do away with the fixed term, however, it has been two years since the implementation of the new housing and real estate business laws and three years since the implementation of the land law. The have been no clear and unambiguous signals to date about the direction change may take.

Here's to hoping

In spite of the unequal competitive landscape, foreign developers continue to acquire LURCs on fixed terms, essentially in the hope that things will change. As it stands, foreign developers have, give or take, the same rights as locals for fifty years, but those years also allow the government to drag out any reforms while continuing to collect money from foreign developers.

Vietnam's determination to maintain its growth, and sign up to free trade agreements bilaterally and as part of ASEAN, offers some glimmer of hope. The country faces stiff competition from regional competitors and will surely want to keep its place as the preferred destination for foreign capital.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.

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