Vietnam new real estate laws - key changes for foreign investors

In brief

Following Vietnam's adoption of the new Law on Land 2013, which took effect last year, a new Law on Housing and a new Law on Real Estate Business will come into effect on 1 July 2015. The Vietnam Government will be issuing a number of detailed regulations to implement these new laws, some of which have been circulated by the Government in draft form. Partner Linh Bui, Senior Associate Hoai Tran, and Associates Nguyen Hoa and Vu Dang explain their likely impact on foreign investors.

General land policies

What is an FIE?

The Law on Land 2013 (Land Law 2013) introduces a new concept of what it means to be a ‘foreign invested enterprise' (FIE) in the real estate sector. Under the new law, FIEs are defined to include:

1. 100 per cent foreign invested enterprises;
2. joint venture enterprises between foreign and Vietnamese investors; and
3. Vietnamese enterprises in which foreign investors subsequently acquire an equity interest.

Under (c), following an M&A transaction, a target Vietnamese enterprise with any foreign ownership level (ie anything from 1 per cent to 99 per cent) will be regarded as an FIE under Land Law 2013 and, therefore, will be subject to less favourable treatment under the law compared to wholly Vietnamese-owned enterprises (VN Enterprises), as noted in various cases below.

Allocation of land for housing

Land users that are VN Enterprises must receive their allocation of land use rights (LUR) directly from the state for the purpose of the development of residential housing projects for sale or for sale and lease. From 1 July 2014, FIEs will also receive an allocation of land for this purpose (ie in the same form as VN Enterprises). Leasing land from the state for this purpose is no longer possible.

No more conversion to lease

Following an M&A transaction in which a VN Enterprise becomes an FIE, the form of LUR of the target VN Enterprise will not need to be changed (whereas previously the allocation of LUR needed to be converted to a long-term lease). However, it is still not clear whether a VN enterprise holding 'long-term and stable' LUR needs to convert its land use form to allocated land with a definite term in order to develop residential housing projects on the land.

Assignment of existing LUR to FIEs

Under the Land Law 2013, FIEs are still not permitted to receive an assignment of LUR from existing land users, other than by way of capital contribution from a VN Enterprise. Further, FIEs are still restricted from receiving capital contributions by way of LUR from Vietnamese individuals and households.

Developers' deposit

In order to be granted their LUR for a real estate project, under the Land Law 2013, the developer must pay a security deposit of 1-3 per cent of the value of the project to ensure their implementation of the project.

Subdivision of lots

Provincial People's Committees have the authority to decide whether a housing developer is permitted to subdivide the land and sell 'unbuilt land lots' to house buyers based on the developer's satisfaction of applicable regulatory conditions, including a precondition that construction of infrastructure must have been completed and land use fees paid to the state.

Conducting real estate business

Permitted activities of FIEs

Under the new Law on Real Estate Business (LOREB 2014), FIEs can now:

1. lease houses or other buildings for sub-letting (which was restricted under the old law);
2. lease land from the state for the development of residential housing for lease or development of non-residential properties for lease or sale;
3. receive an allocation of land for the development of residential housing for sale or for sale and lease; and
4. receive assignment of the whole, or part, of a real estate project (which is incomplete and requires significant development).

Prohibited activities of FIEs

However, FIEs still cannot purchase houses or other buildings for resale or lease, nor receive an allocation of land for subdivision of land lots for sale. In contrast, VN Enterprises are entitled to conduct these real estate activities.

Impact of becoming an FIE

Following an M&A transaction whereby a foreign entity acquires an interest in a VN Enterprise, as noted above, the target VN Enterprise will become an FIE, regardless of the foreign ownership level (though LOREB 2014 does not provide for a definition of an FIE).

Therefore, based on a strict interpretation of LOREB 2014, the target VN Enterprise will need to narrow its business lines to fit with the regulatory limitation of LOREB 2014 for FIEs. By way of example, a target VN Enterprise originally licensed to conduct the purchase of houses or other buildings for sale and lease will need to remove this activity from its business lines following the M&A transaction. The enforcement of this requirement is yet to be seen in practice.

Minimum capital requirements

LOREB 2014 sets out a new legal capital threshold of VND 20 billion (c.US$1 million) for all real estate enterprises, compared to the previous VND 6 billion requirement. This requirement will also capture real estate enterprises established before LOREB 2014 comes into effect. According to the latest draft of the implementing decree for the LOREB 2014, real estate enterprises must satisfy this legal capital requirement by 1 July 2016. The draft decree also proposes to apply a higher threshold of VND 50 billion (c.US$2.5 billion) for projects that require an in-principle approval from the competent authorities. Notably, procedures for certifying the legal capital (ie escrow procedures) are removed under the draft decree.

Presales

If a developer wishes to sell houses or other buildings that are still under construction or scheduled to be constructed, they must provide a bank guarantee for its obligations to refund advance payments made by purchasers if the houses or other buildings are not completed. Only certain banks are qualified to issue such a bank guarantee. The list of these banks is expected to be released in subsequent regulations of the State Bank of Vietnam. In addition, another condition for presales is that the developer must obtain a confirmation from the relevant housing management authority that it satisfies the regulatory conditions for the presale.

Presale payment schedules

LOREB 2014 also introduces a change to the payment method for presales of houses or other buildings still being constructed. VN Enterprises will be permitted to receive up to 70 per cent of the sale price prior to the hand-over of the property. On the other hand, developers classed as FIEs will be entitled to only 50 per cent of the sale price prior to hand-over.

New housing rules

Foreign individuals' ownership of housing

From 1 July 2015, foreign individuals who are allowed to enter into Vietnam may purchase and own houses in residential development projects in Vietnam, including condominiums/apartments, villas and town-houses, for a 50-year term (extendable subject to governmental approval). Notably, foreign individuals married to Vietnamese citizens are entitled to ownership for an indefinite duration, in the same way as Vietnamese citizens.

Foreign ownership quotas

However, foreign individuals can only purchase and own up to 30 per cent of the condominiums in one single building, or up to 250 villas or townhouses in an area having a population equivalent to a ward level.

Foreign organisations

Foreign organisations (including representative offices, branches – including foreign bank branches, and foreign investment funds) are allowed to purchase and own houses in Vietnam, subject to the same limitations that apply to foreign individuals. However, foreign organisations can only use the purchased houses to provide residences for their staff and must not use them for offices, leasing or other purposes.

Housing purchase agreements

Contracts between buyers and developers for the sale and purchase of houses must comply with the standard form of contract prescribed by the law. Otherwise, the contract will not be recognised by law nor can it be used to issue the housing ownership certificate. Developers must register their standard form of housing contract with the relevant authority, most likely the Department of Industry and Trade.

Trading floors?

Developers can now sell houses or other buildings directly to buyers without going through a trading floor.

Maintenance fund

With respect to the management and operation of a condominium building, it appears that the maintenance fund (which is 2 per cent of the value of the houses or other buildings) will be supervised by the Provincial People's Committee.