M&A is an essential component for business and the investment environment. In the real estate development sector, M&A is more essential since it may cleanse the obstacles in the market, and makes it more stable and flowing.
One of the causes of the recent “hibernation” of the market is the difficulty in transferring the unfinished real estate projects due to a lack of legal frame for this activity, and therefore the sellers cannot meet the buyers. The tired developers could find no exit mechanism.
With the effectiveness of various laws on business and investment from 1st July 2015, especially in the real estate development, a new legal corridor has been opened, which brings with it many hopes and expectations for improving the M&A in this market, consequently forming a new movement in the market as well.
1.The Investment Environment is more attractive to foreign investors
The procedure for a foreign investor to acquire equity from a local real estate developer had been preceded in many steps. Amongst those is “seeking opinions from relevant higher authorities (because the real estate sector is a conditional industry), which is a time-consuming procedure, usually fading away the business opportunities of the investor.
The Law on Investment now provides a simpler procedure for foreign investors’ acquisition of equity or new investment in local enterprises. Accordingly, a foreign invested company with foreign capital less than 51% may be treated as a local enterprise in business procedures. Additionally, establishing a new enterprise in Vietnam is also a more streamlined and faster affair, since the procedure is now carried out at the provincial departments of planning and investment. The foreign investor may set up an enterprise at first without a specific investment project as required previously, and then the foreign investor may look for investment projects later. This creates a short start-up track for foreign investors in Vietnam, and substantially reduces the start-up costs accordingly .
A more important and attractive change for foreign investors is the expansion of the scope of foreign invested developers under the Law on Real Estate Business 2014. The requirement of “doing real estate business with newly created real estate projects only” is now expanded to the extent that the foreign invested developer may acquire partially or wholly uncompleted property development projects.
In reality, an acquisition of a business may be conducted in either a “share deal” or an “asset deal” approach (i.e. acquiring the company owning the asset or buying the asset itself only) depending on the facts of the case. However, in real estate M&A, the “shares deal” approach are often used due to lack of a legal frame for project transfer whilst foreign investors often prefer the “asset deal” approach because they will bear less liability and responsibilities over the project compared to those in the “share deal” approach. The policy that allows foreign investors to acquire whole or partial real estate projects will make the market more attractive to foreign investors, since some investors prefer to acquire existing projects with proper licenses and approval, rather than starting up the projects that require obtainment of various approvals that always obsess them in investing in Vietnam. For instance, foreign investors can buy part of an existing real estate project to further develop or lease some floors of an already-built office building for sub-letting, options that were unfeasible under the previous laws.
2. The market is expanded now
The previous policy that permitted foreigners to own residential property in Vietnam is only on a pilot basis, and in fact did not succeed in attracting foreigners due to the many restrictions and qualification requirements. Particularly, the conditions for being qualified for owning residential properties were very difficult to be meet (only a small number of foreigners can meet such conditions), furthermore, the owners actually have only the use right (i.e. not allowed to sub-let, bequeath and so on), which all are unattractive to the foreigners.
The Law on Housing 2014 now expands the foreign subjects who are entitled to own houses in Vietnam. Particularly, those foreigners who enter Vietnam lawfully are entitled to purchase and own residential houses in Vietnam without the quantity limitation as before. Additionally, representative offices, and foreign invested enterprises are also allowed to purchase and own residential houses for their business demands. The “residential houses” under this Law includes apartments and landed houses developed in real estate development project.
More importantly, the housing ownership of foreigners is now almost at parity with that of the Vietnamese. The foreign owners are allowed to sell, lease, capitalize, bequeath, mortgage, pledge or exchange the properties. Vietnamese who buy properties from the foreign owners can enjoy “long and stable use term” with the properties.
The expansion to foreign subjects who are entitled to own houses in Vietnam, expansion of housing ownership rights, and more assurances in liquidating the properties are all encouraging foreigners residing and working in Vietnam. In a recent sale launch by a local developer in Ho Chi Minh, there were around 150 foreigners registering buying apartments in the project as a report says.
The number of foreigners who are interested in owning houses in Vietnam is creating significant additional demand to the market, creating a new momentum for the market, encouraging more interest in, and investments in the market.
3. Obstacles should be cleared
All such consistent policies in relation to land, investment, housing, real estate business have generated greater interest from foreign investors and created more momentum to the market. A new wave of investment in the real estate market and/or more M&A real estate deals can be seen; the market has been boosted with the necessary economic drivers.
To maintain the market tempo from the momentums, the Government’s regulations on implementation guidance should be consistent with the spirits of the policies, and should not repeat the situation that it is broad and is of wide scope at the new law level, but the scope narrows down at the decree or circular level as has often happened before.
For instance, the fact that there is no detailed guidance for implementing the laws that are already effective is causing delays in procedures of business and investment registration, because the authorities at the implementation level do not know how to implement the new law. It is still a concern that such commitments as “issuing the business registration certificate within 3 working days” under the Law on Enterprises can be practical in reality or not. The spirit of “giving the enterprises freedom to do business to the extent not prohibited by laws” under the laws can be still assured or maintained in the coming decrees and/or circulars that provided detailed guidance in implementing the laws are of greatest concern to enterprises and investors these days.
With regard to the Law on Residential Housing, and the Law on Real Estate Business, some concerns appear due to ambiguity of the laws, and on how they will be implemented in the coming guidance:
(i) How will the ratio limit of foreign ownership of not over 30% of total units in an apartment building or 250 houses in a ward be implemented? And how can the developer be aware of, or check such information in order to have a proper sale?
(ii) Will foreigners who buy residential properties from Vietnamese individual owners be subject to the restriction of “30% of units, 250 houses” as mentioned? And how this can be controlled or checked in reality?
(iii) Under the Law on Real Estate Business, “foreign invested developers” can collect advance payments from the homebuyers up to 50% of the sale price only. Whilst the Law on Investment treats enterprises with foreign capital less than 51% of the total charter capital like a local enterprise, will this spirit applied the same under the Law on Real Estate Business? According to the opinions of many foreign investors, this spirit should be applied consistently.
(iv) How it is interpreted with the requirement of “foreigners who lawfully enter Vietnam” under the Law on Residential Housing (in order to determine whether he or she can be qualified for housing ownership in Vietnam)? This should not repeat the situation in which there are various different interpretations at various authorities of the condition of “residing over 3 months” in the previous Law on Residential Housing. In our opinion, the wording is clear and there should not be additional guidance for this.
More and more queries and concerns are emerging from investors, especially foreign investors in the real estate business and development sectors, which is always a complex area with complicated guidance and procedures.
In order to maintain an attractive investment climate that has just been created by the new policies, and ensure the upward trajectory of M&A in real estate, especially in the context that foreign investors are interested in directing their investment flows to Vietnam, the Government should protect and keep up commitments and innovative spirits under the new laws. The coming decrees and circulars should be for clearing the obstacles and providing necessary guidance in implementing the laws, not provide more ambiguities or narrow down the spirit of an “open door” under the new laws.
If that mission can be achieved, the Government not only successfully keeps up the momentum added to the market, but also ensures the positive trend of M&A flows, and thus boosting the liquidity of the market, keeping it stable and increasing its long term endurance.
Tran Thai Binh, Partner (Binh.Tran@LNTpartners.com) LNT & Partners