Singapore: Residential Property Development in Vietnam

Article by Mary De Souza and Ying Ying Lee

This article deals with some issues that may be of interest to property developers seeking to invest in the fast growing residential property market in Vietnam.

The Landmark was the first large, high-rise apartment building to be completed in the centre of Ho Chi Minh City in 1995. This building, a mixed-use building of offices and apartments, was aimed at the high-budget foreign expatriates and provided a mixture of one, two and three bedroom apartments. Since then, many other serviced apartment buildings have been completed providing similar high standards of accommodation and services and charging relatively high rents. These apartment buildings were developed by foreign developers in joint venture partnership with local land owners and were aimed at the expatriate employees of government consulates or high ranking staff of foreign enterprises in Ho Chi Minh City. There are now about 17 high-end apartment blocks in Ho Chi Minh City providing 1,589 apartments of one, two, three and four bedroom units. The latest building to be completed is Saigon Domaine for which Dinning & Associates is the marketing agent. Alongside these high-end developments, over the last five years, a small number of locally developed apartment buildings have also been completed. These locally developed apartment buildings usually charge lower rents and provide fewer facilities and services or facilities and services that were of a lower standard.

When dealing with land, two important issues come to mind. The first is the nature of the interest acquired in the land, and secondly, the extent to which this acquired interest in land can be transferred.

The 1992 Constitution of Vietnam vests ownership of land in the People of Vietnam, and the State is responsible for the "unified administration" of land throughout Vietnam on behalf of the People of Vietnam. Vietnam land laws do not recognize the private ownership of land by individuals and entities. In place of the private ownership of land, the State is instead empowered to grant the right to use land ("land use rights") to individuals and entities, either by way of an assignment of land use rights or a lease of land use rights.

Although Vietnam land laws do not recognize private ownership of land, it should be pointed out that the laws do recognize and permit the private ownership of buildings constructed on such land. This means that although a person may not own the land, he may nevertheless own the building constructed on such land.

For local Vietnamese land users, land use rights may be allocated by the State either by way of (i) a land assignment or (ii) a land lease. In the case of a land assignment, depending on the intended use of the land, the land can be assigned either on a "stable and long term basis" or for a definite period. For foreigners (including wholly owned foreign enterprises and joint venture enterprises and foreign individuals), land can only be allocated by way of a land lease.

A foreign developer may therefore obtain land for its proposed property development project by leasing it directly from the State. Where the foreign developer is forming a joint venture with a local Vietnamese, the required land can also be contributed by its local partner in the form of the local partner’s contribution to the legal capital of the joint venture enterprise. The local partner’s contributed land may be in the form of assigned land use rights or leased land use rights. However, where the land is in the form of assigned land use rights, the local partner is required to convert its land assignment into a land lease which passing on the interest in the land to the joint venture enterprise. This is because the joint venture enterprise is categorized as a "foreigner" under Vietnam land laws and is therefore only permitted to be allocated land in the form of a land lease.

When land use rights are contributed by a local partner of a joint venture enterprise as all or part of its share of the capital of the enterprise, the value of the capitalized land use rights of the local partner will be equal to the amount of land rent payable for the duration of the investment term of the joint venture enterprise.

The land rental rates for land leased to joint venture enterprise and wholly foreign owned enterprises are set out in Decision 189/2000/QD/BTC issued by the Minister of Finance on 24 November 2000. Decision 189 sets out the basic annual rental rates for the lease of urban land and non-urban land. Decision 189 categories cities and towns into five groups and the current land rental rates for urban land are as follows:

Group 1: Within the cities Ha Noi, Thanh pho Ho Chi Minh.

Group 2: Within the cities: Vung Tau, Bien Hoa, Hai Phong.

Group 3: Within the cities:

Group 4: Within the cities:

Group 5: Within the cities of the remaining areas.

The actual land rental is derived by multiplying the basic annual rent by a location co-efficient, an infrastructure co-efficient and an industry co-efficient.

The location co-efficient ranges from 1.0 to 4.0, depending on the location of the leased land. For example, the co-efficient of 4 applies to Category 1 land lots whose frontages face major urban thoroughfares which are convenient for production, business, service and tourism activities, and which are capable of yielding high profits.

The infrastructure co-efficient ranges from 1.0 to 2.0 and depends on the type of infrastructure surrounding the leased land. The co-efficient of 2 applies to land lots that meet the following conditions:

- convenient communication access

- nearby power supply facility to meet the project’s demand

- nearby water supply for use in the project

The industry co-efficient ranges from 1.0 to 1.5, depending on the type of industry that the lessee is engaged in. The co-efficient for a land lot that will be used for the construction of residential homes is 1.0.

If the leased land will be used for the construction of multi-storey buildings, the land rental will further be multiplied by a floor co-efficient ranging from 1 onwards.

Where land is leased to an enterprise for use in the implementation of an investment project, the land use duration for the leased land will be for a definite term and this duration will usually correspond with the investment duration of the foreign enterprise. The maximum land use duration is 50 years although for large investment projects with slow capital return, the land use duration may be extended to 70 years.

The new 2004 Land Law (discussed in further details below) will allow the lessee of the leased land to elect to pay the land rental on an annual basis or on an upfront lump sum basis. This is of importance as the rights conferred on a lessee paying rent on an annual basis are different from the rights conferred on a lessee that has paid rent for the entire land use duration on an upfront basis.

A lessee that pays rent on an annual basis is entitled to:

- sell the assets affixed to the leased land

- contribute capital in the form of the assets affixed to the leased land

- mortgage or provide guarantee with the assets affixed to the leased land

- contribute as capital the assets affixed to the leased land

- if it is licensed to invest in the construction of residential houses, lease residential houses constructed on the leased land

A lessee that pays rent in a lump sum for the entire lease term is entitled to:

- transfer the rights to use the leased land and the assets affixed to such land during the lease term

- sub-lease the rights to use the leased land and the assets affixed to such land during the lease term

- mortgage or to provide guarantee with the leased land use rights and assets affixed thereto

- contribute as capital the leased land use rights and assets affixed thereto

- if it is licensed to invest in the construction of residential houses, sell or lease residential houses constructed on the leased land, and a purchaser (but not a lessee) of the house will be granted land use right certificate by the State

As the 2004 Land Law will allow a lessee to decide on the manner in which it will pay the land rental, a foreign developer should, where possible, elect to pay rental on a lump sum basis as this is enable it to acquire better rights as a lessee of the leased land.

As seen above, a foreign developer paying rent on an annual basis is only permitted to confer rights to the assets constructed on the land whereas a developer paying rent on a lump sum basis is entitled to deal with both the assets and the land use rights of the leased land.

In addition, a developer paying rent on an annual basis is only permitted to "sell" the houses constructed on the leased land by way of a lease. A foreign developer paying rent on a lump sum basis, on the other hand, is permitted to sell the houses it constructs on the leased land, and to thereby confer ownership rights to the houses on such purchasers who are permitted under Vietnam laws to own residential houses.

The Law on Land was passed by the National Assembly of Vietnam as early as in 1993. It was amended in 1998 and again in 2001. This set of legislation is referred to in this article as the 1998 Land Law.

The new Land Law was enacted recently by the 11^th National Assembly on 26 November 2003, and will take effect from 1 July 2004. The new Land Law, referred to in this article as the 2004 Land Law, will replace the 1998 Land Law.

The land authorities of Vietnam have said that the 2004 Land Law is much more appealing to investors. It sets deadlines for local authorities to resolve problems for land users and businesses, which is an improvement on the current lengthy procedures. The 2004 Land Law allows state organizations to oversee site clearance and management. Foreign investors have found site clearance to be a costly, time-consuming process that can cause delays to their construction projects. The provincial people’s committee will also have the power to set land prices close to market value, breaking with the previous dual pricing system in which prices were set by the government and the market. The 2004 Land Law also adds regulations on leases of over 50 to 70 years, on leasing and allocation procedures, on land recovery in projects delayed for more than one year and the management and use of land in industrial and economic zones. It aims to resolve obstacles in land recovery, compensation and clearance, sky-rocketing land prices, rampant law suits and the illicit use of land. Its effectiveness will, of course, be tested over time and it is expected that there will be shortcomings which will have to be resolved following its implementation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.