Mergers and acquisitions are an essential component of the business and investment environment – particularly in the real estate sector, as they help to eliminate obstacles in the market and make it more stable.
The real estate market has recently slowed, in part as a result of the difficulty faced by individuals when transferring unfinished real estate projects. This difficulty stems from the lack of a legal framework for unfinished project transfers. As sellers cannot reach buyers, developers have no exit strategy.
On July 1 2015 new laws on business and investment came into force. These have opened a new legal avenue which will hopefully improve the M&A real estate market.
Before the enactment of the new laws, foreign investors had to follow a complex procedure in order to acquire equity from a local real estate developer – for example, foreign investors had to obtain opinions from relevant higher authorities (because the real estate sector is a conditional industry). This time-consuming procedure usually diminished the investor's business opportunities.
The Law on Investment now provides a simpler procedure for foreign investors to acquire equity or invest in local enterprises. Accordingly, a foreign-invested company with foreign capital of less than 51% may be treated as a local enterprise in business procedures. The procedure for establishing a new enterprise in Vietnam has also been streamlined and is now conducted at provincial departments of planning and investment. In addition, in accordance with the new law, foreign investors can establish an enterprise without a specific investment project (which was previously required) and subsequently look for investment projects. These new policies create a shorter start-up track for foreign investors in Vietnam and substantially reduce start-up costs.(1)
Another important and attractive change for foreign investors is the expansion of the scope of foreign-invested development under the Law on Real Estate Business 2014. The requirement of "doing real estate business with newly created real estate projects only" has been expanded in order to allow foreign-invested developers to acquire incomplete property development projects.(2)
A business may be acquired through either a share deal or an asset deal (ie, acquiring the company owning the asset or buying the asset only), depending on the facts of the case. However, in real estate mergers and acquisitions, share deals are often used due to the lack of a legal framework for project transfers. That said, foreign investors often prefer to undertake asset deals, as they have less liability and responsibilities over the project in comparison to share deals.
Finally, the market has become more attractive to foreign investors as they can now acquire whole or partial real estate projects. Some investors prefer to acquire existing projects with proper licences and approval, rather than beginning new projects. For instance, foreign investors can buy part of an existing real estate project to develop or lease floors for sub-letting – options that were unfeasible under the previous laws.
The previous policy which permitted foreigners to own residential property in Vietnam was temporary and failed to attract significant interest due to its many restrictions and qualification requirements. In particular, the conditions for qualifying to own residential properties were difficult to meet (only a small number of foreigners were eligible). Further, only the owners had the right to use the property (ie, the property could not be sub-let or bequeathed), which was unattractive to foreigners.
The Law on Housing 2014 has expanded foreigners' rights to own houses in Vietnam. In particular, foreigners who enter Vietnam lawfully are entitled to purchase and own residential houses in Vietnam without the quantity limits which were previously applied. Additionally, representative offices and foreign-invested enterprises can purchase and own residential houses for their business needs. Under the law, 'residential houses' include apartments and houses developed in real estate projects.
More importantly, foreigners have nearly the same ownership rights as Vietnamese citizens. Foreign owners can sell, lease, capitalise, bequeath, mortgage, pledge or exchange properties. Vietnamese citizens that buy properties from foreign owners can enjoy long and stable use of the properties.
Foreigners residing and working in Vietnam have been encouraged to purchase housing due to:
- the expansion of foreign housing ownership rights;
- the expansion of general housing ownership rights; and
- the increased assurances when liquidating properties.
According to a report, in a recent sale by a local developer in Ho Chi Minh, around 150 foreigners registered to buy apartments in the project. Foreigners' increased interest in owning houses in Vietnam has thus created significant demand and further investment.
Vietnam's consistent policies in relation to land, investment, housing and real estate have generated greater interest from foreign investors and created more momentum on the market. To maintain this interest, the government's implementation guidance must embrace the spirit of the new laws, not narrow the scope of them at the decree or circular level, as has happened in the past.
The lack of detailed guidance on implementing the laws that are already in effect has caused delays in business procedures and investment registration. Further, it is still unclear whether commitments such as "issuing the business registration certificate within three working days" under the Law on Enterprises are practical. That said, the goal of "giving the enterprises freedom to do business to the extent not prohibited by laws"(3) may be achieved in the coming decrees and circulars, which will provide detailed guidance on the implementation of the laws.
With regard to the Law on Residential Housing and the Law on Real Estate Business, some concerns exist over the ambiguity of the laws and the uncertainty regarding how they will be implemented in the coming guidance, including the following:
- How will the ratio limit on foreign ownership (ie, not over 30% of total units in an apartment building or 250 houses in a ward) be enforced? Further, how can developers check such information in order to undertake a legal proper sale?
- Will foreigners who buy residential properties from Vietnamese individuals be subject to the ratio limit? If so, how will this be controlled or checked?
- Under the Law on Real Estate Business, foreign-invested developers can collect advance payments of up to 50% of the sale price from homebuyers. However, the Law on Investment treats enterprises with foreign capital of less than 51% of the total charter capital as local enterprises. As such, will this limit be applied under the Law on Real Estate Business? Many foreign investors believe that the limit should be applied consistently.
- How will the requirement under the Law on Residential Housing that foreigners enter Vietnam lawfully be enforced? It is hoped that the authorities will not implement different interpretations of this requirement, as previously happened with the former Law on Residential Housing. Arguably, the wording of the new law is clear and no further guidance is needed.
Foreign investors in the real estate and development sectors are continuing to raise concerns, as these sectors are complex and have complicated guidance and procedures.
In order to maintain the attractive investment climate created by the new policies and the upward trajectory of the M&A real estate market – particularly in relation to foreign investors – the government must adhere to the commitments and spirit of the new laws. The coming decrees and circulars should clear any obstacles in the market and provide the necessary guidance in order to implement the laws, rather than create further ambiguities or narrow the new laws. If the government can do so, it will not only maintain the market's momentum, but also ensure that the positive trend in the M&A market continues, thereby boosting the liquidity of the market, stabilising it and increasing its long-term endurance.
For further information on this topic please contact Tran Thai Binh at LNT & Partners by telephone (+84 8 3821 2357) or email (firstname.lastname@example.org). The LNT & Partners website can be accessed at www.lntpartners.com.
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