Kickstarting the real estate market after COVID-19

July 04, 2021

Faced with the complex impact of Covid-19 on economic and social activities, demand continues to decline and possibly follows a prolonged downward trend due to more cautious investors and financial pressure. From a business perspective, as a result of social distancing, real estate transactions slowed down, premises, apartments for rent, and tourist real estate were severely affected. Although the disease has been gradually controlled and real estate has been the most popular investment channel, can the real estate market recover as soon as the epidemic ceases?

Vietnam International Arbitration Center had an interview with Mr. Dang Hung Vo - Former Deputy Minister of Natural Resources and Environment - Arbitrator of Vietnam International Arbitration Center and Mr. Huy Nam - Stock market expert - VIAC arbitrator to shed light on the situation and predict the possible changes in the real estate market.

Recently, problems with legal regulations in project implementation, especially the overlap between the Land Law and the Law on Bidding regarding the land allocation and lease procedure to successful investors, are considered a big bottleneck by many real estate businesses. The introduction of Decree 25 is a clear demonstration of the State's determination to remove institutional problems and maximize congested resources in the economy.

  1. Up to the present, Covid-19 is well controlled. What is the next step the industry is considering?

Arbitrator Huy Nam: Over time, we have witnessed significant market fluctuations due to the pandemic. A similar pattern can be observed in the real estate industry. During the pandemic, it can be observed that transactions have become difficult. Many projects are stopped and only a few where investors signed contracts are in progress. After the pandemic, whether the real estate market quickly recovers or not depends on many issues, one of which is investment “officials” and investors’ obligation.

After the pandemic, the real estate sector is likely to continue encountering difficulties which are the result of certain. First, the buyers’ financial situation leads to their poor ability to pay. Second, the “excitement" in the housing market also subsided, consequently, posed challenges to the real estate industry.

In my opinion, no one can predict whether the real estate market will develop from now until the end of the year. To heat up the market, issues need to be resolved, for example, implementing policy for people in dire need of a house through developing a series of subsidized housing. On the other hand, the second option is developing affordable housing in a clear investment area. For example, recently I have talked about the problems with condotels, which has been a problematic real estate even before the pandemic. At this point, we can take advantage of the pandemic to settle legal issues and develop this product line.

Arbitrator Dang Hung Vo: When considering the post-Covid-19 market, a look at the market situation before Covid-19 is essential. Surely no one can forget that in 2019, there were two important events in the real estate market. First, the development of tourism - resort real estate and Condotel came to an abrupt end after operating without a legal framework. Secondary investors left the market when they found that the draft law did not have practical implications. Second, the overlap of regulations significantly reduced the number of approved investment projects in 2019. Hanoi and Ho Chi Minh City’s authority approved fewer projects than the years before.

At this "intersection", even though people want to buy houses, they are waiting for the lowest price before purchasing. In my opinion, this is not possible since real estate project investors are sober enough to plan for gaining profits in the next few years. Project investors with low financial potential consider transferring projects under a merger and acquisition (M&A). Most likely, many experienced investors are selling real estate to hoard supply in order to manipulate the market when it  is short of supply in the next few years. This is a major problem requiring urgent attention.

As such, the pandemic can be impactful on the real estate market’s slowdown pre-Covid-19. State agencies should have taken advantage of the slowdown to amend regulations so that, after Covid-19, the market can operate fairly . The legal system is incomplete, therefore, legal risks pose an immense threat to the market during the pandemic and may lead to more problems in the future.

  1. From your point of view, we should prioritize improving the legal system. Recently, in order to achieve this goal, the Government issued Decree 25/2020 / ND-CP on investor selection. Dóe Decree 25/2020/ ND-CP has any impact on the current real estate situation?

Arbitrator Huy Nam: Decree 25/2020/ ND-CP is a general decree, including but not limited to the real estate sector because it elaborates on the Law on Bidding. Decree 25/2020/ ND-CP mostly regulates the bidding sector such as PPP projects, large investment complexes such as urban areas, industrial zones, etc. However, with the inclusion of many investment fields and several articles on real estate-related content, this Decree provides some coherent bases which remove certain difficulties in the implementation of real estate projects.

The introduction of Decree 25/2020/ND-CP affects many sectors and partially supports real estate investment. For example, there are more specific regulations on the issues related to auctions of land use rights or real estate investment. Decree 25/2020 / ND-CP enables real estate investors to invest more confidently in the market.

Arbitrator Dang Hung Vo: Decree No. 25/2020 / ND-CP is a substantive legal document and replaces Decree No. 30/2015/ ND-CP issued 5 years ago. This Decree has a lot of improvements in the bidding process for projects using land and facilitating the investment environment. For example, it eliminates pre-qualification steps in land-use projects, which can be considered a reform in administrative procedures for the review and approval of investment projects.

  1. Decree 25/2020/ ND-CP is expected to remove problems and difficulties for investment projects using land compared in Decree 30/2015/ ND-CP. What is your opinion on this replacement?

Arbitrator Huy Nam: Looking closely, it can be seen that Decree 25/2020 / ND-CP has reduced some prequalification procedures for projects using land. In my opinion, there is an overlap in the provisions of Laws, Decrees, and other legal documents and complications in implementing within the Vietnamese legal system.  It is good if the rules are clear. Currently, real estate investors or project investors are afraid of the procedures. The simpler the procedure is, the less difficult the implementation process will be. And it will be even better if there is a mechanism to deal with procedure questions from investors.

Arbitrator Dang Hung Vo: Decree 25/2020 / ND-CP has many changes in the bidding process for projects using land since it facilitates the investment environment. It eliminates prequalification for land-use projects, which is considered an administrative procedure reform in the review and approval of investment projects. This is a welcoming change, drawing from the lessons and experience of Decree 30/2015 / ND-CP’ s implementation for 5 years.

Considering the feasibility of Decree 25/2020 / ND-CP in relation to the Land Law 2016, in the Land Law 2013, there are no regulations on land allocation or lease by the State through tendering for projects using land as the Drafting Committee considered that this form of bidding was not practical. Therefore, a conflict of law arises in determining the state's method of allocating and leasing land to investment projects for business purposes: should land be auctioned or should there be bidding for a project using land?

Due to legal conflicts, Decree 25 has added Clause 3 in Article 11. It states that the “bidding mechanism for projects using land is applied where the conditions for organizing the auction of land use rights in accordance with the land are not met”. Thus, the legal conflict in form has been eliminated, but it leads to incoherence in the decision on the method of land allocation and land lease within the authority of the provincial People's Committee.

According to the provisions of the Land Law 2013, the State recovers land right after the land use planning is approved and conducts a land auction to select investment projects. This provision indicates that land under investment projects whose policies have been approved cannot be recovered, i.e. there is no bidding for projects using land in which the land has not undergone clearance.

However, in practice, at the provincial level,  the bidding method for projects using land is preferred to land auction because there is no need for site clearance. Thus, Decree No. 30 is more practical because it allows acquiring land as planned before auctioning pursuant to the land law. Decree No. 25 has removed the above legal conflict but creates difficulties in facilitating the investment environment. Unfortunately, the Land Law amendment draft has been postponed!

  1. At the present time, the pandemic is gradually stabilizing. In addition, Decree 25/2020 / ND-CP is issued while the Investment Law is in the drafting process. In your opinion, is it considered "enough legal certainty" and creates opportunities for businesses or not?

Arbitrator Dang Hung Vo: In order to develop the market, we need to ensure that there are no legal risks and solving legal issues. As a result, investors will have more opportunities and so do the real estate market.

It is simple to eliminate legal risks since the State has the power to resolve. Legal risks only exist because state agencies who have legislative power perform unprofessionally or inactively.

For example, Housing Law 2014 allows foreigners to purchase houses for a specific term pursuant to free trade agreements (such as CP TPP and EV FTA). At the same time, this also promotes the development of the real estate market in Vietnam. However, the  Land Law 2013 still stipulates that foreigners do not have residential land use right in Vietnam. Some investors have boldly developed the high-end commercial housing segment targeting foreign individuals. Foreigners, seeing the existing legal risks between housing laws and land laws, are not interested in the high-end commercial housing segment, which leads to a surplus of high-end commercial housing.

The postponed amendment of the  Land Law 2013 is creating conflicts with other related laws such as the Housing Law 2014, the Law on Real Estate Business 2014, the  Investment Law 2014, and Law on Public Investment 2014, Law on Construction 2014, Law on management and use of public assets 2017, Law on Forestry 2017, etc.  These legal conflicts are the cause of legal risks.

Regarding the importance of Decree 25/2020/ ND-CP, it removes a legal conflict with the 2013 Land Law but creates other legal risks within itself.  Thus, this Decree is not a cure-all to legal risks. Such risks that have not yet been revised in the 2013 Land Law are still hindering investment. Vietnam has controlled the global pandemic,  which is a great triumph, but as long as legal risks exist, controlling the pandemic does not bring any advantages.

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