Quang Le and Kim-Cuong Le of LNT Partners in Ho Chi Minh City discuss developments in real estate project finance in Vietnam
Real estate projects generally demand a large amount of capital from investors, especially for housing projects. The majority of housing projects are implemented in urban areas, where land use taxes and site clearance expenses are extremely high. Thus, financing is considered the most important factor in the development and operation of real estate projects.
In Vietnam, there are two mechanisms to finance real estate projects: mortgages and the sale of off-the-plan houses to customers. However, both options pose risks that investors, banks, and buyers are rightfully concerned about, especially in a country where the regulating legal system is not well-developed. Those risks became very real during the financial crisis earlier this decade, followed by the freezing of the real estate market. That freezing could be attributed to the dysfunction in the legal system for financing real estate projects. The laws and regulations have since been upgraded to eliminate that Achilles’s heel, but the implementation of such provisions is still proving challenging.
Mortgage of housing construction projects
A housing construction project can be wholly or partly mortgaged if the following documents are provided: the approved project’s documents and technical designs, and the certificates or decisions on land assignment and land leases from authorities. An investor can also mortgage off-the-plan residences in his/her project if the foundations of the residences have been completed and have not been previously mortgaged by the investor. Depending on their capital requirements, investors can choose the most appropriate option to finance their projects.
Investors do not necessarily need a Certificate of land use rights and ownership of houses and other land-attached assets (the “Certificate”) to mortgage their investment projects. Nevertheless, this is where potential risks appear. The laws and regulations do not provide any mechanism for banks to protect their rights in case the State recovers the land from the investors. Pursuant to the Land Law 2014, the competent authority may seize the land if the land user fails to fulfill its financial obligations with the State. If that occurs, even if the banks take the secured assets to make up for the loan, there is not much to take because the land, which is the most crucial asset to a housing project, was already seized by the Government.
Mortgage of future acquired assets on land
The investor can also mortgage off-the-plan residences in his or her project. Circular 26 requires the mortgagor of the future acquired properties to register the mortgage at the competent authority (land registration offices and their branches). However, in order to register the mortgage, the dossier must include a Certificate. Therefore, the investor must complete all the financial obligations regarding the land. That includes paying site clearance expenses, as well as making rent payments and paying registration fees. After meeting those obligations, the investor is able to mortgage the off-the-plan residences for a loan.
Recently, some provincial Departments of Natural Resources and Environment have published lists of mortgaged real estate projects registered in their localities. These actions are motivated by The Harmony residence’s incident, where nearly 600 people are at risk of losing their apartments, because the investor has mortgaged all the land and the future acquired assets on land since 2012. In 2016, only after the bank announced its intention to seize the residence for recovery of the investor’s loan, was the truth revealed to the residents.
Currently, in order to protect the consumers, lists of mortgaged projects are being announced by the authorities. Only projects which have been granted Certificates may register their mortgages, which led to the announcement of mortgaged projects. However, from the perspective of the investors affected, the announcement of their mortgaged projects could adversely impact potential sales because the projects have to be free of the mortgages (or parts of the mortgage) before selling any off-the-plan residences.
There are two disadvantages for investors if they choose to mortgage off-the-plan residences. The first one is that they need to obtain a Certificate, which means they have already spent a large amount of money for site clearance and land rental. The second disadvantage is the public announcement of mortgaged projects, which could make customers hesitant to purchase units. Based on these factors, investors tend to choose the first mechanism (mortgaging the housing project or a part of the project for a loan). In fact, only 10% of projects in large cities such as Hanoi or Ho Chi Minh City are registered for mortgages at the authority. For example, in Ho Chi Minh City in 2016, only seventy-seven of 600 projects had their mortgages registered. The majority of housing projects must be de facto financed from banks’ loans with secured properties. Therefore, the remaining projects are likely to have mortgages over their construction projects, but not over land use rights, or future acquired assets on land. Accordingly, the investors were not required to register the secured transactions.
Article 55 of the Law on Real Property Trading stipulates that investors, in order to sell off- the-plan houses to buyers, must obtain guarantees by commercial banks in case the investors fail to transfer the buildings on schedule as committed. Article 55 creates two issues:
(i) For residential megaprojects, there is a question as to which bank will make the guarantee. For example, Royal City, a VinGroup real estate project in Hanoi, has a total investment capital of 18,000 billion VND, equivalent to 700 million US dollars. That amount surpasses the charter capital of thirty of thirty-three banks listed by the State Bank of Vietnam which are eligible to provide bank guarantees for housing construction projects;
(ii) The banks will only issue guarantees if the investors have assets with sufficient value to secure their obligations. The investors that already spent millions of dollars on construction may not be able to meet those requirements.
Due to the above obstacles, there are those who would rather violate the laws and run away with the consumers’ money when the project is not feasible anymore. In the end, the consumers are the ones who suffer.
Real estate project finance is a complex legal field that needs to be more fully developed, even though Vietnamese legislators and executive bodies have already made great efforts to do so. Sometimes, the law benefits investors, but creates great risks for banks and customers. And sometimes the exact opposite is true. Finally, some legal requirements appear impossible to meet, creating pressure to meet them through inappropriate responses, such as violating the law.