Become a member

Get the best offers and updates relating to Liberty Case News.

― Advertisement ―

spot_img

Thank you for your feedback – In-House Community Congress 2022 -Hong Kong

Thank you for submitting the feedback form. If you have any questions or require a copy of the slides from speakers at the Hong Kong...
HomeCommon ways to acquire real estate projects in Vietnam

Common ways to acquire real estate projects in Vietnam

Tran Thai Binh_CBRE profile pic 1_2019By Tran Thai Binh, Partner
LNT & Partners

The booming real estate market of Vietnam has been a lucrative attraction to many foreign investors. However, real estate investment in Vietnam is very challenging to foreign investors, partly because of differences in the legal system in respect of land and real estate and legal procedures relating to project development, and also partly because of transaction practices, cultural barriers and other factors.

As it is hard to discuss all issues relating to this matter in this limited space, the article will focus on some common ways for a foreign investor to enter Vietnam’s real estate development market with sharing from the author’s daily practice.

Overview of Real Estate Project Development in Vietnam

A basic condition for real estate project development is possession of land for such development. Although the Land Law allows foreign investors to lease land use rights from the State, it is hard in practice for foreign investors to obtain land from the Government for project development purposes. In addition, before getting to the stage of commercially exploiting a real estate investment project, the developer has to go through many time-consuming and unfamiliar administrative procedures, such as obtaining in-principle project approval, land compensation and clearance, land allocation, 1/500 design plan approval, developer approval, detailed design approval, construction drawing approval, etc.

In light of these difficulties, foreign investors may find it more feasible to acquire fully licensed projects from local developers or somehow cooperate or form a joint venture with local partners in project development. The following are practical ways to realise such acquisitions.

Project Transfer

The Law on Real Estate Business allows a property developer to partially or wholly transfer his project to another investor.[1] However, in reality, since transfer of a project also means transfer of the land use rights attached to it, the foreign investors must have a corporate existence in Vietnam in order to enter into the project transfer agreement. Simply put, the foreign investor must have set up an enterprise in Vietnam before taking over the project.

Furthermore, the transferor must meet certain conditions to transfer the project, for example it must have:

  • obtained a written approval for the transfer from the local governmental authority (who has approved the project);
  • obtained all approvals for the project development (e.g. land use right certificate, 1/500 approval, land compensation and clearance, developer approval and etc.); and
  • completed investment in infrastructure attached to the project.

In reality, verifying whether the transferor has completed its investment in technical infrastructure attached to the project is a time-consuming and complex process involving numerous authorities.

As for the transferee, it must be licensed to partake in property development and have sufficient financial capacity to develop the project as scheduled and approved.

Business Cooperation Contract (BCC)

A BCC means an agreement between investors for business cooperation on the basis of profit-sharing or product-sharing without setting up a new corporate entity.[2]

In this vein, even if the Vietnamese authorities have granted investment registration certificates (IRC) to foreign investors to lawfully recognize the latter’s investment in Vietnam,[3] the project would still be implemented in the name of the local partner. Simply put, the local partner is still the project developer and owner. Business activities would be conducted under the local developer’s name.

Local partners prefer this option because this will not change the legal status of the project and no approval from the authorities is required. However, in view of the counter partner’s interests, this approach is risky as the foreign partner only has the BCC as the legal basis for its investment.

Acquisition by Equity or Share Transfer

Foreign investors are also permitted to form joint ventures with or acquire shares or capital from local businesses under the Law on Investment.[4] Accordingly, foreign investors may contribute more capital to an existing local business, or buy shares or capital held by owners in such local business to partially or wholly own that local business.

In view of buyers, this approach may be risky because of concerns about existing or hidden liabilities of the target company.  However, it is often preferred in practice due to its relative simplicity in terms of legal procedures compared to the project transfer approach, and also due to the legal restrictions in relation to foreign investment in real estate development in Vietnam.

For example, some local developers may already run out of finance before having fulfilled all mandatory legal procedures for the project, while foreign investors cannot wait until the completion when there may be no more opportunity for them.

A thorough due diligence of the target company, the partner, and/or the project may address the concerns. The due diligence should assess the legality of the project, possibilities and risks of land recovery by the State, disputes with others, fulfilment of financial obligations by the land owner and so on.  Many issues need to be verified and assessed.

Furthermore, if acquiring more than 51% of capital from local owners in a company, foreign buyers are required to obtain an approval from licensing authorities.[5]

Forming a joint venture with a local partner is also a common approach whereby a local partner and a foreign partner jointly set up a company to develop a project. The local partner usually contributes its land use rights to the company and the foreign partner contributes the capital required for the project.

Using a Local Nominee

Some foreign investors also use their local contacts as nominees who could act as owners of local businesses and do real estate business, especially properties of which foreign ownership is prohibited. Even though there may be ways to control the nominees, the foreign investors would still be exposed to certain risks. Therefore, this is not recommended.

***

Above are ways for foreign investors to become a real estate developer in Vietnam market. It is hard to say in the abstract which approach is better because it always depends on the particular facts, the investor’s expectations, or legal status of the land or the project. Foreign investors should seek advice from legal counsels who should be able to reach a judgment after reviewing all relevant factors.

 

[1]Law on Real Estate Business 2015, Article 48

[2]Law on Investment 2014, Article 3, Clause 8

[3]Law on Investment 2014, Article 28

[4]Law on Investment 2014, Articles 24, 25, 26

[5]Law on Investment, Article 26

W: https://lntpartners.com/