» » Post-Decree 71: Easy for Long Term, Hard for Short Term Investment

VNRE - The Decree 71/2010/ND-CP guiding the implementation of the Law on Residential Housing, which officially took effect on August 8, 2010, has recently caught the high attention of real estate investors in Vietnam. How will this decree affect the real estate market in the upcoming time?

Difficult for short-term speculative projects

The transfer of project land in the form of capital-contributing investment contracts is quite easy before the Decree 71 came to effect. Most real estate companies liquidated old capital-contributing contracts and replaced the name of new buyers or set up contract appendices. Sellers pay a trading fee specified by project investors (usually less than 1 percent of total transaction value) and property transfer tax. It usually takes one week to complete this transaction.

In addition, in order to purchase this type of real estate, speculators only need to look at the design map to select products without having to pay field visit as other types of residential housing and land.

The facility of transactions in the form of capital contributing contracts makes this market segment have highest level of liquidity on the real estate market. In Ho Chi Minh City, most speculators tread water with this form of property. Meanwhile, to trade pink residence books, investors need at least two weeks (normally four weeks) for the notarization of contracts, tax payment and registration.

However, since August 8, 2010, the Decree 71 disallows the transfer of project land in the form of capital contributing contracts (details in Clause 1, Article 60). Hence, cooperation contracts signed before August 8, 2010 will not be allowed to transfer until purchase contracts are reached with investors. With this policy, the chance of “treading water” will become much more difficult than before.

The market of long-term investors

Under the impact of Decree 71, when the real estate market stops trading project land in the form of capital-contributing contracts, other market segments are expected to be more active. The demand will be switched to land and houses with ownership certificates instead of investing in project land. Besides, the supply in these segments will also increase.

For example, a man owns two types of real estate land, namely house and land with ownership certificate and a product-sharing contract, he can only sells the first one for money when he needs. With low liquidity, this market segment will attract medium and long-term investors.

Besides, on the primary market, there will be no longer much room for speculators to complete a deal in a very short term because the Decree 71 provides investors cannot use more than 20 percent of houses in each project to raise funds in the form of capital-contributing contracts. The transfer is not allowed until purchase contracts with investors are signed. For the rest of apartments, speculators hardly tread water, given longer time and higher cost than old-type investments.

Difficult to increase prices in the short term

In the short term, the real estate market in Vietnam will hardly increase prices following the enactment of the Decree 71 for the below reasons:

First, without speculators on the secondary market, the market lacks the ground for price hike.

Secondly, the State Bank of Vietnam (SBV) is likely to pursue tightened monetary policies in the coming time to stabilize the local dong. Besides, banks are discouraged to provide loans for real estate investors.

Thirdly, after a long period of price rise, property prices are not low in relation to other regional countries. The price rate in Ho Chi Minh City climbed 2-4 times since early 2006 while the inflation in Hanoi is even higher in the same period.

In the long term, the Decree 71 helps minimise risks for buyers. This strengthens the confidence of investors in long-term housing investments. Additionally, a brake on real estate speculation will make the market develop more sustainably.

The enforcement of the Decree 71 aims to weaken speculation and reduce market liquidity. Tight monetary policies and limited lending for real estate investments are the devastating news for the real estate market in the short term. In the long term, the government’s policy for the sustained real estate market development is necessary.

Source: VCCI News

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