Real Estate Market: In Search of Effective Fundraising Policy

VNRE - While global economic recovery is lethargic due to financial difficulties of leading economies, Vietnam issued new land management, fiscal and monetary policies in a bid to bolster macroeconomic stability. With respect to real estate field, the introduction of Decree 71/2010/ND-CP of the Government has created positive effects upon property investment and business. However, in practice, this policy also limits cash flows into real estate because of relatively stringent and rigid rules on fundraising. To learn more about this, Journalist Do Son of Vietnam Business Forum Magazine has an interview with Mr Nguyen The Diep, Vice President of the Vietnam - Germany Small and Medium Business Association, and President of Reenco Song Hong Investment Joint Stock Company.

What is your assessment of the positive effects of Decree 71 dated August 8, 2010 on real estate investment and business?

Real estate business requires huge financial resources. No matter how big a property company is, capital availability is limited. Therefore, they have to mobilise capital from outside sources like credit institutions, organisations, individuals and households to have enough resources for their business operations. Nonetheless, the introduction of the Decree 71 in lieu of the Decree 90 largely affected capital mobilisation of companies. But, it is undeniable that this ruling has certain positive effects on property market. In my opinion, the Decree 71 has three major positive differences in mobilised capital management of investors over the Decree 90:

Firstly, investors can mobilise capital by issuing corporate bonds, nonbanking institutions (investment funds, financial companies, etc.) and certainly loans from commercial banks.

Secondly, primary investors can transfer a part of their projects attached with infrastructure to secondary investors when their projects have completed site clearance.

Thirdly, property project investors can mobilise capital from individuals and organisations to build houses on profit-sharing or production-sharing principles on the basis of negotiation and sharing. But, this approach is not allowed to exceed 20 percent of total products of individual projects. Previously, according to Decree 90, investors entered into capital sharing or lending contracts before fixing products and executing.

So, Decree 71 will have positive impacts on the real estate market in some of the following aspects. Firstly, investors can develop capital sources and increase capital healthily and transparently. Secondly, the Decree specifies the time for evaluation and approval of projects. Housing projects with less than 500 apartment houses will be decided by district authorities and the time for this process is no more than 30 days. Hence, the supply of the property market will increase, helping balance supply and demand, ease local fevers and reduce risks for end customers. The process of making financial capital sources healthy is also a good element for the market, as fundraising must be carried out in a clear framework, not free as earlier. As a result, property investors will have better ‘health’ in the future.

But, it is said that this policy inhibits capital from flowing into the real estate market. What is your opinion about this?

That’s correct. Relatively restrictive regulations on capital mobilisation provided by Decree 71 and Circular 16 affect the rights to mobilise and attract investment capital. Specifically, these regulations provide lending from credit institutions and investment funds while not mentioning loans from other institutions and individuals. Investors are also not allowed to issue bonds attached with the preference rights to purchase apartment houses. These reduce the appeal of projects in the eyes of business partners. Worse, the time of raising funds for projects according to profit-sharing principle or production-sharing principles prevents investors from forming business cooperation with other partners in accordance with the Law on Investment.

In addition, the unclear definition of “mobilising a maximum of 20 percent” leads to different interpretations. Decree 71 and Circular 16 do not define what capital mobilisation means, but only apply the method of itemising contracts to define capital mobilisation. Using the itemisation method is not enough, because it drops many types of contracts as provided in Civil Code 2005, like the deposit contract which provides the guaranty of future contract signing and enforcement.

The business cooperation contract signing clause stipulates that in case of not having certificate of ownership rights and not receiving houses, business cooperation parties are not allowed to sign contracts with the buying and leasing parties, but transfer such contracts to investors to sign. This provision will raise difficulty for all concerned parties, reduce the autonomy of business cooperation parties, increase the responsibility of investors, and in fact cause disputes in case investors swindle.

According to Article 63 of Decree 71, authorisation contracts are not permitted for public notarisation for the purpose of restraining multiple transfers of houses. Nevertheless, such a regulation is not really fair to both investors and buyers because the trading of property products brings profits for investors. Therefore, this is also regarded as an important legitimate channel of capital mobilisation.

Notably, while a series of barriers in the Housing Law and the decrees guiding the implementation of Law on Real Estate Business are not eased, the ongoing credit squeeze will send the market to the hands of foreign companies. Decree 71 plus the tight credit policy provided in Circular 13/2010/TT-NHNN, which specifies that the risk ratio of credit to property investments is lifted to 250 percent from 150 percent and the ratio of credits for nonmanufacturing sectors like securities and real estate is reduced, has caused serious impacts on the real estate market and the economy as a whole.

It is believed that this is a war of life and death, but it will make the market better. I think this is right but insufficient, because the current situation is the upshot of many previous regulations and policies.

Do you have any recommendations to rescue the property market?

I think the most important thing is to improve macro management mechanisms and policies, and to ensure the maximal exploitation and mobilisation of domestic and foreign financial resources for housing development, property market development, and sustainable economic development.

Up to 70 percent of Vietnamese real estate businesses are small and medium-sized. Thus, many may collapse as a result of Decree 71 and tightened credit policy. State agencies should issue policies to balance and sustain development.

Source: VCCI News