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Vietnam’s New Real Estate Business Law
Vietnam’s new Real Estate Business Law, set to come into force in 2025, enforces stricter regulations on real estate transactions. This includes setting deposit caps, defining property eligibility criteria, and enhancing documentation requirements.
On November 28, 2023, the National Assembly of Vietnam approved the new Law No. 29/2023/QH15 on Real Estate Business. Scheduled to take effect on January 1, 2025, the new law will supplant the 2014 Law on Real Estate Business. Its primary aim is to bring clarity and transparency into Vietnam’s real estate industry.
The new law ushers in a series of provisions that are set to reshape how Vietnam manages real estate transactions. These include:
- Stricter conditions for off-the-plan real estate sales: Properties must be part of formally approved projects for constructing houses and other structures, ensuring transaction transparency and legality.
- Clear guidelines on deposit amounts: The maximum deposit for off-the-plan purchases is capped at 5 percent of the purchase price, aiming to safeguard both buyers and sellers and enhance financial transparency.
- Buyer empowerment regarding bank guarantees: While sellers are still obligated to secure a bank guarantee for off-the-plan projects, the new law empowers buyers to decide whether a specific guarantee for the purchase is necessary, simplifying administrative procedures.
- Minimum investment requirements for investors: Investors must contribute a minimum of 20 percent of the total capital for projects under 20 hectares of land, and at least 15 percent for larger projects, ensuring financial stability and accountability.
- Provision for deferred payments: The new law formalizes a provision allowing real estate buyers to defer 5 percent of the total payment until they receive the ownership certificate, offering added flexibility and assurance throughout the transaction process.
These changes collectively aim to mitigate risks and enhance confidence in Vietnam’s real estate market.
Key changes introduced in the new law
Real estate business scope for foreign-invested enterprises
The new law introduces significant changes that may impact business operations in Vietnam, particularly those of foreign-invested enterprises (FIEs). All FIEs, irrespective of their foreign capital, currently encounter strict limitations on engaging in real estate activities compared to domestic companies. This situation has generally deterred FIEs from participating in real estate investments.
Things are about to change with the new law, which will categorize FIEs into two distinct groups:
- FIEs subject to conditions and procedures outlined in the Law on Investment for foreign investors: This group likely comprises companies where foreign investors hold more than 50 percent ownership, directly or through subsidiaries, as defined by Article 23 of the Law on Investment.
- Other FIEs falling outside the aforementioned group: This category includes primarily FIEs with 50 percent or less foreign ownership, either directly of through their subsidiaries.
Under the new classification, FIEs with 50 percent or less foreign ownership will now receive similar treatment as domestic entities in matters concerning real estate business. This means they will have fewer restrictions and more opportunities to engage in real estate activities, and shall be subject to the regulations applicable to domestic companies.
Deposits for the sale and lease of properties
The new real estate law introduces, for the first time, regulations regarding deposits for property sales and lease-purchases. Property developers are now restricted to collecting a maximum deposit of 5 percent of the contract price from customers, provided the property meets all trading requirements outlined in the new law. The deposit agreement must detail the contract price and the trading construction floor area in cases of sale or lease-purchase of construction area.
This provision aims to deter developers from raising funds from customers through deposits or reservations for projects ineligible for trading, thus mitigating potential disputes.
Properties and real estate projects eligible for trading
The new law identifies properties in three categories:
- Construction works;
- Floor area of construction works; and
- Land use rights relating to a land with existing technical infrastructure in a real estate projects.
Accordingly, the properties and real estate projects available for trading are:
- Residential properties and houses to be formed in the future;
- Construction works and construction works to be formed in the future;
- The floor area of construction works and construction works to be formed in the future;
- Land use rights relating to a land with existing technical infrastructure in a real estate projects; and
- Real estate projects.
The new classification of applicable properties suggests that the new law has adopted a more flexible and extended approach to also include mixed-use properties such as condotels or shophouses, which are well available in Vietnam’s real estate market.
Prohibition of land use rights trading in certain urban class areas
The new law introduces new conditions on land use rights trading for property construction, aligning with the New Housing Law.
Land intended for trading must not be located in special class, class I, class II, or class III urban areas. This expands the circumstances under which land use rights trading is prohibited compared to the current legislation.
Trading of land in other urban classes (class IV and V) is subject to specific conditions set by relevant local authorities.
Eligibility for the market
Prior to the circulation of real estate in the market, the new law mandates the provision of specific information and documents to verify ownership, precise location, project execution capabilities, and financial obligations for each real estate type. This includes off-plan properties, existing apartments, buildings, and infrastructure construction within a real estate project.
To ensure the viability of real estate operations, FIEs must mitigate bankruptcy or insolvency risks, maintain a secure ratio of outstanding loans and bonds to equity, and contribute a minimum investment proportion for each project. Typically, a 20 percent share per project is established as the foundational threshold for each area.
Transfer of real estate projects
In the new law, the term “real estate project” refers to an investment endeavor associated with construction activities. Real estate project transfers are only mandated when there’s actual construction involved; otherwise, the transfer procedure outlined in the new law isn’t required.
Moreover, the new regulations enhance the requisite documents for real estate project transfers. These include approval of investment projects, detailed plan approval, completion of compensation and resettlement support, land use rights, absence of project suspension or termination decisions, and fulfillment of administrative sanctions decisions.
In cases where only a portion of the real estate project is transferred, the components or their utilization must be distinct from the remainder of the project in terms of operational autonomy or business objectives.
Additional conditions for organizations engaged in Vietnam’s real estate business
The new law introduces two additional conditions for organizations involved in real estate activities, which were not part of the 2014 Real Estate Business Law:
- Organizations must maintain a balanced ratio of outstanding credit debt and corporate bonds to equity.
- Entities engaged in real estate ventures through projects must uphold a minimum equity level of 20 percent of total investment capital for projects covering less than 20 hectares of land, and not less than 15 percent for projects spanning 20 hectares or more. Developers are required to demonstrate their capability to raise capital for project execution. If an organization handles multiple projects simultaneously, it must ensure adequate equity for each project to meet the prescribed ratio.
The primary objective of the first condition is to enhance developers’ financial resilience, while the second condition reinforces existing regulatory standards, now reiterated in the new law.
Conditions for real estate brokerage
The new law brings significant changes to the landscape of real estate brokerage in Vietnam. Individuals are now mandated to conduct their real estate brokerage activities through licensed entities such as a registered real estate brokerage or an exchange company, rather than operating under their individual names.
Furthermore, the law introduces key stipulations that aim to enhance the standards and accountability within the real estate brokerage industry:
- Personnel requirements: The law has revised the minimum number of required brokers from two to one. This adjustment streamlines the operational aspect of real estate agencies while ensuring that they can efficiently provide brokerage services.
- Regulatory compliance: Real estate agencies are now obligated to adhere to government regulations and implement specific operational protocols for their services. This includes maintaining both adequate physical infrastructure and up-to-date technical facilities to facilitate smooth transactions and enhance service delivery.
These stringent requirements are poised to elevate the professionalism and transparency of Vietnam’s real estate brokerage sector. By setting clear standards and enhancing regulatory oversight, the law seeks to instill greater confidence among stakeholders and foster a more robust and trustworthy real estate market.
Conclusion
With the impending enforcement of the new law, a stronger legal framework is poised to shape Vietnam’s real estate market, offering enhanced protection to customers and potentially catalyzing market growth.
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