By John Frangos, Limcharoen

Recent changes, and expectations of more, in Vietnam’s foreign ownership laws have rekindled the real estate market there. Savvy investors should keep watch for developments this year that could have a significant bearing on future prospects.

The country’s real estate market has bottomed out after undergoing a boom-and-bust cycle. Moreover, there are signs that Vietnam’s overall economic situation has improved after a recent downturn.

One key development to watch for is a new draft law that, if approved, will further open the residential property market to foreign investors. The law would mark a watershed moment for foreign property purchasers in Vietnam.

Why Buy in Vietnam?

With its friendly people, natural beauty and proximity to wealthy hubs such as Hong Kong and Singapore, Vietnam has significant potential in the luxury home market. The country boasts lush forests, temperate mountain highlands and a long coastline with miles of unspoilt beaches. Moreover, property prices are generally lower than in other major Southeast Asia holiday destinations.

“For second home residences,” says Mauro Gasparotti, an executive director for Alternaty, a Ho Chi Minh City-based property and hospitality consultancy, “Vietnam offers beachfront property that would be very expensive anywhere else.”

“Vietnam still gives investors the possibility to buy a condominium unit or landed house in locations that are very close to the central business district for accessible prices,” adds Mr. Gasparotti. Moreover, since Vietnam’s two main cities, Ho Chi Minh City and Hanoi, are growing rapidly and are expected to receive influxes of investment over the coming years, the value of residential units and land is expected to grow over the medium- and long term.

Adding to Vietnam’s value as a property destination is the growing number of tourists. While the numbers are smaller than neighbouring Thailand, there were 7,572,352 international arrivals in 2013, 10.6% more than the numbers in 2012, according to the Vietnam National Administration of Tourism. With the influx of tourists, more accommodation and better conveniences for expats visiting and living in Vietnam can be expected. The rise in tourism should also have a positive effect on property values, especially in resort areas such as Da Nang, Nha Trang, Mui Ne and Phu Quoc.

Real Estate Market Background

Since it did not fully develop until well into the 1980s, Vietnam’s real estate market is characterised by its relative youth. Until the mid- to late 1980s, government was focused on implementing agricultural co-operatives. Subsequently, there were efforts to decentralise property rights, which culminated in the Land Law of 2003. As decentralisation continued, and Vietnam moved forward with market-oriented policies, domestic investment in the real estate sector rose quickly. In large part, the investment boom was fuelled by speculators and the lack of alternative investment options. Over that period, new construction boomed in both urban and coastal areas.

Then in 2008, the global economic crisis, plus a downturn in Vietnam’s own economy, caused a sharp drop in real estate investment. High inflation and other macroeconomic problems contributed to the malaise. Borrowers defaulted on loans, most notably those linked to real estate, and banks consequently curtailed lending. Property was no longer an attractive investment and supply far exceeded demand. The real estate market froze.

Now, however, there are strong indications that the property market has turned a corner. Inflation has been tamed, and the bad debts that permeate the banking system are being slowly addressed. Prices have fallen from their heights to more reasonable levels as speculation was tamed.

Now major new developments are planned, including a USD2.5 billion residential and hotel project on the south-central coast. As well, individual villa sales have increased markedly in the resort area of Da Nang, according to a January report in The Wall Street Journal.

Legal Framework for Foreign Purchasers

A key fact non-residents must be aware of in Vietnam is that expats are prohibited from owning land. All land belongs to the people and is administered by the state. As such, land is allocated or leased to land users. For foreign individual buyers, residential property can only be leased (albeit on a long-term basis of 50 years) instead of owned outright. Indeed, until a few years ago, foreigners were generally prohibited from purchasing residential property in Vietnam altogether.

In 2009, Resolution 19 was issued as a five-year pilot project. Under it, for the first time, foreigners were allowed to purchase residential property. The resolution technically expired at the end of 2013, although it is uncertain whether its application will cease. In any event, there are significant limitations attached to Resolution 19. For example, the only foreign buyers entitled to purchase property are those individuals who fall into one of the following categories:

• Investors who make direct investments to Vietnam;
• Those married to Vietnamese citizens;
• Expatriate managers working in Vietnam; or
• Those possessing special skills that are needed in Vietnam.

Moreover, only 50-year lease terms for apartments – not individual houses on plots of land – may be purchased under the terms of Resolution 19. Buyers may only purchase one unit at a time and are prevented from subleasing the premises.

Given those limitations, it is not surprising that the number of foreign investors who have purchased apartments under Resolution 19 has been fairly low. In order to facilitate the real estate market’s recovery, then, various government ministries have proposed a law that would lift most of those restrictions.

Under the resulting new Draft Housing Law, both individual investors and foreign organizations would be entitled to invest in property. The only requirement for individuals would be that they hold a visa, valid for at least three months, to enter the country.

Under the proposal, in addition to apartments, foreign individuals and organizations would be allowed to acquire houses of less than 500 square metres in size. As well, the maximum lease period for an apartment would be extended to 70 years, foreigners would be able to own more than one residential property at a time, and the properties could be leased out.

Another prospective liberalization of the housing ownership laws would allow foreigners to invest in property through an offshore share ownership plan that includes a mix of offshore and onshore transactions. As such, the proposal, called the Nam Hai structure, would not involve direct leases to individual buyers.

Outlook For The Future

Vietnam’s real estate market is therefore poised to improve in 2014. Many of the country’s economic challenges are being addressed. The country’s stock market rose by 22% in 2013. And importantly, residential housing prices have eased down to more reasonable levels.

Meanwhile, Vietnam is in negotiations with other Pacific Rim nations, including the United States, Canada, Japan, Australia and Singapore, on a Trans-Pacific Partnership free trade agreement. If it is signed, Vietnam’s economy and real estate market are likely to benefit.

As for the Draft Housing Law, while passage is not certain, the momentum required for approval seems to be there. The proposals have received the backing of the prime minister and other key government officials. There is a general trend toward greater economic openness and it could be just a matter of time before Vietnam’s housing market is more welcoming of foreign buyers. For anyone interested, it would be wise to keep a sharp watch on this year’s developments.