Why buy property in Vietnam?

The idea of buying property in Vietnam seems like it could be a step too far for many UK overseas property buyers. In many ways, the country is so far away on the other side of the world, that it is almost as if it is only being seen as a property and economic hotspot because everywhere else has been mentioned.

After all, the country was ravaged by years of fierce fighting, and has remained in a volatile position ever since. However, with recent law changes allowing certain foreigners to buy certain properties, an open forum for development and an expanding economy, Vietnam has many advantages. And all of this is without considering the 3,400 km of coastline.

In addition to the booming economy and the gorgeous coast, Vietnam is emerging as a trading and tourism centre in ways in which we do not hear about here in Europe. The coastal resorts are popular with tourists from Australia and New Zealand, while the country has opened up to international trade, allowing more multinational companies to enter the market in Vietnam on an equal footing with local companies.

Popular buying locations

Extending 1,650 km north to south, Vietnam is only 50 km across at its narrowest point. Home to more than 86 million people, it is a huge country, but the majority continue to live simple and often poverty-stricken lives. Vietnam is mostly low-lying, and should there be a significant rise in global sea levels in coming years, much of the south of the country would be in danger of severe flooding. While much of the population remains in the countryside, the development of cities like Hanoi has long been watched with interest in the region. Ho Chi Minh City has grown to accommodate more than eight million people, and is still developing with new tunnels and bridges across the river to link the various city districts.

Hanoi has had much the same story – rapid development of infrastructure to deal with the growing population with disposable income to spend. At the same time, the business community has grown to help the levels of money in the cities continue to grow, and as the government has lifted the restrictions on how many foreigners are allowed to work in a business, which brings a different perspective and atmosphere to the city.

With the growth in the population and the way in which the wealth is distributed, there has been a rapid development in the Vietnamese economy, and any recent issues that have blighted the reputation of the economy seem to be abating slightly. Vietnam had an explosion of growth in the early part of this century – GDP and exports took off in a huge way and without proper controls in the form of interest rates, inflation ballooned. While this has begun to relax a little, the current rate of inflation of 25 per cent will take some years to get down to a more manageable single-digit level.

The temptation for panic seems to have been resisted among the business and private community, and there is predicted to be a period of consolidation. High inflation is something to be expected in emerging markets, and is not a reason for investors to be diving for cover. Food and oil prices have risen across the world, which has taken the sting out all but the most remarkably immune markets. No collapse in the Vietnam economy is predicted – the market is strong and the doom and gloom is unlikely to materialise.

Demand for property in the two major cities – Ho Chi Minh City and Hanoi – remains strong, and although there is currently some consolidation going on with developers and investors, the properties that are coming onto the market will not be enough to cover demands in the coming years. In Ho Chi Minh City, some new 38,000 properties are due to be delivered to market by 2011, which will not be enough in a city that has a rapidly developing infrastructure.

The properties that have already been delivered to market in Vietnam’s cities have been of the higher-end variety. With predictions that only around 10-20 per cent of the population currently have the means to buy their own property, it is expected that developers will begin to build more mid-level developments. This will allow more growth in the market from the bottom upwards and bring property ownership to more people in the city, while at the same time maintaining a healthy rental market for those who are able to get in early and buy to let.

While the economy has slowed the growth of the country to a certain extent, rising construction costs of have slowed the building of new developments, meaning that the market has remained strong. The situation has not arrived where there are thousands of units arriving on the market with no confidence in the economy among local investors. While there are not the queues for new apartments that were seen in 2007, new developments are still over-subscribed, and with the change in the property laws coming in 2009, foreigners will be supplementing the numbers of buyers and creating more demand.

Legal issues

Following the boom in property buying that resulted in the queues to reserve off-plan developments, and what was a somewhat relaxed attitude from developers to building schedules and deadlines, the Vietnamese government established a strong legal framework for the property industry. In addition, the government has changed the law to allow certain foreign investors fulfilling pre-defined criteria to buy condo apartments from 2009, eliminating the need for buyers to go through forming an official joint venture in order to buy property.

The first piece of real estate regulation is known as Decree 153, and relates to the funding of projects that are sold off-plan. Previously, it had been known for developers to take payments for project that had not even broken ground, and for the completion dates and staged deadlines to be completely ignored along the way. The Decree has now set up a framework for this type of development, meaning that developers can only take initial payments for projects once work has begun. In the case of residential developments, the first payments can only be taken when work has been completed on the foundations.

In addition, the rest of the funding for the project must be transparent, and available for investors to examine when requested. The details of commercial loans must be specified in the contract for the purpose of pursuing compensation should the contract be breached by the developer during the build.

Perhaps the most important of the clauses concerns the late delivery of projects to the investors. It was previously common practice for developers to finish projects up to 18 months or two years behind schedule, with no financial penalty structure in place. This meant that private investors have lost out on the potential rental income they would have budgeted for, with no recourse to reclaim those monies. The Decree has instituted a series of late delivery penalties that are levied on the basis of the total monies invested, designed to protect the growing number of international investors in Vietnamese property.

The law allowing foreigner investors to buy their own property in Vietnam is known as Circular 13. While it is a significant step in allowing the purchase of property by foreigners, the law goes further in setting down a legal framework for the buying and selling of property across the country. For example, the law states that the burden of due diligence is on the developer and service provider, rather than leaving it to the client to carry out their own research individually. This is designed to ensure that dubious developers and projects do not trap investors, and makes sure the right conditions are in place for the development to succeed.

However, the most important point of the legislation is that which allows foreign individuals to buy property in Vietnam for the first time. In order to qualify, buyers have to fall into one of five categories:
• Individuals who already invest directly into Vietnam, through some business or other concern
• Individuals who have contributed to Vietnam and have received an award from the State President or Prime Minister
• Individuals with a university degree who are working in certain defined sectors
• Individuals who are married to a Vietnamese person
• Non real estate businesses can buy property for their employees

In addition to these conditions, there are a couple of other constraining factors – the maximum length of lease foreign individuals can buy is 50 years, and the property can only be resold after 12 months of ownership. Freehold property for foreigners is not available, and is unlikely to ever be so in the future.

The overall effect on the property market in Vietnam is unlikely to be huge as it is estimated this change in legislation will only affect 10,000 to 20,000 people. However, it does signal the desire and willingness of the Vietnamese authorities to open the property market up to outside influences. Circular 13 is due to come into effect on 1st January 2009.

More pages

Click here for full guide