Associations insist on land value u-turn

Hoang Van Cuong - Member National Assembly Financial and Budgetary Committee

Removing the residual method in land valuation from the draft Law on Land will make the authorities lose the basis to evaluate the land price in undeveloped areas.

According to international practices, many countries use the residual method and do not report loss because there is no arbitrage and tax evasion. Their legal and business environment is transparent and disciplined. In such an environment, even if the input price is lower than the actual price when the selling price is different, it will be regulated through tax.

Valuation is about finding true value, not pricing. Thus, if the residual method is abandoned, it is obvious that we will not have a basis for valuing the so-called undeveloped land areas.

In addition, this method itself is not a matter of pending, but rather a management mechanism. On types of land needed to invest, creating new values and new buildings, for example empty land, selecting the residual method is still the most popular tool to evaluate the land.

Nguyen Thi Dieu Hong - Legal Department Vietnam Chamber of Commerce and Industry

The draft contains adjustments to the land valuation method. It suggests the direct comparison methodology, the income methodology, and the land price coefficient methodology.

Meanwhile, the residual methodology will no longer be used to determine land prices.

Many enterprises are concerned that the removal of this method would have an adverse impact on their investment activities. They believe that other methodologies are unlikely to replace it.

Enterprises take a lot of time to determine land prices and land use rights. On top of that, this change will result in an unstable legislative environment for the real estate market.

Given that the majority of property projects use the residual methodology, enterprises say that the instability of legal policies is a challenge for their business activities.

Le Hoang Chau - Chairman, Ho Chi Minh City Real Estate Association

Ho Chi Minh City has 320 projects, and among those 280 projects applied the residual methodology. This method, however, has a high risk in pricing. For example, a project can be priced at VND900 billion ($38 million) with the residual methodology, but can be valued at double the price in other methods.

The reason for this big gap is that the residual method is calculated on the total assumed investment costs and assumed total revenue. All methods need the exact income figures and data, but the activity to collect figures and data have been not good enough with outdated solutions and technologies. As a result, we cannot have the exact data for any solution.

We welcome the regulation to apply land price coefficient methodology to determine specific prices to calculate land use fees and rents for real estate projects, commercial houses, and urban areas.

This methodology should be used for all land plots regardless of their value. This will contribute to ensuring transparency, fairness, protecting state budget revenue, and many other aspects.

Tran Quoc Dung - Deputy general director Hung Thinh Corporation

The land price coefficient methodology is being widely applied in many cases, but it is limited under $8.7 million. This method is easy to apply, has a clear formula, and Ho Chi Minh City has continuously recommended using it. However, this creates a legal gap when there are no regulations for projects over this value, when many projects are above this level.

The Ministry of Natural Resources and Environment says this method is complicated, and valuation results are inaccurate and easily lead to risk. However, many projects cannot use other methods because there are no similar properties to compare, regardless that the regulation requests at least three properties for comparison. In addition, the model is based on market data, capable of identifying growth potential, which is good for businesses and managers.

The residual method is capable of offering information such as the purchase price of an apartment and other costs that the market can accept, while other methods cannot cover these factors. We recommend keeping the residual model in the draft amended law because it is scientific and in line with international practices.

Vu Sy Cuong - Deputy head of Financial Policy Analysis, Academy of Finance

The residual methodology currently applies to almost 90 per cent of real estate projects, so if we remove this method, this could generate additional costs such as those associated with collecting information or retraining relevant staff.

The Ministry of Natural Resources and Environment argues that the residual methodology is inadequate and contains many assumptions, but we are not yet assured that collected information from other suggested methods is precise.

Here in Vietnam, we have discussed asset valuation technics, yet relevant laws in many countries don’t follow this direction. Instead, they obey management principles to ensure the interests of stakeholder parties.

Assigning price valuation to district-level units is also a cause of concern due to the gap in knowledge level between state employees at central and district levels. It is necessary to have in place concrete regulations to avoid confusion.

Tran Duc Phuong - Lawyer Ho Chi Minh City Bar Association

A lack of information leads to confusion when applying land valuation methodologies. If the information is standardised, then, no matter which method is applied, there is not much difference. If we remove the residual methodology, there are fewer in place, making it more difficult to solve the problems of land valuation in the market.

Indeed, the value of many projects can only be calculated by this method. Other methodologies fail to determine their value in a transparent manner. It is used for properties with factors depending on planning, construction, and land use scale. Meanwhile, the comparison model can’t reflect the value of such properties correctly. In addition, it is associated with the technical elements of a project.

For a project with thousands of plots of land, it will be time-consuming to determine the land prices. It is more convenient to use the residual methodology to reduce the workload. I suggest keeping the residual methodology but reviewing the technical problems related to the model.