Developers left in the cold

Decree 02/2006/ND-CP requires foreign and Vietnamese developers to have on hand 20 per cent of the total investment capital for new town developments of at least 50 hectares, or no less than 20 hectares in areas with limited land available.
The decree, seen by Vietnam Investment Review last week, prohibits residential projects from misusing buyers’ funds before the start of development. However, it does not detail the exact start of the development.
Nguyen Xuan Dao, managing director of Hanoi-based real estate consulting firm Vietnam Property, said the new regulations deal another hard blow to cash-strapped developers who are suffering from a slump in the real estate market.
“The new rules will have a great impact on Vietnamese developers,” he said. “Almost all of them have limited capital and experience to invest in large projects.”
Dao said the rules should have been issued long ago to eliminate a common situation in which developers set up new urban projects despite not understanding the concept, size, design, management and financial ability needed to build a new town.
He pointed out that a handful of developers set out to establish new large urban developments but ended up simply selling raw land without any spending on house construction, and noted that others pursued projects far beyond their financial ability.
One example is the International Exchange City in Hanoi, which is now under the government’s investigation. The developer, Vigeba, has a chartered capital of VND90 billion ($5.66 million) but was allocated 97 hectares of land, which would have required hundreds of million dollars to build a new town. As a result, the project’s site is still a huge empty plot despite land being handed over to the developer a few years ago.
Developers are now required to have strong financial ability to carry out new town projects because they will no longer be able to sell houses when the properties are still on paper, Dao said.
Tran Ngoc Hung, secretary general of Vietnam General Construction Association, said this ban would eradicate cash-strapped developers who acquire land through personal contacts with authorities and then sell it without spending on construction.
Hung said the capital ratio requirement for a new town development would effectively screen developers out of the market as they will have to consider their ability before establishing any new urban projects.
Dao said the decree made it more difficult for Vietnamese companies to build new town developments as most of them, even large state-owned corporations, are not financially strong enough to pursue large projects, which requires hundreds of millions dollars to develop.
“What developers should do is to get together to create a synergy and seek financial resources from banks or investment funds,” he said.
Dang Hung Vo, deputy minister of natural resources and environment, said the decree could easily create advantages for foreign investors, who have the financial clout and experience to develop large projects.
The Ministry of Construction, which advised the government on the decree, was not available for comment when contacted by Vietnam Investment Review last week.
The decree allows new town developers to transfer and lease land use rights via auctions or direct negotiations to second investors who can build properties in line with the approved master plan.
The rule asks that the quality of all houses and apartment blocks be inspected and approved before being used, according to regulations on the management of construction work quality.
The decree also states provincial People’s Committees are allowed to establish land fund development organisations to re-collect, compensate and clear sites for new town developments.
The state will recover all or part of land if developers do not carry out projects one year after the land is allocated or if the project is two years behind the approved schedule.


No. 744/January 16-22, 2006