Fresh land law will offer beneficial economic utility

February 28, 2024 | 08:00
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The adoption of the revised Land Law in January was billed as one of the most important legislative tasks of the latest National Assembly. It will come into effect in January 2025 and should be viewed as a strengthening of the foundation underpinning the Real Estate Business Law and the Housing Law, both passed last November.
Fresh land law will offer beneficial economic utility
Ben Gray, director, Knight Frank

Over the next year, foreign investors and developers allocating capital and resources into the Vietnamese real estate market will have the time to adequately assess the positive outcomes that the law changes will bring. It extends to 16 chapters and 260 articles, and has a couple of key matters that foreign developers and investors are considering carefully.

The first matter is the largest bottleneck for the further development of the real estate market and has been a consistent source of frustration for foreign developers and investors.

Commercial projects, specifically commercial and industrial development, commercial housing, and much-needed affordable housing projects, have stalled due to structural issues in the framework used to determine land pricing. This has a direct effect on the time it takes to negotiate compensation, effect land clearance, and establish the payable land use fee.

The law has worked to address this by moving away from the 5-year cycle of land pricing being centrally managed by way of the national guidelines in the form of pricing brackets, with localised price lists.

Real estate is a relatively dynamic asset class. This legacy framework did not allow for, or reflect, the pricing changes that happen over a short period of time at a local level for land plots.

This led to an acute disconnect between the achievable price for land on the open market, versus the national guidelines that set land pricing for five years. It resulted in significant delays in the time it was taking for the state to transfer land to developers.

Fresh land law will offer beneficial economic utility

To address this, from 2026 onwards, the new law will accommodate an annual calculation of the land pricing, based on pricing proposals submitted the previous year being applied for the upcoming 12 months. The pricing methodology to be used by valuers has been further qualified and shall be based on the direct comparison method, income approach, discounted cash flow, and the coefficient method, with weight given to the comparison method above all else.

Whilst there is still room for improvement, by re-engineering the framework and implementing a 12-month cycle for price guidelines, the state will be able to offer developers and investors the ability to better establish the total land fee costs for development with greater accuracy, as well as offering landholders being compensated comfort that the guidelines are better placed to accurately reflect the intrinsic value of their land.

While any changes will not start to have a material effect until 2026, they do offer the promise of greater clarity and transparency for landholders and developers. This in turn will have a positive effect on the availability and cost of project financing by reducing risk from project delays related to clearance and compensation, and will improve the liquidity of the market.

The second matter the law addresses is working to codify the circumstances where socioeconomic development is deemed a priority for the state, national security, and defence, and where land uses can be revoked by the state to serve these purposes.

By qualifying these matters and explicitly excluding commercial housing, this has given landholders comfort that their legitimate land use rights were not being revoked and then converted to alternative more valuable uses to the economic benefit of investors. This shall go some way to unlocking land for infrastructure projects that have faced significant delays in compensation and land clearance as negotiations with landowners have stalled.

The law additionally allows for investors and developers to negotiate directly with landowners to agree compensation, a step that will free the state’s resources to be better applied elsewhere.

The law further supports investors and developers by allowing for land use fees to be payable either on an annual basis, or in an upfront lump sum. This should give the ability for approved projects to unlock additional senior lending, regardless of which payment method is received by the state. It will also help increase much-needed supply.

The entire law is underpinned with the intent that it shall improve the effectiveness of state administration of what is at its core - the largest single asset that the Vietnamese people collectively have ownership rights over.

It is undoubtedly a key piece of legislation that will pave the way for the state and people of Vietnam to further derive positive and beneficial economic utility from this collective asset.

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By Ben Gray

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