M&A activity likely ahead within real estate sector

March 09, 2023 | 16:00
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With lower cash flow, bonds tightened, and interest rates hiked, mergers and acquisitions are being considered an effective solution to help real estate businesses in difficulty.

After a few tough years, many real estate developers are exhausted, unable to continuously their projects, and forced to sell off property. According to experts, this is the fastest and most feasible way to help real estate businesses get out of the increasingly serious situation.

M&A activity likely ahead within real estate sector
M&A activity likely ahead within real estate sector, photo shutterstock

Phan Xuan Can, chairman of SohoVietnam, said that in contrast with the stable increase in 2021 and the first half of 2022, merger and acquisition (M&A) transactions are quiet so far in 2023.

“Investors who are hunting to find real estate projects to buy, sell and transfer will always be in the market. The demand for M&A is there, but it is not easy for them to pour money in at this stage,” he told VIR.

The sale of existing assets or investment cooperation are key solutions for businesses to retain cash flow and continue operating. Therefore, the inability to successfully create M&A ventures when other capital mobilisation channels are congested will likely push businesses towards bankruptcy, according to Can.

Explaining the cause of the decline in real estate M&A activities, Can said it was mostly due to legal problems. “Many real estate projects are currently in the process of waiting for procedures and cannot be implemented. Therefore, they are unlikely to be bought and sold by other investors,” he said, adding that the legal risk was huge and waiting times exceedingly long.

In addition, many projects are still being sold at very high prices, but investors are waiting for the price to drop further to decide to cash in.

Can said the demand for M&A of real estate projects was there. “However, the market is on the side of buyers where they have many options, more time and opportunity to consider and choose the best project with the right price and enough legality.”

Su Ngoc Khuong, senior investment director at Savills Vietnam, agreed that legal issues were the biggest reason why Vietnam’s real estate market was losing its attractiveness to foreign investors.

“The state needs to come up with practical and quick solutions to attract resources, especially foreign direct investment inflows into all real estate segments such as retail, office, industrial parks, and housing,” Khuong said.

Most of the real estate M&A transactions on the market recently have come from investors who are very knowledgeable about the market’s risk fluctuations, have good financial potential, and accept long-term investments, such as CapitaLand Vietnam, Keppel Land Vietnam, and Gamuda Land.

Meanwhile, recommendations to allow businesses to transfer projects more freely were given at a conference to collect opinions on draft laws for housing, land, and real estate, held by the Central Committee of the Vietnam Fatherland Front in Ho Chi Minh City in mid-February.

Le Hoang Chau, chairman of the Ho Chi Minh City Real Estate Association, said that the legal system should consider allowing owners to transfer their projects from the earlier stage when they have not yet completed the taxation obligations to the competent bodies.

“These types of taxes on land use, rents, and related fees will be the responsibility of the buyers who will not face difficulties because they have capital in their hands,” Chau said.

He added that the Law on Investment 2020 stipulated the adjustment of ventures, allowing investors to have the right to adjust goals, merge, or split their projects. The transfer of all or part of one is a normal business activity under the enterprise’s autonomy in production and business as prescribed in the Law on Enterprises.

Le Hong Nguyen, head of the Vietnam Bar Federation in Ho Chi Minh City, said that the current legal regulations were strict in the transfer of part or all of an initiative.

“This is because the management authorities assume that if the transfer is open, the project will be bought and sold many times and could disturb the real estate market. Many developers would prefer M&A for immediate profit rather than developing them. But I do not think this is the right way to go,” Nguyen said.

“This causes serious waste of assets of enterprises, and the state cannot collect taxes and fees,” Nguyen added.

“Many ventures have taken too long, causing conflicts to end-users and investors,” he said. “The problem is that we should let them transfer even if they haven’t paid enough tax, but the buyer will have to commit to this part of tax.”

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Dealmaking is likely to return to normal levels as investors are looking to reposition their portfolio after the pandemic.

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Despite the lucrative potential of mergers and acquisitions, miscommunications and various other differences can derail the benefits and synergies of significant deals in the post-merger period. Seck Yee Chung, partner at Baker McKenzie Vietnam, discussed with VIR’s Celine Luu the factors of a failed takeover, as well as how to maximise compatibility from different stakeholders.

By Bich Ngoc

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