Reforms key to thawing the real estate market

November 19, 2012 | 10:50
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Issues in the mechanism and state policies are partly responsible for the housing market stagnance, and should be resolved to unfreeze this market, writes attorney Trinh Van Quyet, general director of SMiC law firm. Quyet, who is also chairman of FLC Group Joint Stock Company, shares his view on the real estate sector.

The so-called “clean” land - a term which implies land that has been cleared, compensated and handed over to enterprises for real estate development— is an indispensable asset and a prerequisite for developing real estate projects.

But to acquire clean land at acceptable cost within an appropriate time period is not a simple thing for investors, especially in projects that involve more homeowners eligible for compensation.

A customer of SMiC Law Company had a centralized farm project that had been approved, but after five years, the project still could not be implemented because the land clearance was incomplete.

The reason was that the law requires project owners to directly reach agreements on compensation with residents, but they face many difficulties when negotiating with people who own land in the project area.

Many homeowners demand compensation at such high rates that the investors could not accept. Therefore, each year compensation is paid for only a few thousand square meters of land, although the investor’s money is available.

SMiC had advised the client to expand the field of activities of the project to serve the public interest. This is because Point e, Clause 3, Article 2, Decree 17/2006/ND-CP amending and supplementing a decree guiding the implementation of the Land Law, specifies that projects whose purpose is to serve the public interest will receive the state’s support in land acquisition.

Thanks to this legal flexibility  to mobilise the participation of the state in the process of land acquisition, the aforementioned project could be implemented and has so far been effective.

This example shows that issues in the acquisition process directly affect the survival of projects, not to mention their business performance thereafter.

Statistics of the People’s Committee of Hanoi show that from July 2004 to June 2011, out of the 33 cases where the compensation and acquisition of land were to be decided upon the direct negotiation between investors and homeowners, only nine investors managed to successfully reach agreements, mostly for small-scaled projects.

The remaining cases were stuck in problems and had to apply for adjustment towards land acquisition by the state.

The major problem when implementing the compensation mechanism of direct negotiation, is that people who own houses and land in the clearance area always claim compensation and other policies at levels that are much higher than prescribed.

In order to accelerate the acquisition process, a number of investors, on the one hand, publicise the compensation rates that are equivalent to the levels prescribed by the state, on the other hand, accept tacit deals to support the residents further.

As a result, conflicts of interests among homeowners in the same project arose, leading to residents blocking the project land, obstructing construction, destabilising the local social order and safety.

Premises costs always account for a large proportion of the total value of a project. Hundreds of billions of dong were spent for the acquisition stage, not to mention the costs associated with converting the purpose of use of the land (if any), which has pushed up the real estate prices. The longer the acquisition process lasts, the greater the costs of capital, and the bigger gap between real estate prices and people’s capacity to pay.

Therefore, to create market liquidity, the state needs policies to drag down the housing prices, in particular, starting with supporting real estate enterprises in the acquisition process, so that they could obtain clean land fund at reasonable prices.

Currently, Danang is implementing these supporting measures very well. They consider land as a resource and the authority steps in to acquire and transfer the land fund to enterprises.

Recently, the Hanoi People’s Committee proposed the government apply uniform policies of compensation, land acquisition support and change of land use purposes regardless of project land acquisition by the state or by the enterprise.

Another important reason that drives the real estate business and the homeowners into this difficult situation is that the authority has classified the housing sector as non-production, which does not encourage lending for real estate investment.  This has made it difficult for real estate businesses to raise capital from banks. They even have to mobilise capital at high costs.
However, there is sufficient basis to consider  real estate as an indispensable element to promote the production activities of the entire economy.

The freeze of the real estate market has a direct impact on business activities in the value chain. The visible consequence is the stalemate of the sales of construction materials, such as iron, cement, brick.

Statistics show that in the first nine months of the year, inventories of cement increased by 50.2 per cent and inventories of iron, steel, cast iron increased by 40.6 per cent over the same period of last year.

Many construction materials companies have insufficient cash flow to sustain operations and debt repayment. Losses and bankruptcy threats have arisen as a result. In the longer term, enterprises that supply the input for the steel industry such as mining and metallurgy would also be affected. An important part of the economy is almost paralyzed, due to the impact of the difficulties in the real estate sector. Therefore, supporting the real estate sector will benefit not only a group of enterprises, but also the production and business activities and social security of the entire economy.

If there are currently no policies to support the real estate enterprises through these tough times, then at least they should be treated equally, as a production sector, which is appropriate to their social contributions. My view is that it is not ominous to have social resources concentrated in this area.

Because by the market rules, funds will be allocated to the fields with higher profitability. The situation where almost everyone is doing business in the housing market is just a product of the transitional phase, and over time, it will automatically be adjusted in accordance with the law of supply and demand of the market.

By Trinh Van Quyet

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