Taking the right approach to the condotel legislation conundrum

May 19, 2022 | 17:17
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The absence of legislation and clarity regarding condotel ownership has been a significant obstacle for property developers and the hospitality sector. In the last 7-10 years, there was a significant amount of investment in condotel products, mainly in resort areas alongside villas and hotels. These multi-segment developments have often been funded by the presale of villas and condotel units.
Taking the right approach to the condotel legislation conundrum
Kenneth Atkinson-Vice chairman, Vietnam Tourism Advisory Board

However, there is no separate body of law governing condotels and in most locations where they have been constructed it is clear that such developments cannot be issued with pink books for individual units, so ownership ultimately rests with the developers, with a lease term not extending beyond 50 years (70 years can be permitted). In addition, many buyers have been lured by guaranteed returns of 8-12 per cent for the 10 years.

Warnings of potential future problems sounded from 2017, but due to the cyclical nature of tourism and potential disruptions to inbound tourists, these were largely ignored and we have already seen failures of such projects like Cocobay and other developers now unable to meet their guaranteed return commitments and for certain several more to come.

Now, we have around 240 tourism real estate projects and over 114,000 condotel units, and Vietnam has the largest pipeline of tourism-related accommodation units in Southeast Asia; many of these are condotel units. So action is urgently needed to try to resolve some of the growing numbers of issues – but in many cases, it is already too late.

Whilst condotels, including tourist apartments and villas, are important parts of the structure of tourist accommodation establishments, they are owned by secondary investors and by businesses as real estate developers and primary investors, but are required to be managed the same as other tourist accommodations e.g. hotels.

The controversies about condotels in recent years are mainly linked to rights, economic benefits, and risks among investors in this model.

In relation to property ownership of condotels, the Vietnam National Real Estate Association made a recommendation back in 2017 on granting ownership certificates for tourism apartments or villas to condotel buyers. This would at least be the start of a more formal ownership structure giving buyers of these units more control.

The government should also consider the application of regulations on the transfer of condotel sales contracts similar to those applied for houses, and established in the future. This is aimed at increasing the protection of property rights and the liquidity of condotel asset transaction buyers, who are nearly all secondary investors.

In order to support the project owners, the promulgation of a set of condotel construction standards is also required because the construction standards for high-rise apartment buildings or hotels cannot be applied to condotel construction works and this would also be an important step for the future protection of owners.

With regard to the guaranteed annual returns for condotel buyers as secondary investors, many contracts lacked clarity and were often not properly reflected in the seller’s financial statements. If securing annual profits for buyers does not become a mandatory legal obligation, clearly shown on sales contracts and debt obligations on the seller’s financial statements, then buyers must be made aware of the fact that these returns are not guaranteed but may vary.

It is critically important for the developers and investors to have a track record showing cash flow management skills and capacity to ensure the businesses’ long term stability and ability to fulfil their commitments for guaranteed returns to their clients.

One solution is to require the returns to be guaranteed by a reputable financial institution. The government should also consider introducing some clear regulations and penalties for real estate developers who have committed guaranteed returns, which in many cases were unrealistic, and are now unable to meet their commitments.

Consideration should be given to promulgating clear regulations for the sale of condotel units to foreign buyers with a view not only to attracting additional sources of secondary investors but also as a means of securing returning visitors to Vietnam.

By Kenneth Atkinson

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