Amendments to the housing law regarding foreign ownership, which were highly anticipated and long discussed, have support from all levels of government and the property industry.
Mr. Troy Griffiths, Deputy Managing Director, Savills Vietnam
Recently approved by the National Assembly and to take effect from July 1, 2015, the new regulations on house ownership for foreigners in Vietnam will allow eligible-entry individuals to lease and own a maximum of 30 per cent of an apartment building or up to a maximum of 250 villas or townhouses, with a 50-year renewable leasehold.
The housing amendments have attracted a positive public response. There is the potential for residential demand to improve and for Vietnam’s regional competitiveness and investment environment to receive a boost.
Foreigners will have an enforceable title with greater rights, potentially opening up a deeper purchaser pool. This will add greater liquidity to the residential market, which is now showing signs of a modest recovery throughout the country. Foreigners are now permitted to sublet, effectively promoting an investment vehicle that will allow investors with entry visas to have exposure to a very attractive asset class within an emerging market that has excellent structural characteristics and strong growth potential.
The recent amendments follow the relaxation on overseas Vietnamese, who now have full and unfettered ownership rights. In 2013 overseas remittances were up 10 per cent year-on-year to $11 billion, and much of this can now be effectively and confidently held in real estate.
Regulations on foreigner property rights exist in many countries in the region, such as Malaysia, Thailand, and Singapore, with similar terms and conditions. The 50-year leasehold in Vietnam is the same as in Hong Kong and Cambodia and better than in Indonesia, which only allows for a 25-year ownership, or in Taiwan, with 20 years.
It is unlikely that Vietnam will finalize the Trans-Pacific Partnership (TPP) and the European Union (EU) Free Trade Agreement before 2014 ends, but it will do so sooner rather than later. There is good potential for a greater flow of international businesses requiring foreign housing. Foreign direct investment (FDI) growth has averaged 5 per cent since 2010 and is expected to see stable growth into the future.
Malaysia and its competitive “Malaysia My Second Home” program is a good case study. According to its Department of Immigration, in 2013 there were more than 90,000 expatriates residing in the country. The estimated transaction value of foreign property purchases was approximately $1.4 billion, or approximately 7 per cent of all residential property transactions.
Average FDI growth rate from 2010 to 2013 was more than 10 per cent. Additionally, the advantage of long leaseholds, of up to 99 years, taxation incentives, and low capital thresholds for residency are more competitive than in Vietnam.
According to the General Statistics Office (GSO) there are currently more than 74,000 foreigners working and living in Vietnam. It is estimated that up to 70 per cent are living in the two most developed cities: Hanoi and Ho Chi Minh City. Mature economies such as the US and Australia have foreign purchasers accounting for around 5 to 10 per cent of total transactions, equating to approximately 2,600 dwellings per annum and around VND6.6 trillion ($315 million). Using FDI growth as a proxy for foreign housing demand, the total number of transactions annually in Vietnam may reach 3,400, or VND8.4 trillion ($400 million), by 2020. Additional benefits to flow to Vietnam are the invigoration of the residential construction industry and potentially capital gains taxation. At 1 per cent of value, stamp duty or processing fees could presently deliver VND66 billion ($31.5 million).
With most neighboring countries having low bank deposit and residential returns, investment in Vietnam’s residential market at above 6 per cent gross is very attractive. If the amendments were to open up to an investment asset class then significantly greater foreign demand could be generated.
The recent amendments also allow foreigners to “pay for the property via a financial organization operating in Vietnam”. This should flow though to promoting easier access to property mortgages for foreigners. However, there is uncertainty regarding foreign investment regulations from the State Bank of Vietnam as well as entry visa qualifications tying to mortgages. Circulars to guide these processes are expected to add clarity.
The positive aspects of the amendments are that they stimulate demand to absorb residential product. Residential development is the engine room of the economy as it provides a major store of wealth for the financial sector as well as directly generating an enormous amount of employment and related revenue. The negative aspects relate to movement of capital, unknown purchasers, and “grey” money washing into the economy. The negative issues can all be controlled with good registration procedures.
These welcome amendments follow wholesale legal reform across many sectors and come at a time when foreign investors are showing increasing interest in Vietnam. The rapidly changing legal landscape is creating greater business certainty and a healthier and more competitive financial environment.
- Year in review