Real Estate Market HOT!

Keeping a check on developers

by Nghiem Viet Anh
The real estate market is hot, with a number of companies racing to develop new urban zones in order to cash in on rising prices.
Building a new urban zone eats up an enormous amount of capital, but in reality few enterprises carry out such projects on their own. Financing and secondary investors with free capital and a desire to invest are tapped, to be repaid when the project is sold and residential and commercial units sold or leased.
Earlier this decade, a number of real estate developers, after obtaining investment licences to build a project, proceeded to subdivide land area for the project into many smaller plots and selling the land-use rights without constructing any improvements according to the officially approved plan for the project. This turned a quick buck for developers but undermined the validity of the real estate market as a whole.
To counteract the practice, the Government issued Decree No 181/2004/ND-CP to prohibit enterprises from transferring land-use rights for approved projects prior to construction. While this limited unscrupulous practices of selling off land- use rights, it also choked off investment in a number of projects, helping contribute to the well-publicised stall in the real estate market widely blamed on problems surrounding transition to the new Land Law.
In 2006, Decree No 17/2006/ND-CP amended Decree No 181 with an intent to "defrost" the real estate market. Under the decree, enterprises could transfer land use rights prior to construction for new urban areas not situated in existing cities and towns, or planned to become a city or town.
This definition proved a bit difficult to apply in practice, so the HCM City People’s Committee issued a list clearly stipulating areas in which land use rights were transferable prior to construction.
Financing of and investment in housing projects is regulated by the Law on Real Estate Transactions, the Law on Residential Housing and Decree No 02/2006/ND-CP and Circular No 04/2006/TT-BXD of the Ministry of Construction governing new urban zones. Together, these provide that enterprises are allowed to raise capital for construction but such financing or outside investment cannot exceed 70 per cent of the value of house purchase contracts under the project.
The Law on Residential Housing and Circular No 04 differ in terms of the moment at which real estate developers can accept money from investors. Pursuant to Article 39 of the Law on Residential Housing, enterprises can accept capital from investors after building designs have been approved and construction of foundations has been completed. Item 1, Section VIII of Circular No 04 provides that enterprises can accept installment payments under a contract but can only accept the first payment after ground clearance and infrastructure construction have been completed in accordance with schedules approved by investment licensing authorities.
The difference in the two rules may be due to the fact that the less strict conditions apply to small-scale projects located in existing city centres which require less investment in infrastructure, while the stricter requirements apply to new urban zone projects requiring substantial investment in new infrastructure construction