As foreign direct investment (FDI) continues to flow into Vietnam, multinational corporations are navigating a legal framework rich with opportunity but also layered with legal complexity. At the heart of every successful venture lies a well-drafted contract. However, the true value of a contract is realized not at its signing, but through its successful execution. […]
As Vietnam is getting closer to a new normal, the country’s mergers and acquisitions (M&A) outlook in 2022 is bright with increasing investments from foreign businesses. However, in order for these investments to bear fruits, investors must equip themselves with correct information about the current situation of the real estate market.
Vietnam has long been an attractive investment destination for foreign investors, thanks to its strategic location, socio-political stability and low-cost yet skilful labour force. Specifically, Vietnam’s real estate industry has developed along with the recovery of the economy after the COVID-19 pandemic and is forecast to see brighter and more positive colours compared to 2021. As it gradually returns to the pre-pandemic trajectory, foreign investors with plans to enter the market must equip themselves with correct and up-to-date information to avoid unnecessary obstacles and stay ahead.
Upcoming trends
The results of a recent survey of real estate enterprises performed by the Vietnam Report have shown several major trends for the real estate sector in the future years.
The disruption produced by the COVID-19 epidemic has expedited the digitalization revolution in several industries, including the real estate business. As a result, the real estate industry will have to adapt to the influence of digitalization in practically every activity, including transactions, capital deployment, property management, virtual tours, and even consumption trends.
Future project planners must also think about smart infrastructure requirements. Nowadays, customers tend to prefer newer buildings with better ventilation systems and more flexible layouts with modern amenities such as touch systems.
In the near future, new, multi-purpose industrial park concepts with synchronous utility systems will also become popular. In fact, businesses have been showing more interest in offices and eco-industrial parks that are green and clean, decrease resource exploitation, limit environmental effects, and do not hinder company performance in their sustainable growth strategies. The year 2022 is also expected to see more environmentally friendly construction processes.
Potential sectors
The real estate market will increase in most segments, with the industrial real estate segment, particularly the data centre and logistics segment, land plot, and housing segment, expected to grow the most. Additionally, 2022 will also see the recovery of the resort and commercial real estate, although most resort real estate products so far have not been granted ownership certificates for secondary investors, preventing these products from being traded, bought or sold.
Industrial real-estate
According to Mr Matthew Powell, director of Savills Hanoi, the industrial real estate market in Vietnam is appealing to FDI enterprises because land prices are still relatively low, there are many reputable developers, and legal policies are reasonable, in addition to other factors such as labour, traffic, and convenient import-export connections. Savills Vietnam also stated that a lot of significant US and European companies are seeking possibilities to enter the Vietnamese market, particularly the industrial real estate market, which is now flooded with high-quality investments.
Office and Retail commercial market
Particularly for the office and retail commercial segment, after being heavily impacted by the COVID-19 pandemic during the past two years, entering 2022, this segment begins to have many positive prospects, especially in the context of a new normal.
The office real estate market is driven by rental growth in areas such as information technology, e-commerce or data centres.
The retail real estate market also has many positive signs when the tourism industry is reopened, along with an increase in consumption and capital use.
The basic legal framework applicable to real estate, tourism, and other associated regulations govern tourism real estate investment and business activities (at least 5 relevant laws such as Land Law, Construction Law, Law on Real Estate Business, Housing Law and Law on Tourism). This complicates not only licensing ownership - the pink book for secondary investors - but also related transactions. According to Vietnam National Real Estate Association (VNREA) figures, as of September 2021, there were approximately 100,000 tourist apartments (condotels) that have not been approved in accordance with the provisions of the land law.
The Vietnamese government is making adjustments to create a more convenient legal corridor in the real estate sector.
How can a foreign investor jump into a real estate project in Vietnam?
Generally, domestic investors enjoy a simpler investment/ incorporation process than foreign investors. Offshore companies are not permitted to build or run real estate projects directly. Investments can only be made if they:
- Establish a solely owned subsidiary in Vietnam or a joint venture with a local partner (a type of foreign-invested enterprise), or
- Purchase equity interest or shares in an existing company operating the real-estate projects. Foreign investors investing in Vietnam for the first time by setting up a foreign-invested enterprise (FIE) must apply for an Investment Registration Certificate (IRC) and Enterprise Registration Certificate (ERC). Industrial sub-licenses will be applicable to certain business sectors. By law, FIEs are those companies that have any foreign investor as a shareholder and, when making investments in other companies, certain FIEs (those with more than 50 per cent foreign ownership) will also be treated as foreign investors in terms of foreign investment restrictions and investment procedure
Typical structure
Structure 1 (combination of asset and equity deal)
Where the public company directly engages in the real-estate business, the public company sets up a new company and then transfers real-estate assets to the new company and the potential buyer will acquire secondary shares in the new company from the public company. If the potential buyer is a foreign investor, the new company will become an FIE and have the restricted scope of real-estate business activities as noted above.
This structure allows a foreign potential buyer to buy a majority stake in that new company because the new company is a private company (not subject to the 50 per cent foreign ownership limitation like a public company). In addition, this structure is preferred by potential buyers as it can help avoid historical risks and liabilities and the PTO procedure.
Structure 2 (equity deal)
Where the public company engages indirectly in real-estate business through several subsidiaries and it acts as the parent company of a corporate group, the potential buyer can directly acquire a majority stake in the public company. In the case of a foreign potential buyer, prior to the combination, the public company’s registered business lines should be reviewed and if any of them is included in the list of business lines with restricted market access, these restricted business lines should be removed to avoid foreign ownership limitation.
This structure allows a public company to keep the organizational structure of its corporate group, its licenses and its permits. In addition, in this structure, to avoid complexity, the public company will try to seek the shareholders’ waiver of the PTO and the SSC’s approval for waiver of the trading band.
Structure 3 (asset deal)
The local potential buyer can directly acquire the real-estate assets from the public company as the assets will be directly owned and operated by the local potential buyer
This structure cannot be used in the case of a foreign potential buyer because a subsidiary needs to be set up that is an FIE, which is not allowed to purchase existing real estate for sale or sublease.
Conclusion
Vietnam’s real estate industry has developed along with the recovery of the economy after the COVID-19 pandemic and is forecast to see brighter and more positive colours in 2022 and beyond. However, in order to avoid risks, increase company efficiency, satisfy client expectations and maximize the benefits, foreign investors must equip themselves with the up-to-date information and trends and develop suitable strategies. With more than 10 years of experience in consulting, Viettonkin is confident in our abilities to provide guidance and assist you in your future endeavours in the Vietnam real estate M&A market. Let your successful adventure begin right now, with us by your side!
