New decree aims to control shady real-estate practices

Laws - A new decree more strictly regulates how developers of housing projects can raise capital and is expected to shine a light on fraudulent practices.

Undercapitalised and less-than-reputable developers have long exploited the practice of selling unfishished units to buyers to cash out of and walk away from projects, leaving the home buyer holding the bag.

The Law on Housing, passed in 2005, tried to end this practice by stipulating that real estate developers must complete construction on the foundations of housing projects before accepting deposits from buyers, explained Deputy Minister of Construction Nguyen Tran Nam.

Some developers, however, have tried to get around even this restriction by selling interests in housing developments to secondary investors. These companies, in turn, have continued to practice of selling unfinished properties to potential home buyers.

The practices had caused losses to consumers and negatively affected the market, said Le Hong Son, an official from the Ministry of Justice.

“Clearer and stricter regulations on the issue will be able to weed out businesses with a shortage of financial capacity,” added Nam.

Sale restrictions

The new Government Decree No 71/2010/ND-CP therefore limits the ability of real estate developers to sell interests in uncompleted projects to secondary investors and, in turn, restricts such investors from selling housing units still under construction to home buyers

The decree, by boosting transparency and options for real estate developers to raise capital for projects, might even assist some developers to make progess on some projects stagnant for years, said Viglacera Land deputy director Nguyen Tri Dung.

For instance, the new decree also promotes the use of real estate trading floors to raise capital for projects already under construction.

Developers are limited in the decree to raising no more than 20 per cent of the total project budget from secondary investors – unless they are raising the capital via a trading floor. The decree waives the 20-per-cent limit but requires developers to report on these investments to their municipal construction departments.

Century Real Estate Joint Stock Co deputy director Pham Thanh Hung said this provision would help promote real estate transactions by capital contribution through trading floors.

“The decree has untied the hands of investors by recognising the legality of capital contributions beyond a certain percentage made through trading floors,” Hung said.

It also brought investment contracts out in the open, when many had previously been illegal or underhand, he said.

“The decree allows investors to allocate up to 20 per cent of the total housing units in a project based on capital contribution contracts,” said Nam. “In other words, they can’t sell units to organisations or individuals beyond trading floors.”

The decree also stipulates that developers cannot transfer land-use rights in new urban areas if they do not build homes on the land.

“This requires investors to ensure project progress,” Nam said.

“Real estate developers will have to jump into a game with new rules. The most beneficiaries would be people with real demands to buy a house,” said Nguyen Van Long, director of the Hong Phu Estate Trading Floor.

Former Deputy Minister of Natural Resources and Environment Dang Hung Vo predicted the market would see some stagnancy in the short term due to the stricter regulations but would be more transparent and stable in the long term.

It would take a couple of years for developers to get used to the new business conditions, Vo said.

“When that period is over, the market will be more stable, with higher property values,” he said.