Vietnam to work on amending regulations on condotel model

Vietnam to work on amending regulations on condotel model

With many investors getting duped by developers, the HCMC Real Estate Association (HoREA) has proposed amending unreasonable regulations affecting the condotel segment which causes huge losses to secondary investors.
18:30, 12/12/2019
A large number of condotel projects are located in Nha Trang coastal town in the central Khanh Hoa Province. (Photo: Shutterstock/Nguyen Phuc Thanh)

Vietnam’s relevant agencies will complete required documents within this month to soon introduce regulations on condotel, a real estate segment that has boomed in recent years yet is not regulated.

The ministry will work on a standard contract between condotel developers and secondary investors, setting out specific rights and responsibilities for buyers and sellers, in addition to strictly controlling money lent by banks to invest in the condotel business model, Deputy Minister of Construction Le Quang Dung said at a government press conference on December 2.

He pointed out several legislative bottlenecks of this segment, which include the lack of legal framework, lack of ownership certificate, lack of management regulations, and contract breach between primary and secondary investors.

Meanwhile, he admitted that the biggest problem was that there was no legal corridor for this business model, adding that neither the Law on Real Estate Business, Law on Tourism, Land Law nor Housing Law have yet identified this type of business. Therefore, there was no regulation granting ownership certificates for investors or management and operation rights to condotel owners, he added.

For these reasons, the Ministry of Construction and local authorities have warned secondary investors of risks of investing in this segment, Hung said.

Under Decree No.11 released in April 2019 by Prime Minister Nguyen Xuan Phuc, the Ministry of Construction is required to draft regulations on standards of condotel and the operation of this segment.

The Ministry of Natural Resources and Environment has been tasked with providing guidance related to ownership and land use rights of condotel owners.

The Ministry of Culture, Sports, and Tourism needs to issue regulations on the management of condotels while the Ministry of Science and Technology is tasked with issuing guidelines on land ownership for condotels.

All the documents must be completed in December to create a legal framework for condotels, Deputy Minister Le Quang Hung said at a regular government press meeting on December 2.

After Empire Group, the developer of Cocobay Danang condotel complex, informed its 1,700 buyers that it would stop paying the 12% annuity beginning next year, HoREA on wrote to the Government and the ministries of Construction and Natural Resources and Environment, proposing amending some regulations.

Earlier, Bavico, another condotel project in Nha Trang, had promised 15 percent annual returns, only to renegotiate them down to 8 percent, then defaulting on them altogether.

The association pointed out a loophole in the Law on the Real Estate Business, which creates conditions for the sale of houses to be constructed in the future but has no strict requirements on the sale of other property products, including condotels.

Therefore, HoREA suggested considering tourism land as non-agricultural land or adding regulations on tourism land into Article 153 of the 2013 Land Law to enhance the State management of this kind of land.

It is necessary to regulate that tourism land must be used for tourism development purposes only and must not be converted to residential land to prevent technical and social infrastructure overload, which may destroy the tourism plan and negatively affect the local investment environment.

In addition, tourism land, including tourism land for condotel development, should be used for a maximum of 50 years, or in special cases, 70 years. Buyers of condotel products will be granted periodic land use rights and condotel ownership certificates based on the duration of the projects.

HoREA proposed the Ministry of Natural Resources and Environment coordinate with the Ministry of Finance to send the Government a plan to calculate the land use fees and land rent for tourism property projects.

Regarding the sale of condotels, HoREA suggested adding new regulations on condotel projects that will be constructed in the future, such as those on cooperation and capital contribution in condotel projects and the sale of condotels. Specifically, a regulation that the deposit for condotels must not exceed 5%-10% of the contract value is needed.

The association also proposed the Ministry of Planning and Investment coordinate with the ministries of Construction; Natural Resources and Environment; and Culture, Sports and Tourism to seek the Government’s approval of the issuance of regulations on the management, operation and business of condotel projects to secure the interests of buyers.

"A condotel pledging annual returns between 12 and 15 percent, which is two or three times higher than bank deposit rates, is far too unreasonable. Condotel returns should at most only be equal to deposit rates," Dung said.

However, the annual returns commitments between condotel developers and secondary investors being a civil matter, the regulatory agencies will only intervene "at an appropriate level," he added.

A condotel is typically a hybrid that joins a condominium and a hotel, operating as a commercial hotel even though the units are individually owned. The first condotel project in Vietnam came up in 2013 on a seaside street in the central resort town of Nha Trang.

In 2016, it became a craze, with condotels appearing at coastal resorts alongside villas and other houses. Over the two following years, many developers, small and big, entered the condotel sector with projects dotting the country's entire coastline.

In 2017, the ministry and some local governments made reports warning the overheating of condotels amid legal uncertainty. In 2018, the ministry asked localities which are home to many condotels projects to examine the projects. Attention to infrastructure and population density at condotel projects was also alerted.

According to real estate services firm CBRE, about 30,000 condotel units had been launched by the end of 2018 and another 3,000 units have been added to the market this year.

Increased competition in the sector saw developers enticing investors with promise of high guaranteed returns on their purchases. Major developers of condotel units or resort villas began to promise guaranteed returns of 5-10 percent per year for 5-10 years, and newer developers promised even more.

Despite real estate experts like Savills and CBRE warning that returns of over 10 percent per year was extremely high and tough to achieve, investors still flocked to buy up the properties.

To solve the problems, the ministry has made some recommendations, such as making transparent information of construction progress and risks in primary investors’ commitments; issuing the warnings; tightening credit for real estate projects, including condotels; and working out regulations on contracts made between primary and secondary investors.

In addition, banks must tighten control over credit for condotel projects. The ministry has also proposed issuing sample contracts between condotel investors and buyers.

The government move has been made following the announcement to stop paying profits for secondary investors at Cocobay Complex in the central city of Danang. The investor of the VND14-trillion (US$617 million) project said they will stop the profit delivery of 12% per annum to its clients from January 1, 2020 due to a financial collapse.

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