Lacking control

The development of condotels around Vietnam has occurred absent a dedicated legal framework.

The recent tourism boom in Vietnam has fueled the increasing popularity of condotels, with a significant rise in both supply and demand seen around the country. 

Government officials and industry insiders, however, have warned recently about a potential supply surplus and a lack of legal guidelines for the new real estate segment. 

Despite the fact that many condotel projects have developed aggressively in some coastal cities, investment in and construction and sale of condotels are not regulated in any legal documents. 

The Ministry of Construction (MoC) has proposed the government assign the Ministry of Natural Resources and Environment (MoNRE) to prepare amendments to the Land Law, especially regulations on classification and the mechanism for the use of mixed land areas, which are used for both residential and for trading or services, and the granting of land use rights and ownership of houses and other assets on land for condotels.

Appealing segment

As at the end of August, there were approximately 42 second home properties with more than 9,700 units in Vietnam, from affordable to luxury, according to research from Savills. 

It is anticipated that six coastal destinations - Khanh Hoa, Da Nang, Phu Quoc Island, Ho Tram, Ha Long, and Quang Nam - will witness a huge wave of second home supply over the next three years, totaling more than 19,200 units. 

This continues on from a strong 2016, when 12,000 condotels were offered in Da Nang, Nha Trang and Phu Quoc Island, with sales at more than 70 per cent.

Condotel supply will account for 80 per cent of total second home supply in main coastal destinations by 2019. 

“We see more and more projects being announced, seemingly trying to outdo each other in terms of scale and outlandish guaranteed returns,” said Mr. Mauro Gasparotti, Director of Savills Hotels Asia Pacific. 

The guaranteed rental return offered in Vietnam can be as high as 12 per cent for eight years or 10 per cent for ten years. 

Among the main reasons why condotel developments in Vietnam have become more popular over the last year is the development of the tourism sector.

International visitors increased sharply in August, with over 1.229 million arriving on Vietnam’s shores, up 18.5 per cent compared to July and 31.5 per against August 2016, according to the General Statistics Office (GSO). 

“Condotel projects with modern infrastructure and focusing resources on tourism development, exploit the strength of the country,” Mr. Nguyen Manh Ha, Chairman of the Board of Management at Phu Quy Land, told VET.

Despite many warnings from industry insiders about the limited legal framework for the condotel segment, some experts and developers remain optimistic about its development. 

“We don’t see an end-point for condotels, as no other investment channel is as attractive,” Mr. Nguyen Ngoc Thanh, Deputy Chairman of the Vietnam National Real Estate Association (VNREA), told a workshop entitled “Condotel Market and Fears of Oversupply” held by VET in Hanoi in August.

 “I appreciate developers who bravely invest in the property segment. This real estate product has created transitional cash flows from secondary investors to consumers, which leads to high liquidity.” 

Moreover, Ms. Huong Tran Kieu Dung, Vice Chairman of the FLC Group, an active developer in the segment, affirmed that the condotel market is still not saturated. 

“Some buyers are worried about the profit commitments from developers,” she said, but “with an occupancy rate of 45 to 50 per cent, developers can guarantee profits for customers and this rate is even higher in reality.” 

“Ambiguous” law

 Condotels are a relatively new type of property in Vietnam and only been developed for about two years, but are not new in countries like Thailand, Malaysia, and Indonesia. 

Mr. Thanh also told the seminar that Vietnam does not have comprehensive regulations regarding ownership rights and management for this form of property. 

A representative from PPC An Thinh Vietnam, the developer of the Wyndham Soleil condotel project in Da Nang, told VET that condotels are still a relatively new business model in Vietnam, so the government is still grappling with the introduction of an appropriate legal framework. 

The Land Law clearly defines the term for land allocation or lease for developers investing in projects at no more than 50 years. 

Thus, condotels are subject to regulations on land use terms, which housing projects are not. Investors who buy condotels will be issued a certificate of ownership and land use rights without having to form housing units for a certain time in accordance with the project’s land use term. 

At the end of the land use term, an extension may be granted as stipulated by law. 

Lawyer Pham Van Hung from the Ho Chi Minh City Bar Association told local media that certification is conducted in accordance with Circular No. 23/2014/TT-BTNMT from MoNRE. 

However, not all condotels are sold, so buyers are only granted a certificate in projects where investors are allowed to conduct such business under the Law on Real Estate Business.

Mr. Hung also said that under the Law on Tourism, a condotel project is merely a hotel project, and land use certificates aren’t issued. 

The Housing and Real Estate Market Management Agency at MoC has confirmed that land use rights certificates (known as “red books”) are currently not issued for condotels. “In fact, almost all condotel buyers have not been granted land use rights and house ownership certificates because of unclear mechanisms,” he said.

There are now many developers offering products and committing to complete procedures for a red book for secondary investors. However, according to Mr. Pham Van Thuong from the Housing and Real Estate Market Management Agency and the Ho Chi Minh City Real Estate Association (HoREA), some developers have told secondary investors they will be given long-term land use rights certificates, but this is simply not the case.

Regarding legal issues, Ms. Vu Thi Lan Anh, Deputy General Director of the CEO Group, said that foreigners not being allowed to buy condotels is a limitation. 

“Condotels are attractive to foreigners, including those working in Vietnam and those overseas,” she said. “If the government adopts more open policies for foreigners, it would help to capitalize on foreign development capital.”

There is still a lack of legal framework for most hybrid asset types, such as condotels, home-tels, and office-tels. “There has been no specific supporting policy to attract investment in condotels,” Mr. Stephen Wyatt, General Director of JLL Vietnam said. 

Similarly, Mr. Gasparotti from Savills agreed that as the business environment and transparency are key factors when investment decisions are made, the lack of a legal framework makes condotels less attractive to investors, especially foreign investors, who have very limited experience in and knowledge of the local market.

Implicit risks

Mr. Le Hoang Chau, Chairman of HoREA, said that while total supply of condotels in 2016 was 16,000 units, there will be from 27,000 to 29,000 condotels each year in the 2017-2019 period, with areas of about 45 sq m. 

However, “if condotel supply continues to see surging growth, this may lead to oversupply and profits not matching investors’ expectations,” he said.

He also identified limitations in the segment. Condotels have been growing over the last two years but issues in management, service and current technology have been revealed. 

Also, “profit commitments are always a concern, with a raft of developers committing to profit for ten years, but the future can’t be anticipated,” he added. 

Mr. Thuong from MoC is also concerned about the investment future of the segment. He has warned developers that they need to consider what happens beyond the next ten years and identify solutions when the potential for profit is no longer new and attractive. 

“Regulations are needed to ensure transparency in profit sharing in the long term and the rights of buyers, as profit sharing now relies mainly on developers’ guarantees, while a solid framework would protect customers,” he said.

There is also a paradox: the occupancy rate at condotels in Vietnam is around 56 per cent while hotel occupancy is only 44 per cent, while in most other countries the opposite is normally found, so “it is necessary to have a suitable solution for the segment’s sustainable development,” Mr. Chau added.

VN Economic Times

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