Real estate: easy to buy, hard to sell

By Ngoc Tran in HCMC

Real estate is very easy to buy now. But what’s the point of buying when there’s absolutely no profitability? Paperwork is a headache, renting properties is hard, supply is greater than demand, and real estate is not as liquid as stocks.

Advertisements offering real estate for sale are everywhere. Real estate developers do everything possible to woo buyers, offering all kinds of incentives – buy a property, get gold; receive a car with the purchase of an apartment; promotional interest rates; and discounts.
The Thanh Truong Loc Company, the investor of the 4S Riverside Linh Dong project in Thu Duc, HCMC, for example, has come up with an unusual sales strategy. Buyers need to make a down payment equivalent to 30% of the price of an apartment and pay the remainder by monthly installment equivalent to the value of one square meter of the home. The investor also offers 15% discounts for government officials and workers.
The Golden Palace project in Tu Liem, Hanoi also has a promotional campaign that is second to none. If a buyer chooses an interior furnishing package – which includes refrigerator, TV, kitchen cabinet, decorative lights, beds, sofa, window curtains, and clothes dryer – then the price will be lowered by VND2-5 million per square meter to VND30-33 million per square meter. If a buyer chooses the basic interior furnishing package – that is, only equipment installed on the walls – then the price will be reduced by VND7-9 million per square meter with a sale price down to VND27-29 million per square meter.
Even with such promotions one should be careful when buying to invest or speculate.

Trouble with title transfers

When investing or speculating without receiving the deed for an apartment or land lot that has a house on it (since 2004 the Government has not allowed the transfer of empty, construction-ready lots), the procedures for title transfer are messy and complicated. And they require a lot of time from both the seller and the buyer.
In the past property transfers involving the buying and selling of apartments or empty lots – with or without the deed – were simple. But since 2010, according to real estate transfer law, both sides must draft purchase and sale contracts for homes to be built in future, and execute them at a notary public office. There the seller must present the purchase and sale contract signed by or with the developer. If the property has been transferred twice or more, then the prior title transfer contract must be presented as well.
Thereafter, one of the two sides submits a copy of the documentation to the tax authority for payment of income tax. After having paid the tax, the buyer submits an application to execute the transfer of title so that the developer can confirm the transfer.
This application includes a copy of the income tax receipt or documentation from the tax authority showing the seller’s tax exemption status; a copy of the property purchase and sale agreement signed with the private buyer; and a notarized copy of the title transfer agreement. That is the government side of it. Developers also require an owner who sells his unit to apply for a “permit to transfer” document in advance. Only then can the seller perform the notarization and tax procedures.
For apartment buyers, even for those who have resided for a long time, there is a long waiting period prior to receiving the certificate of ownership. According to the Ministry of Natural Resources and Environment, from 2001 to the end of 2011 in Hanoi and HCMC there were 952 development projects started with about 333,000 apartment units and condominiums.
However, based on the issuance of land use permits, certificates of home ownership and other property related to land for buyers of project units as of the date of inspection, only 64,400 apartment units had been completed – that is, 19.3% of the total number of approved units; 9.3% of which are in Hanoi and 30% in HCMC.
Inspecting 10 apartment buildings in HCMC, a working group discovered that private investors had only submitted certificate applications for 2,140 units, 37.8% of the apartments sold, with certificates only received for 1,495 of them. In Hanoi, private investors of nine projects examined had submitted applications for 710 cases – only 23.7%. And only four project investors had been issued certificates for the owners of 557 apartment units, 18.4% of all units purchased.
From the date an owner takes possession of an apartment home, the buyer must wait up to two years to receive the certificate of ownership – and that is if the process moves along quickly. Delays in issuance of certificates of ownership make it difficult for investors to sell their products.
The way in which title transfer tax is calculated is also an issue to think about. The tax rate of 25% on income tax applies only to individuals transferring titles of real estate with complete paperwork and invoices, which serve as a basis for price determination and related fees. In other cases, the tax rate will be 2% of the price of the property transferred.
Individual income tax law, with respect to real estate title transfers, requires that two conditions must be met in order to qualify for the 25% tax rate above: Properties to be transferred must be owned legally, and the purchase and sale contract must be notarized. The tax rate of 2% over the sale price is applied to almost all property transfers because the difference between the purchase price and the sale price is not definite for a great number of properties.
In many cases, the statutory tax of 2% over the sale price results in a loss for the seller because even if the seller loses money on the sale, he or she must still pay the tax. These are situations in which the legally required paperwork for a property did not exist when the owner bought it; the documentation was completed after the purchase, and the owner then sold it – or purchased when the price was high and then had to sell at a low price after the market had reversed and gone down. Some buyers borrowed money from a bank to purchase real estate when interest rates were high, but the interest payments were not calculated into expenses in order to reduce income tax.

So why buy?

Regarding investors and speculators, why should one buy or receive the title for a property if it cannot be resold? Paperwork headaches and the high tax make buyers hesitant. And buying property with the intent to rent it out is not easy either. Being able to find tenants depends on location. If the property is far away from the city center, the price is low and it is more difficult to rent. Moreover, if you buy a property to rent it out, then that is a large amount of money tied up in one place – almost like hiding it in your mattress or burying it in the garden.
Investing VND1.5 billion to VND2 billion to purchase an apartment and renting it out at VND10 million per month, it would take 13 to 17 years to recover the initial investment. If you deposited that amount in the bank at an interest rate of around 10% per year, the monthly return would be VND15 million.
Projects on paper that sell properties in advance and require up-front payments put buyers in a risky position. Projects that are delayed and postpone delivery are by no means rare.
Attorney Dinh Thi Quynh Nhu, head of the An Luat Attorneys’ Office (HCMC), explains installment payment contracts for real estate projects are a big risk for buyers. If investors do not have the necessary financial and technical capacity, they may end up in bankruptcy after taking their buyers’ money.
In addition most contracts to buy houses with payment prior to construction are not equitable. The terms usually favor the developer. If the buyer pays late by one month, he or she will be penalized by an increase in the interest rate. In contrast, the developer can delay delivery from three to six months before an interest rate penalty takes effect. In the past there were even contracts with terms stating that the buyer could not sue the project developer and that he or she would not suffer an interest rate penalty for delaying the transfer of possession.
There are construction projects started a few years ago that remain uncompleted up to now although the developers have received a great deal of money from the buyers. A typical example is the SME Hoang Gia building (in Hanoi), construction of which began in 2009, and the Mekong Plaza (also in Hanoi) for which construction got underway in 2010. Home buyers have billions of Vietnam dong sunk into these projects, and they still do not know when they will take delivery of their apartments.
In HCMC, the Department of Construction has discovered 16 projects approved from 2006 to 2009 that have yet to get off the ground, such as the Saigon Castle, Tan Thuan residential and commercial center, Tan Kieng apartment development, Mega apartment building, and Tan Thoi Nhat apartment development.
Even worse, there have been cases in which the developer has got away with buyers’ money.

Supply far exceeds demand

At present, supply is much greater than demand. Peter Ryder, CEO of the Indochina Captial Investment Fund, says that not only high-end real estate but all classes of real estate are in excess supply. Investing in real estate at this time is like loaning your money to someone else and not knowing when you will get your money back.
According to the CBRE Vietnam Real Estate Consulting and Management Company, in the first three months of this year, the total supply of available new housing units on the entire market numbers 7,500 units.
In Hanoi, many new apartment building projects have appeared, such as the new Tay Mo-Dai Mo Urban Area project, the new Geleximco Urban Area, Nam An Khanh, Bac An Khanh, and Van Canh.
The number of unsold units in HCMC had amounted to 18,000 units by the end of 2011. According to real estate consulting firm Knight Frank, the number of new units sold during the first quarter of 2012 was around 1,800, and there will be an additional 23,500 units built in 53 projects over the next three years.
At present, a small number of people are extremely happy because they got out of the real estate market in time. And they swear they will never get back into it. However, if any investors have some extra money and still want to do business in this sector, they should wait until the market has hit the bottom.
Perhaps it will take until the end of 2015 for the market to pick up again. However, it will never reach the highs it did in the past.

The Saigon Times Daily