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Tony Milton MRICS

BSc (Hons) Est Man

Investment Case for Vietnam
Friday, 27 February 2009



1 Profile of 150th WTO MEMBER.............................................................

1.1 OVERVIEW & HISTORICAL CONEXT................................................


1.3 GEOGRAPHY..........................................................................................

1.4 DEMOGRAPHICS & HUMAN RESOURCES.....................................

1.5 ECONOMIC GROWTH...........................................................................

2 ECONOMIC REFORMS...............................................................................

2.1 INTEGRATION INTO THE WORLD ECONOMY.................................

    2.1.1 WORLD TRADE ORGANISATION.................................................

    2.1.2 EU-ASEAN FREE TRADE AGREEMENT......................................

    2.1.3 US BILATERAL TRADE AGREEMENT..........................................

    2.1.4 ASEAN & CHINA................................................................................

2.2 STATE OWNED ENTERPRISES REFORM..........................................

2.3 FINANCIAL SYSTEMS & INSTITUTIONS..............................................

2.4 PRIVATE SECTOR REFORM..................................................................

3 INVESTMENT CLIMATE................................................................................

3.1 STABILITY....................................................................................................

3.2 INVESTMENT INTO THE ECONOMY.....................................................

3.3 FOREIGN DIRECT INVESTMENT...........................................................

3.4 EXPORTS & IMPORTS..............................................................................

3.5 WAGE COSTS.............................................................................................


3.7 FOREIGN EXCHANGE RATES & RESERVES......................................

3.8 COUNTRY ECONOMIC INDICATORS....................................................

3.9 TAXATION.....................................................................................................

3.10 AGRICULTURAL..................................................................................... .

3.11 VIET KIEU............ .................................................................................. ...

3.12 FOREIGN AID ........  ...................................................................................


.... .1 CURRENT SITUATION..............................................................................

.... 4.2 LEGISLATIVE FRAMEWORK..................................................................

.... 4.3 LAND TENURE SYSTEM.........................................................................

.... 4.4 FOREIGN OWNERSHIP RESTRICTIONS...........................................

.... 4.5 FINANCING................................................................................................


.... 4.7 TOURISM....................................................................................................

.... 4.8 TIMING........................................................................................................

.... 4.9 FORECAST................................................................................................

1 Profile of 150th WTO Member            


Official name:                                                    Socialist Republic of Vietnam

Total area:                                                         329,560 sq km

Population (2006 est.):                                       84,402,960

Labor force:                                                       44,390,000

Life expectancy:                                                70.8

Literacy rate:                                                     94% (2003 est)

Main exports:                                                    Rice, crude oil, fisheries, light industrial


Main imports:                                                    Fuel, raw materials. equipment, consumer

goods, steel, raw cotton, grain

Government debt:                                               $26 billion (end-2006) or 31.2% GDP

Budget deficit:                                                   $17 billion (2008-est)

2006 GDP per capita:                                         $722 ($420 in 2004 & $1,000 est 2010)

GDP per capita / PPP:                                       $3,000

2003  2004  2005  2006/7  2008  2010(est)

Export ($billions)                                                20.15 26.49 32.23 47.54    62.9   72.5

Imports ($billions)                                               -        -        36.88 44.41   79.9      -  

Investments / GDP (%)                                       37.85 38.46 38.62    -         -          -

FDI ($billions)                                                    3.19  4.55  6.84     10.2      64        -

GDP – Current Exchange Rate ($billions) 39.54    45.33 51.39  58        -         -          -

Real GDP Growth (%)                                        5.47 6.31 8.01        7.5       8.4      6.2



1.1     OVERVIEW & HISTORICAL CONTEXT                                    


Human civilization started in Vietnam a very long time ago. During the Pre-Paleolithic Age, also known as the Son Vi Era (between 10,000 to 30,000 years ago), the population of Vietnam was rather large and widespread. Vietnam's history began with the Metal Age (about 4,000 years ago). The foundation of the Nation went through a number of historical periods and dynasties, including Van Lang Nation, Au Lac Nation, Champa Nation, the period of foreign domination (1st century, BC - 10th century, AD) , Ngô Dynasty, Đinh Dynasty, Pre-Lê Dynasty, Lý Dynasty, Trần Dynasty, Hồ Dynasty, Later Trần Dynasty, Lê-Sở Dynasty, Tây Sơn Dynasty, Nguyễn Dynasty, and the French colonization period (1858-1945). The Proclamation of Independent Vietnam by President Ho Chi Minh founded the Democratic Republic of Vietnam in 1945. The country then had to go through two long wars for independence for 30 years, which culminated in the famous victory of Điện Biên Phủ, leading to the Geneva Conference in 1954 and the Great Spring 1975 Victory leading to country reunification in 1975.


After nearly 30 years of continuous war, followed by a period of close relations with the former Soviet Union and other Eastern Bloc Countries, Vietnam began the transition from a centrally planned economy into a market oriented system. With the introduction of Doi Moi (the restructuring of, and new direction for, the economy), Vietnam has opened its doors to the international community in the hope of improving the country's living standards through economic development and growth. Vietnam possesses a great variety of natural resources including oil, coal and mineral resources, significant hydro-electric power potential, agriculturally rich land, forest and marine life as well as increasing tourism.


In 1986 Vietnam launched the Renovation (Doi Moi) which introduced reforms intended to facilitate the transition from a centralized economy to a "socialist-oriented market economy." Over 20 years since then, the Government has proved to be forward looking, pushing changes that bring long-term benefits to the people of Vietnam as there has been general agreement that the best way to meet national goals is through economic reform.


Along with regulatory changes, there are several other drivers of real estate development in Vietnam. The emergence of large scale urban infrastructure projects, an increasing standard of living, a young, well educated population and the availability of mortgages are all applying pressure on a limited supply of real estate. As a result, Vietnam is now witnessing what the most believe will be the beginning of a period of strong and sustained growth which is likened to that of China in the late 1990s. The real estate sector has transitioned from being a sector that was state controlled to one that is more market-led. This shift has been driven by a change in attitude towards the ownership of real estate by the public and enabled by continuing economic reform and development. The country's economic growth has given rise to a burgeoning urban middle class with an increased amount of disposable income. This increased purchasing power, combined with Vietnam's increased international integration including a rising influx of international tourists and multinational companies has led to an increasing demand for real estate in all sectors. Recent developments in real estate regulation and laws are a result of public and business pressures demanding change as well as a desire to avoid the poor performance of the first round of international property investments in the mid-1990’s. The Government is beginning to realise that the real estate sector must be allowed to develop for the benefit of the country with assistance from the private sector.




The Socialist Republic of Vietnam is under one-party rule with elections held every 5 years. The head of state is the President who is appointed by the National Assembly. The President elects the Prime Minister and sanctions the proposals of the Prime Minister on the appointment of the deputy prime ministers and other cabinet ministers. Cabinet ministers are appointed by the President on the recommendation of the Prime Minister and their appointment is ratified by the National Assembly. The doi moi economic policy adopted was intended to gradually displace its command economy, characterised by a dominance of state owned enterprises, with a more market-oriented and diversified economy. Since that time, the country has made great efforts to encourage domestic investment by the private sector, attract foreign investment, modernise the banking and financial services industries, and to restructure and "equitise" SOEs, as well as introduce a stock market. Some 5 structural reforms have been initiated, namely to : -


(i)                 integrate more fully with the world economy;


(ii)               improve the climate for private enterprises;


(iii)             reform the SOE sector;


(iv)              strengthen tile banking sector; and


(v)                bring better management to bear on public resources.


1.3     GEOGRAPHY                                                                                    

Lying on the eastern part of the Indochina's peninsula, Vietnam is a strip of land shaped like the letter "S". China borders it to the north, Laos and Cambodia to the west, the East Sea to the east. The country's total length from north to south is 1,650km. The coastline is 3,260km long and the inland border is 4,510km.Vietnam is also a transport junction from the Indian Ocean to the Pacific Ocean. Vietnam's climate is tropical and monsoonal; humidity averages 84 percent throughout the year. Annual rainfall ranges from 1,200 to 3,000 millimeters, and annual temperatures vary between 5°C and 37°C.


1.4     DEMOGRAPHICS & HUMAN RESOURCES                              


Vietnam has a land area of 329,560 bordered by Cambodia, Laos and China. The population is young and reached 83.12 million people in 2005, some 700,000 people more than forecast in the 2001-2010 plan, which gives it one of the largest labour forces in Southeast Asia. The cost of labour in Vietnam is still relatively low compared to most other countries in the Asia-Pacific region and only about half the level of those in China. Productivity is still low, primarily due to out of date technology, capital shortages, poor management, and insufficient training. The urban unemployment rate, currently around 6% is high but stable and is expected to reduce with the expanding domestic economy absorbing those losing jobs in the state sector. With a literacy rate of 94% (comparable to that of Singapore), the population is better educated than the per capita income figures might suggest.


Vietnam is a family of 54 ethnic groups, in which Kinh (Viet) people make up nearly 90% of the whole population, and 53 other ethnic groups represent over 10%. The major religious traditions in Vietnam are Buddhism (which fuses forms of Taoism and Confucianism), Christianity (Catholicism and Protestantism), Islam, Dadaism and the Hòa Hảo sect.


Around 1 million people migrate from rural to urban areas every year and the urbanisation figures are 18.5% (1989), 20.5% (1997), and 28% (2007). By 2020 it is officially estimated that the country’s urban population will increase to 45% (equivalent to 46 million), but some interna­tional organisations have pre­dicted that urbanisation rate will reach 60% by 2020, and Dr Willibold Frehner, head of Germany's Konrad Adenauer Foundation Office in Viet Nam, believes that by 2020 Viet Nam's population will have climbed to 100 million, with 70.84 million living in cities and towns. He warned that a failure to distribute this large urban population would result in mega-cities with populations of 20 million. Vietnam has experienced a baby boom since the early 1980s and statistics show that 20 million of the 83 million are between 11 and 19 with an average age of 24, which means roughly 25% of the total are teenagers and some 72% are under 35, making it the youngest population per capita in the world. If the population continues to increase by about 1.2% per year (some 1.3-1.6 million people), with a fertility rate of 2.09, the country’s population should stand at 125-130 million in 2020, with forecast urbanisation rates of 33% (2010) and 48% (2020).


Vietnam already has some 500 urban centres of various sizes, where around 27% of Vietnamese people live.


  • Between 1999-2004 Ho Chi Minh City’s population officially experienced an increase of more than 1 million people or an average of 200,000 inhabitants a year, and migrants account for 30% of the city’s 7 million people, according to the Municipal Economic Institure and the city’s Planning and Construction Institue. Ho Chi Minh City’s population has increased from 5.25 million in 2000 to 6.42 million in 2006 (an increase of 22.4%), and could increase to more than 10 million by 2020. Currently some 14 million people live in the SKER (Southern Key Economic Region) centered around HCMC, accounting for 17.7% of Vietnam’s population. Economics experts project that by 2010 the region’s population will reach 17 million and by 2020 the figure will be 20-21 million. Officially, HCMC’s population is expected to be at 10 million in 2025 with 7.4 million living in the urban areas and the rest the suburban areas, however official migrants already make up 29% of its population, and this excludes the many who are ‘unofficial’ and so not recorded.


  • Hanoi’s inner-city population is more than 2.1 million people with around 1.4 million people in the suburbs. These figures will increase to close to 3.7 million and 2 million by 2025 respectively. It is predicted that, with such a population, the city's total land area will need to increase from 921 to 1,975 and that 2.85 million people will live in new districts on the banks of the Red River.



When looking at other Asian countries, it becomes clear that family sizes will become smaller, creating a larger consumer base. Vietnam today holds Asia's largest per capita rural population, representing more that 73% of the inhabitants. Using the "World Value Survey" data for 2006, Vietnam had the second highest score amongst some 10 Asian nations regarding national pride, indicating a fierce national pride in being Vietnamese. The survey also highlighted that work was very important in their lives, while family seemed less important in contrast to other Asian nations, indicating that sacrifices to family may be in the cards to achieve work happiness and success. Vietnamese have a possible practical approach to the future, in terms of multiple bread-winners and equality at home and at the work place. Having looked at population trends and attitudes, there is reason to believe that Vietnam will in many aspects resemble China and India, but to a lesser and perhaps, more healthy extent since : -


  • In 2006, Vietnam experienced the highest media spend growth in all of Asia, a whopping 40%, compared to India, 23% and China 18%.


  • When comparing Vietnam FMCG (Fast Moving Consumer Goods) growth to the rest of Asia, again Vietnam leads the list at 20% growth compared to China at 11%.



1.5     ECONOMIC GROWTH                                                             


Real gross domestic product grew at annual average rate of 7.8% and more than doubled between 2001 and 2006. A dynamic manufacturing sector, booming con­struction activity and buoyant retail / wholesale trade, hotels and restaurants, tourism and financial services have more than compensated slower agricultural production. Per capita GDP rose to USD$722 in 2006 from USD$413 in 2001. The strong growth performance has been accompanied by remarkable success in poverty reduction, with poverty at the USD$1 a day level felling well below 20% from 58% in 1993. Strong domestic demand should offset a large trade deficit and sus­tain robust economic growth at around 8% over next few years. Per capita GDP could exceed USD$1,000 by 2009. Membership of the World Trade Organization (WTO) has further inte­grated Vietnam into the global busi­ness network and added impetus to market-oriented reforms. The intro­duction of new investment and enter­prise laws are aimed at aligning the legal and regulatory framework with WTO commitments and creating a transpar­ent and equal playing field for all investors. The government has strived to speed up the industrialisa­tion and modernisation process by focusing investment on key infrastructure projects via attracting for­eign and private capital as well as improving the disbursement rate and strengthening transparency in the planning and management of these projects. The fast growing economy, large population and potential to develop as a lucrative market, large supply of young and semi-skilled workforce at relatively low costs (despite a shortage of high-skill, well ­trained workers) and favorable geo­graphic positioning in close proximi­ty to coastal China and the rest of the ASEAN make Vietnam a favorable destination for FDI. Investment has been strong thanks largely to increasing FDI and a reviving real estate sector. The ratio of gross capital investment to GDP rose to 35.7% in 2006 from 27.6% in 1999 and likely will rise further above 40% over next few years. Much of the growth in investment is from domestic private and foreign-invested sectors. The Ministry of Planning and Investment (MPI) predicts USD$14.5 billion in FDI for 2008. Meanwhile, capital inflows fueling an asset boom and rising household incomes thanks to wage gains have boosted consumer demand. Retail sales grew 20.9% in 2006 and show robust private consumption. Vietnam’s GDP is forecast by the Asian Development Bank to about 8.5% in the next few years, the second highest predicted rate in Asia (after China), with inflation at about 6.8%.





Real GDP growth has been strong and stable since 1993, driven by expanding private investment, including high inflows of FDI. However, the MPI’s Foreign Investment Agency says that the infrastructure in general and the electrical supply system in particular, along with land clearance issues were the biggest obstacles to increasing the rate of absorption of capital.






The socio-economic plan for 2006-2010 has set a target of achieveing a GDP per capita of around US$950-USD$1,000 (double that of 2000) from the current US$680 (in purchasing power parity PPP terms USD$3,100), although Vietnam will remain amongst the poorest countries in the region.







Ho Chi Minh City’s GDP in 2007 was USD$14.3 billion or USD$2,180 per capita - up 12.6% (the highest growth rate in the past 10 years), and represented 20% of the total national GDP. The city’s GDP per capita is about 2.5 to 3.75 times higher than the national regional averages, and average income are expected to rise by 10% annually in the years to 2010, with economic growth holding steady at 12-15% (8-10% nationally).





2.  ECONOMIC REFORMS               


Since the mid-1990’s, the Government has taken a series of steps designed to move the Vietnamese economy from a centrally-planned system to a more mixed, market-oriented system. Early reforms were gradual, but the final disintegration of the Soviet Union and other Eastern bloc countries, on which Vietnam was highly dependent for trade and assistance, forced the Government to adopt a more market-oriented approach to stimulate economic growth and to help to restore Vietnam's position in the international community. The momentum for reform is likely to continue, firstly due to the success and thus popularity of the reforms in increasing the Vietnamese people's incomes, and secondly the regional competition to attract investment, particularly given the success of China's reform policies in attracting the majority of the region's foreign direct investment. There have been four key elements to the Government's economic reforms : -


2.1     INTEGRATION INTO THE WORLD ECONOMY                         


General Statistics Office figures show that there were 3,697 FDI firms operating in Vietnam in 2005, an increase of 17.1% against 2004, and 39.9% against 2003. FDI firms with 100% foreign investment amounted to 2,852 companies, representing 77.14% of total FDI firms in Vietnam in 2005. The number was 2,335 firms in 2004 and 1,869 firms in 2003. The Government has taken several measures to make it easier for Vietnamese companies to access world markets and similarly for foreign companies and investors to access Vietnam. These have culminated in the long-awaited membership to the WTO, but also include broad tariff and quota reductions, and the signing of several Bilateral Trade Agreements (BTA).


2.1.1  WORLD TRADE ORGANISATION                                                                

WTO accession has forced Viet­nam to open its market, heightening the urgency to accelerate reforms of the state-owned-enterprise (SOE) and banking sectors to cope with increas­ing competitive pressures. Many SOEs equipped with out-of-date technologies and unfamiliar with WTO practices, especially those in the heavily protected industries, will find it difficult to survive. Meanwhile, for­eign investors are allowed to tap into previously restricted sectors such as telecommunications, utilities, air­lines, banking and insurance. The market environment calls for a trans­parent legal framework and institu­tion and strengthening risk manage­ment capacities and prudential regu­lation of the banking sector.


While the WTO phase-in period may buy some breathing space with some technical barriers in place, it is not a substitute for urgently needed reforms. Vietnam has faced great challenges since its WTO accession to meet the organisation's rules on safety and standards, particu­larly those relating to the pro­tection of the environment and humans, animal and plant life and health, prevention of deceptive practices as well as security interests. Vietnam Standards Cen­tre (VSC) deputy director said Vietnam did not lack standards rules as many of them matched international levels. "The problem here is that we [Vietnam] have been unable to control and check the quality since we lack equipment, experts, knowl­edge and awareness from state offices.” Experts have also warned that Vietnam would face more international trade technical barriers, while it was weak in adopting non-tariff measures to protect domestic produc­tion in the face of a flood of foreign goods. According to, the US Commerce Service, Vietnam does not appear to use techni­cal measures to serve as non ­tariff barriers.


The threat of dumping allegations is looming large for Vietnam. "Under a non-market economy, the price of Vietnamese products abroad are always eyed as unreasonable, which encourages import nations to become involved in anti-­dumping measures," according to the deputy director of the Vietnam Finance Institute. The prices of Vietnamese goods sold abroad could be either too high to profit or too low so as to attract dumping allegations, both of which were counter to Vietnamese exporters' interests. According to World Trade Organization commitments, Viet­nam has 12 years beginning in Jan­uary 2007 to become a market economy. The non-market economy is one of the main reasons that the US always alleges that Vietnamese exporters are dumping goods. The country's status is a burden on all Vietnamese exporters' shoulders. There are many government subsidies and protectionary mea­sures rolled into Vietnamese export prices, and the US has been very tightly controlling imported prod­ucts from Vietnam. Any category of goods that saw increased exports to the US would be all in danger of anti-dumping suits. Vietnam and China are the only two WTO members that are being considered for market econo­my status, so achieving the target before the official timeline will be rather challenging, even for China, and in the eyes of some is not the most important thing for Vietnam to do right now. Instead the Vietnamese government should reduce subsidies and protectionary measures and most importantly, exporters should better research market trends and their export markets demand.


2.1.2  EU-ASEAN FREE TRADE AGREEMENT                                  


Officials from the Min­istry of Industry and Trade say that the EU­ASEAN Free Trade Agree­ment (FTA) currently under negotiation is expect­ed to be signed by 2009. It aims at opening European Union (EU) and ASEAN member nation markets in a comprehensive way, with import taxes of 90% to be reduced to zero. According to the Euro­pean Chamber of Commerce (EuroCham) in Vietnam, Vietnam's enterprises will enjoy greater advantages in investing in or exporting goods to the EU and vice versa. The FTA may help Vietnam secure an additional 2.2% in its annual gross domestic product through the removal of non-tariff barriers. The EU makes up 18% of Vietnam's total foreign trade. Vietnam exported $7.1 billion worth of goods to the EU in 2006, up 28.5% over 2005 and imported $3.1 billion in 2006, up 20.8%. Key Vietnamese exports to the EU were footwear, garments and textiles, seafood and coffee. Vietnam's enterprises will have more opportunities in market access, foreign investment, transfer of tech­nology and management experience, development of society and human resources as well as cultural exchanges with the EU and ASEAN.


2.1.3 US BILATERAL TRADE AGREEMENT                                               


The US-BTA has resulted in exports to the US expanding rapidly, a trend that is forecast to continue accelerating (US Dept Commerce).


Two-way trade between the US and Vietnam in 2008 hit USD$15.3 billion - up by nearly 24% on 2007.

2.1.4 ASEAN & CHINA                                                                     


Under the ASEAN (Association of South-East Asian Nations) Free Trade Agreement’s (AFTA) Common Effective Preferential Tariff (CEPT) regime, and the ASEAN ­China Framework Agreement on Comprehensive Economic Co-op­eration, most products from China or an ASEAN member country (ex­cept the Philippines), can obtain concessionary tax rates.


The ASEAN single market will include 5 core elements: (i) free flow of goods; (ii) free flow of services; (iii) free flow of investment; (iv) freer flow of capital; and (v) free flow of skilled labour. In order to achieve the first core element, the elimination of import duties was set between 2007-2012 for products in priority sec­tors and between 2010­-2015/18 for sensitive and highly sensitive products. Non-tariff barriers must be eliminated by 2010 for the ASEAN-5 (Brunei, Indone­sia, Malaysia. Singapore and Thailand), by 2012 for the Philippines, and by 2015 with flexibility to 2018 for Cambodia, Laos, Myanmar and Viet Nam. The action plan for liberalisation of services includes the removal of all restrictions on trade in ser­vices for four priority ser­vice sectors, including air transport, e-commerce, healthcare and tourism by 2010 and logistics services by 2013. The removal of all restrictions on trade in the other services must be achieved by 2015 (except for certain financial ser­vices). The ASEAN­ Japan Comprehensive Economic Partnership, which covers trade in goods and services, invest­ment, and development co-operation, would lift of import tariffs on around 90% of trade between the two sides over 10 years but 15-18 years for Cambodia, Laos, Myanmar and Viet Nam. The Agreement should be signed and take effect some time this year. ASEAN is concluding a comprehensive FTA with South Korea under a Frame­work Agreement on Com­prehensive Economic Co­operation which will cover trade in goods.


2.2     SOE REFORM                                                                         



There has been a continued process of reducing the influence and ownership of the State in SOEs, including the creation of equity share capital and public listings to create share capital that can be sold ("equitisation"). State ownership has been reduced through the sale of shares to management, local private and institutional investors. Between 2001 and June 2005. a total of 2,881 SOEs in the country were reorganized. The number of SOEs shrank to 4,086 firms in 2005 from 4,845 in 2004. The operation scale of each SOE, however increased with more workers and higher capital. Each enterprise had an average of 499 employees and USD$22.18 million in 2005, considerable higher than 363 workers and USD$8.12 million in 2000. A recent World Bank study on recently equitised companies state-owned companies revealed the overwhelmingly positive performance of equitised enterprises: 88% of those surveyed reported increased profits and productivity at 49 and 26% respectively. However, many SOEs are equipped with out-of-date technologies and are unfamiliar with WTO practices, especially those in the heavily protected industries, and will find it difficult to survive.



2.3     FINANCIAL SYSTEMS & INSTITUTIONS                                  



The Vietnamese financial system comprises state-owned banks, shareholding banks, credit cooperatives and finance companies. The market environment calls for a trans­parent legal framework and institution and strengthening risk manage­ment capacities and prudential regulation of the banking sector. Since 1998, with support from these multilateral institutions, the Government has outlined a comprehensive reform and restructuring program to improve the efficiency of the commercial banking system, since while the WTO phase-in period may buy some breathing space with some technical barriers in place, it is not a substitute for urgently needed reforms of state­ owned commercial banks (SOCBs). To increase the competitive edge of domestic banks, the government aims at the restructuring of domestic banks by improving their financial position (mainly via raising capital adequacy and reducing NPLs) and encouraging (foreign) strategic investment. Banks are now empowered to make their own lending decisions based on commercial principles and offer new products such as unsecured loans, loans secured against land and financial leases. The reform programme includes 3 key components : -



(i)                 restructuring shareholding banks through mergers and closure; and


(ii)               transforming state-owned banks into independent businesses; and


(iii)             improving and strengthening the supervision and inspection of commercial banks to create a "level playing field".



2.4     PRIVATE SECTOR REFORM                                                   



The Government has taken bold steps to encourage private enterprise. Key reforms include amendments to the Vietnamese Constitution giving private sector entities equal status to state bodies, and a continued reduction in "red-tape" surrounding registration of companies and the issuing of investment licenses. In early 2005, the Ministry of Planning and Investment (MPI) developed a master plan on small and medium enterprise (SME) development, and the Government's policy towards the domestic private sector in Vietnam over the last 5 years appears to be leading to significant results. There will be around 450,000 private enterprises by 2010, operating in such forms as limited liability companies and joint stock companies, with more than 35,000 private firms established annually. The private sector is a vital engine of economic growth, as it now accounts for more than 40% of the GDP and 55% of the country's jobs. The number of newly established businesses increased 233% in the first 10 months of 2007 to 43,590.



3    INVESTMENT CLIMATE                     



 3.1     STABILITY                                                                               



Vietnam has one of the most stable political systems coupled with economic growth ranked amongst the highest in the world, according to the World Bank and UNDP. Clear evidence for the relative economic stability is that Vietnam's growth has varied in a band between 4.5% and 10% since 1996, compared to swings as large as 15% for Hong Kong and Korea. The Government's macroeconomic measures have also helped reduce inflation, bring comparative stability to the Vietnamese Dong / US$ Dollar exchange rate and control state sector borrowing. There is a reduced risk to changes in external market conditions as performance is now largely driven by the domestic economy which leaves it less exposed to the global economy than more export oriented economies such as Malaysia and Singapore.



3.2     INVESTMENT INTO THE ECONOMY                                                                


The share of investment in GDP rose rapidly from 11% in 1990 to 39% of GDP in 2005. The rise in investment has been financed by increased government savings, increasing foreign direct investment capital, and a booming domestic private investment.



3.3     FOREIGN DIRECT INVESTMENT                                             



The fast growing economy, large population and potential to develop as a lucrative market, large supply of young and semi-skilled workforce at relatively low costs (despite a shortage of high-skill, well ­trained workers) and favorable geo­graphic positioning in close proximi­ty to coastal China and the rest of the ASEAN make Vietnam a favorable destination for FDI. Investment has been strong thanks largely to increasing FDI and a reviving real estate sector. The ratio of gross capital investment to GDP rose to 35.7% in 2006 from 27.6% in 1999 and likely will rise further above 40% over next few years. Much of the growth in investment is from domestic pri­vate and foreign-invested sectors. Currently over $50 billion in foreign-invested projects is waiting to be licensed. The Ministry of Planning and Investment (MPI) reported USD$20.3 billion in FDI for 2008, with around 40% of capital inflows going into the property market according to the Ministry of Construction. Meanwhile, capital inflows fueling an asset boom and rising household incomes thanks to wage gains have boosted consumer demand. Retail sales grew 20.9% in 2006 and show robust private consumption. Meanwhile, for­eign investors are allowed to tap into previously restricted sectors such as telecommunications, utilities, air­lines, banking and insurance. From 1988 to 2005, FDI commitments totaled US$52.84 billion, of which about 58% had been dispersed. About half of FDI has been directed at the 2 major cities (and environs) of Ho Chi Minh City and Hanoi. The largest sector by far for licensed FDI is industry and construction. Other sectors attracting FDI include oil and gas, fisheries, agriculture and forestry, transportation / communications, hotels and tourism.




Vietnam has progressively opened its economy to foreign investors over the past two decades but it maintains a sizeable number of hurdles, restrictions, limitations or prohibitions to FDI entry and establishment. The main reason underlying the lack of services FDI in Vietnam is that the government had chosen keep most services sectors closed to foreign investors. Much of this is going to change in the next few years as Vietnam is committed to opening up many of the service sectors to FDI as part of its World Trade Organization commitments.



Vietnam attracted nearly USD$83.1 billion in registered FDI in the 20 years from 1988 to 2007. In the 1998-1990 period each FDI project was worth on average USD$7.5 million. During the 1991-1995 period it was USD$13 million while from 1996-2000 it was USD$14.8 million. The 1997 regional financial crisis affected the 2001-2005 period when the average was USD$5.2 million, but in 2006 and 2007 it was USD$14.4 million per project.


Viet Nam at­tracted USD$11.26 billion in FDI in the first 10 months of 2007, a 33.6% increase over the same period in 2006. A total of 1,144 foreign-in­vested projects, mostly in the in­dustrial and construction sectors, received licenses with a total reg­istered capital of USD$9.75 billion - a year on year increase of 59% in investment capital and 36% in the num­ber of projects. The industrial sector was the leader in FDI representing 54.6% of total registered capital with the services sector taking 43.6% and the remain­der for agriculture, forestry and fisheries. But according to the Planning and Investment Minister, Vietnam could attract even more if it could solve its infrastructure problem. While demand for transport infrastructure is forecast to grow in key areas by between 25-27% a year, the level of infrastructure development is only estimated at 20%. He added that the construction of major infrastructure projects, es­pecially in key economic zones and central areas, was important to ensure high economic growth in coming years.


Of the 50 countries and terri­tories investing in Viet Nam, South Korea is the top of the list with $2.44 billion, making up 25% of the to­tal, trailed by the British Virgin Islands with $1.73 billion (17.8%). The southern coastal province of Ba Ria-Vung Tau main­tained its lead among provinces in the country, with FDI of $1.06 billion, representing 10.9% of the total. HCM City and Ha Noi followed, making up $1 billion (10%) and $896 million (9.1%) of the total, respectively.


Around 85% of foreign direct investment in HCM City in 2007 flowed into the property sector. The city had attracted USD$2.5 billion in the first 11 months with over USD$2.1 billion had been in­vested in real estate, mainly apart­ment and office blocks.



3.4     EXPORTS & IMPORTS                                                            



Principal exports are crude oil, textiles and garments, footwear, fisheries products, and electronics. The main export destinations were the United States, Japan, China, Australia, Singapore and Germany, and the Ministry of Industry and Commerce believe Vietnam earned an export revenue of more than USD$39 billion in the first 10 months of 2007, which is expected to realise the target of USD$48 billion for the year.




A large trade deficit reflects strong domestic demand instead of weak exports. Large demand for capital goods and production materials amid an under­developed domestic industrial supply chain coupled with lower tariff rates have caused imports to surge. A decline in crude oil exports dragged down total exports, but other products have maintained solid growth.



According to the Ministry of Industry and Trade (MoIT), Vietnam's trade deficit climbed to USD$7.63 bil­lion in the first 9 months of 2007 - some 2.3 times higher than the same period in 2006. The MoIT predicts that trade deficit will hit USD$10 billion by the end of 2007. However, in the past the country bought foreign products, mostly food and consumer goods, to meet local consumption needs. Imports at present are for expanding manufacturing and processing. Hence, a limita­tion on imports in order to reduce the trade deficit is not necessary.



A major task ahead to curb the trade deficit is to promote exports with a higher added value. The country needs to define vital goods that could be produced domestically instead of being imported. The government wants to focus investment in the pro­duction of machinery, garments and textiles, footwear, electronic goods, automobiles and wood. But the State Bank’s Banking Development Strategy Dept have cautioned that it requires “professional methods not just words and policies written on paper” and that one of the government’s major tasks must be to create a mechanism that would encourage enterprises to conduct better export promotion activities.





3.5     WAGE COSTS                                                                        


Minimum monthly pay has increased from USD$13.1 to $28.1 between 2003-2006. It increased to $33.75 at the beginning of 2008. Wages of Vietnamese workers in Hanoi and Ho Chi Minh City were just USD$155.75 per month (2006), about half the level of China, and only higher than Jakarta's (USD$134.33), and compared with an average regional rate of USD$262.67; and the monthly wages for Vietnamese engineers in Hanoi and Ho Chi Minh City was USD$367.75, compared with the regional average of USD$624.93.






Regional Vietnam China     India     Indonesia   Malaysia    Philippines Singapore Thailand

average  (Hanoi/  (7 cities)(New    (Jakarta/   (Kuala           (Manila/             (Bangkok)

HCMC)               Delhi)    Balam)        Lumpur)        Cebu)


2004     204.08   119.5     NA        143.75   112.33          218.00         110.50    545.50   179.00

2005     205.4    134.75   162.86   184.25   105.33         205.00         175.50   529.50   146.00

2006     262.67   155.75   222.93   256.17   134.33         221.00         284.70   662.50   164.00




Regional Vietnam  China       India       Indonesia   Malaysia  Philippines      Singapore     Thailand

average  (Hanoi/   (7 cities)(New       (Jakarta/    (Kuala        (Manila/                               (Bangkok)

HCMC)                    Delhi)      Balam)         Lumpur)       Cebu)


2004       1,180.51    677.25   NA        998.00   690.33  1,641.00     595.00               3,083.00   579.00

2005       1,129.47   684.50  720.43   984.00    640.33 1,643.00    787.00               2,992.50   584.00

2006       1,209.98   956.75  641.77  1,100.31   684.65   1,638.00    926.86              3,047.50   684.00

Unit: USD$            Source – JETRO



Note - The minimum wage at all at state, privately-run and foreign-invested enterprises will increased from 2008 by 20-38% (from $28.125 per month) for state and private employees, and by 13-15% above USD$45, USD$50 and USD$55 for those work­ing in foreign-invested enter­prises – depending upon the location.


Considering Vietnam's stable population growth, young population, increasing urbanisation, liberal, practical and determined attitudes, it stands to reason that Vietnam will become the next big consumer market in Asia by 2020, creating significant opportunities for investors to participate in potentially attractive investment opportunities.






In July 2000 the Vietnam Securities Exchange was opened. Although the activities of the new securities market are still limited at this stage, the opening of the long-awaited stock market was seen as a positive step toward creating a channel for long-term capital mobilisation which will have a positive impact the economic reform process and for private investments. The securities market is likely to see faster development over the coming years as there is significant latent supply and demand to be exploited by an expanded public securities market. With major companies slated for listing to 2010, including the state banks, the securities market is poised to expand significantly over the next several years. Vietnam successfully issued its first dollar-denominated bond offering in 2005, which is a significant step in the development of deeper bond markets and indicates a departure from the stigma of the so-called Brady Bunch, a reference to developing nations that issue Brady bonds.


Foreign investors can obtain up to 30% equity in local private and State Owned Enterprises in certain industries, and up to 49% in Vietnamese listed companies as well as the ability to have 100% Foreign Direct Investment, through the establishment of wholly foreign owned enterprises, in most industries (but not real estate trading), and in a breakthrough decree in mid-2005, the Government granted foreigners the right to buy unlimited stakes in distressed or bankrupted state owned enterprises SOEs.


Portfolio investments to Vietnam has increased substantially since 2002 and some international funds managers rated Vietnam among the most promising securities market in Asia (Bloomberg, 21/9/2006). The VN-Index increased by 66% in 2006, the fastest growing index in Asia, surpassing those of China.


Vietnam's first stock exchange, known as the Ho Chi Minh City Securities Trading Center, was established in July 2000. In March 2005, Vietnam opened an over-the-counter exchange, known as the Hanoi Securities Trading Center. The purpose of the second exchange is to expedite the process of equitisation of state­ owned enterprises. By the November 2006, the number of companies listed on the exchange had reached 52, representing a total market capitalization of USD$3.8 billions or 7.6% GDP. Currently two-thirds of the companies listed on securities markets are equitised SOEs.


The domestic stock market witnesses an exceptional expansion in late 2006 and early 2007. Total market capitalization of both the Ho Chi Minh Stock Exchange (HoSC) and Hanoi Securities Trading Centre rose 20 ­fold year-on-year to reach USD$14 billion (22.7% of GDP) at the end of 2006 and increased further to about USD$20 billion (about 30% of GDP) by the end of June 2007. A recent State Bank survey on the portfolio investment capital in Vietnam shows that 74 foreign investment funds are present in Vietnam, including 22 funds established in the first 8 months of 2007. The total capital brought to Vietnam by the end of August is estimated to have reached USD$6 billion, or nearly 10% of GDP. However, a substantial number of the equi­tised SOEs during the period of 1997-­2006 were small ones. According to the Ministry of Finance (MOF), more than 3,200 SOEs had been equitised by the end of 2006, but there remain 2,200 SOEs with total capital equiva­lent to 31% of GDP. The equi­tisation has entered a challenging stage of restructuring large SOEs. Investment funds await large IPOs to pour more capital into Viet­nam's market as the government remains committed to carrying out the plan to equities all State Owned Commercial Banks and reduce the number of SOE’s to 554 by 2010. Authorities have tight­ened regulations to minimise risk in the stock market, particularly on lending for securities investment. The State Bank banned commercial banks from granting loans to affiliate secu­rities companies for securities trading and requested domestic credit institu­tions to limit the loans funding secu­rities trading to 3% of total outstanding loans by the end of 2007. Authorities have also required better information disclosure by listed com­panies and vowed to get tougher on insider trading. With sound macroeconomic fundamentals, mar­ket-oriented reforms to improve the investment climate and enhanced supervision of market operations, the outlook is positive for a stable and long ­term development of the capital markets.


Funds poured into stocks accounted for 41.7% of the total in the economy and those into property for 39.8% in 2006. Furthermore, some 80% of the companies that have listed on the bourse either have or plan to develop property projects in the next 5 years.



Some 43 investment funds are the major sources of capital flows into the market, accounting for 40% of trading value in the stock market, with about USD$3-4 billion of cash ready to invest in Vietnam. Several existing funds are reaching their full size targets as well, whereas many local firms are gearing up for fund management off-shoots. Some foreign fund manag­ers said that some 46 country funds were operating at the moment and their as­sets are USD$7-8 billion. Foreign portfolio investment has reached about USD$20 billion, including about USD$7.6 billion in listed shares with the balance in unlisted shares. Some bankers added, "The stock market here is in a very early stage of develop­ment: commodities are still lim­ited to corporate shares; the debt market has not been in place while derivatives are not available either. This means the potential for investment funds is huge." But does Vietnam intend to limit the establishment of new investment funds or capital inflows or not? "No, absolutely not," said the deputy director of the Securities Busi­ness Management Depart­ment under the State Securi­ties Commission. Attracting more institu­tional investors, especially investment funds, is one of the top priorities of the stock market watchdog and the commission have already drafted rules on open-ended funds and are considering the time of intro­duction.


3.7     FOREIGN EXCHANGE RATES & RESERVES                          


The rationale for a Government to have a fixed exchange rate system has been driven traditionally by 4 factors : -


(i)                 a desire to build confidence in the currency; and


(ii)               a need to keep the debt burden low for companies holding dollar-denominated debts (notably state enterprises); and


(iii)             a concern to avoid fuelling inflation; and


(iv)              a wish to keep exports competitive.


Together these 4 factors have meant that the Government has allowed only a slight down-ward pressure in the value of the local currency to ensure stable exchange rates. The Government, however, continues to maintain substantial capital controls, including restrictions on both incoming and outgoing capital flows. Capital account convertibility is quite restricted as the Government remains instinctively cautious, something reinforced by the Asian currency crisis in 1997.


3.8     COUNTRY ECONOMIC INDICATORS                             


Sovereign risk                                               B

Currency risk                                                 Ba3

Banking sector risk                                      B

Political risk                                                   B

Economic structure risk                             CCC


In September 2007 Standard & Poor affirmed Vietnam's foreign currency rating at BB and its local currency rating at BB+ indicating a stable out­look. Just another notch up, Vietnam's sovereign bonds reached the investment grade, so they may now be widely taken by overseas investment funds, especially pension ones who are now restricted from investing in below-investment grade bonds, also called junk-bonds. The rating agency said: "The ratings on Vietnam reflect its low-income economy and developing fi­nancial system, which in­crease the vulnerability of the economy to severe shocks that could significantly increase the public financial burden. In addition, the strain of necessary infrastructure building is heavy at this stage of Vietnam's economic devel­opment. This prevents the Government from building up an adequate financial buffer against potential economic shocks. The banking sector is not good enough despite many reforms as its commercial operations are still intervened by the Government. Partly because of this, macro-economic man­agement relies on administra­tive measures rather than market-oriented policy instru­ments.” It forecasts Vietnam's defi­cits of 2.5% to 3% of GDP in the next few years due to a dire need of infrastructure invest­ment. The debt burden is also expected to remain at above 35% of GDP in the same period, a level somewhat below that for the median ‘BB’ country rating. The outlook is stable, how­ever since the structural reforms and infrastructure upgrades in recent years have helped to lift growth prospects for the economy. The brighter out­look has lured larger invest­ment inflows, which have in turn lifted the central bank's reserves and increased capac­ity to cushion a large adverse economic shock.



3.9     TAXATION                                                                               



The primary forms of taxation applicable to businesses operating in the property sector in Vietnam are Business Income Tax (BIT), Value Added Tax (VAT), Foreign Contractor Withholding Tax (FCWT), Tax on Land Use Rights and Import-export duties. Vietnam's standard BIT rate is 28%. An incentive regime exists that enables eligible investors to access BIT exemptions, BIT reductions and preferential BIT rates. All incentives are provided for limited timeframes. From 1st January 2004, the repatriation of profits has not been subject to Profit Remittance Tax.



Under the current VAT Law, there are three rates : -

0%.     -           primarily for exported goods and services

5%      -           for essential goods and services

l0%      -           the standard VAT rate applicable to all other goods and

                         services. Certain goods and services are exempt from VAT.



FCWT applies to payments to non-residents for interest, royalties, licence fees, service fees (irrespective of where the services are performed) and cross border lease charges. No FCWT is imposed on profits paid abroad by a foreign investor. The FCWT rates incorporate a BIT and VAT component and vary from 2% to 10%. Income from the transfer of land use rights or land lease rights is subject to 28% tax. After calculating income tax at the tax rate of 28% the remaining income shall be subject to a surtax at rates ranging from 0% to 25%. The rental of land use rights by foreign investors (if not contributed to legal capital) is in effect a form of property tax. It is usually known as land rental and the range of rates is wide depending on the location, infrastructure and the industrial sector in which the business is operating. Taxpayers with foreign-invested capital are exempted from paying imported duties on goods imported for the construction and establishment of an enterprise and on goods used for the production of goods destined for export. The Government is progressively implementing the lower import duty rates under its international commitments as a member of the WTO and ASEAN.


Vietnam offers investment incentives for foreign investors, such as BIT exemptions, BIT reductions, preferential BIT rates and import duty exemptions for imported equipment of certain investment projects. Foreign direct investment rose steadily in the early 1990s but declined during 1997 to 1999. More recently, the Government has made efforts to streamline investment procedures and create a more favourable environment for foreign investment. Foreign direct investment has made a solid turnaround since the investment doldrums of the period post the Asian financial crisis.


In 2008 the Minister of Natural Resources said that land taxes and fees contributed USD$1 billion to Vietnam’s GDP but emphasized that the land revenue would double or triple if land was better managed.



3.10   AGRICULTURE                                                                       



By employment, Vietnam is an agrarian country, with around 65% of the labor force working in agriculture, forestry and fisheries. However, the agricultural sector currently accounts for just 23% of GDP, down from 40% in 1991. In recent years, there has been spectacular growth in the output of pepper, coffee (100%), making Vietnam the world's second largest exporter of these commodities, and a robust growth in the output of rubber, tea and especially rice, for which Vietnam is now the world's third largest exporter.



3.11   VIET KIEU                                                                               



Some 3.5 million Viet Kieu (Overseas Vietnamese) living in 94 different countries remitted $20 billion between 2001 and 2006 according to the MPI, while their direct investment was still modest at only USD$780 million in the past 20 years. The Vietnam Overseas Committee (VOC) say that remittances from Viet­namese living and working abroad hit more than USD$6 billion in 2007, leap-frogging 2006’s USD$5.2 bil­lion and USD$4 billion in 2005. The figures, which VOC based on statistics from banks and other financial institutions, may not reflect the true amount with large chunks of money flying under the radar and overseas remittances could reach USD$10 billion, or roughly two-thirds of registered foreign direct investment. Then there is the unofficial market. Around one million Vietnamese returning home to visit relatives often with large amount of money carried by hand.



3.12   FOREIGN AID                                                                          



From 1993 to 2005, Vietnam received pledges of US$32.7 billion of ODA, of which about 50% actually has been disbursed. In 2007 international donors pledged USD$5.4 billion in ODA for 2008, up USD$1 billion on 2007. Largest donors for Vietnam include Japan, the World Bank, and the Asian Development Bank. During the period 2006-10, Vietnam hopes to receive US$14 billion-US$15 billion of ODA. After 2010 it is hoped that Vietnam will have an GDP per capita income of over USD$1,000 moving the country from low-income status to middle income, with a consequential reduction in ODA. However, the move to industrialised status will offer a new set of challenges.






4.1     CURRENT SITUATION                                                             


Since the beginning of the Government's "Doi Moi" renovation policy, the real estate sector in Vietnam has begun a strong emergence from a controlled state position to a market oriented environment. The country's economic growth has given rise to a burgeoning urban middle class with an increased amount of disposable income which, when combined with Vietnam's increased international exposure including a rising influx of international tourists and multinational companies, has lead to an increasing demand for real estate in all sectors. Recent developments in regulations and laws governing the real estate sector are a result of public community pressures demanding change as well as the poor performance of the first round of international property development in the mid-1990’s. These changes also confirm the Government's recent acknowledgement that real estate must be allowed to develop for the benefit of the country with assistance from the private sector.


The construction industry contributes around 9% to GDP and it forecast that the sector will log 7% plus growth in the 2006-2010 period. Foreign investment in the Vietnamese property market is expected to reach USD$9 billion in 2010 and foreign investment in the sector has increased significantly during the period from 2005. Leading investors come from South Korea, Singapore, Malaysia, Hong Kong and Taiwan. HCM City has topped the list for investors, followed by Ha Noi, central Da Nang and northern Ha Tay provinces. It is widely predicted that the number of foreign investment projects will continue at a bustling rate over the next few years.



4.2     LEGISLATIVE FRAMEWORK                                                   


Real estate is a conditional investment sector but it is unclear what, if any, conditions will apply but speculation has been that the conditions could be in terms of the charter capital, funding guidelines, etc. Foreign-invested companies incorporated in Vietnam may lease land directly from permitted lessors, including the State, or acquire land via the capital contribution of a Vietnamese partner in the form of the value (or part thereof), of Land Use Rights. Often investment in the more attractive locations / projects in Vietnam will only be commercially / practically possible in this second form.


Legislation permits, but does not specifically encourage, foreign investment in the sector, except in select assets classes and regions where economic development is significantly behind the national average. Therefore, there are limited opportunities for tax incentives in the sector.


In the past, foreign investors had to set up green field projects or buy an interest in a licensed foreign-invested enterprise eg an office or apartment development JV. Under the new law, foreign investors can also buy shares in an existing domestic company, but again, it is unclear what the ‘conditions’ are.


Vietnam does not have thin capitalisation rules within its tax regulations. Under the former Law on Foreign Investment, the maximum debt / equity ratio of a foreign-invested enterprise was 70 / 30. Such conditions do not exist in the Law on Enterprise and was removed from the Law on Investment. However, there is still an implicit limit by virtue of the need to have a stipulated investment capital and charter capital approved by the licensing authority. Accordingly, the difference between the investment capital and charter capital could be treated as the maximum amount of debt for an entity.


Vietnam has to date ratified more than 40 Double Tax Agreements, which provide opportunities for optimising financing and structuring options. The more material regulatory changes include : -


  • In 2004 Joint Venture developers were permitted to be licenced to build apartments for sale, subject to approval from the Prime Minister. Prior to this regulation foreign developers could only build apartments for lease to the small expatriate community. A further acknowledgment by the Government for the assistance of the private sector to provide housing for its people.


  • The Land Law (2004) increased transparency as well demanded the establishment of Land Registries at provincial and district levels for registrations of Land Use Rights and other land use certificates, and clarified responsibility for the management of real estate assets, which encouraged investment, and increased the ability of financial institutions to provide better lending on property assets.


  • The first auction of Government land for real estate development purposes happened in 2004, although since then only a few other auctions have been arranged by the government department responsible, charged with using the proceeds for further infrastructure development. However, the number of properties sold at auction looks set to dramatically increase with several mega-projects requiring investment, such as the 770 hectare Thu Thiem peninsula opposite Ho Chi Minh’s District 1.


  • The Law on Residential Housing (2006) discussed Certificates of Ownership for both land and the buildings on the land.


  • Improved access to longer term mortgages and higher lending proportions. Local banks can now offer mortgages of upto 30 years on a small selection of prime developments and at up to 90% of the current valuation of the property eg apartment development by Phu My Hung in Saigon South, subject to the mortgagor’s personal financial status and income.


  • Continuing development of compulsory purchase and compensation regulations with the annual revaluation of land prices slowly getting closer to Open Market Values for compensation purposes.


  • The Law on Real Estate Business (2007) purports to govern various aspects of real estate business including, detailing the amount of investment capital required in order to create, to purchase, to receive an assignment of, or to lease or to hire pur­chase real estate in order to sell, assign, lease out or sub-lease out or to grant a hire purchase land for profit-making purpos­es. Foreign investors may participate in the following real estate activities : -


  1. Housing construction for sale and lease; and


  1. Investment in infrastructure for leasing land; and


  1. Real estate brokerage; and


  1. Real estate valuation; and


  1. Real estate consulting; and


  1. Real estate bidding; and


  1. Hold a “real estate transactions floor.”


To date, while in theory foreign investors can set up a wholly foreign-owned enterprise for undertaking real estate investments, it is very difficult for foreign investors to gain access to land, particularly in large cities. In this regard, joint ventures are still common. In most cases, the Vietnamese partner will contribute the land to the joint venture.


'Real Estate Business'- What's covered? Who can play?


Vague terms? Under the Law on Real Estate Business (LREB) 'real estate business activities' comprise 'real estate business' and 'real estate service business'. But what do these terms actually mean? Under the LREB, 'real estate business' is defined as including the activities of purchasing, leasing or developing real estate for sale, lease, sublease and hire purchase. 'Real estate service business', on the other hand, includes the activities of assisting the real estate business and the real estate market, including brokerage, valuation, trading floor services, consultancy, auctioning, advertising and management. So the terms are actually quite distinct.


Foreign vs. local players Can all investors--domestic and foreign--participate in both types of real estate business? The LREB says 'no' and provides for different permitted scopes of activities for foreign investors and local investors. However, it unfortunately fails to define precisely what a foreign investor is. Our observation of current practice is that foreign-invested companies established under an investment licenses/certificates are generally treated as ‘foreign investors'. The permitted scope of activity for such foreign investors under the LREB includes all real estate service business, but only one real estate business: development of real estate for sale, lease and hire purchase. This means that foreign investors may not, by law, engage in the business of purchasing housing/construction works for sale, lease or hire purchase; receiving assignment of land use right for re-assignment; leasing housing/construction works (with or without adding value) for sale, lease and hire purchase; or leasing undeveloped land (with basic infrastructure) for sublease.


Along with these regulatory changes, a number of other drivers are stimulating real estate development: the beginning of large scale urban infrastructure projects; an increasing standard of living; and a young population, are all applying pressure on the limited supply of real property.


4.3     LAND TEUNURE SYSTEM                                                                 


In Vietnam, all land is held by the state and is then distributed through a system of land use rights managed centrally by the Ministry of Natural Resources and the Environment. Vietnamese citizens can have effective freehold title as typically no time limit is set on land ownership rights. Foreigners are restricted to a land use rights period of 70 years by law although in practice they are rarely for more than 50 years. Furthermore, foreigners are only allowed to lease land directly from the Government for development purposes. Private Vietnamese companies and individuals are allowed to lease property to foreigners but not vacant land. The basic land laws currently governing land ownership allow for land use rights to be leased, mortgaged, exchanged, transferred and inherited. These laws have been amended several times, but the body of laws that define and protect property rights in Vietnam is still in its infancy.


There are several grades of land title with Land Use Rights Certificates (LURC) being the principal one, which is the equivalent to a freehold. Red certificates are issued to those who have obtained the right to use a piece of land and are required by both the Land Law and the Civil Code. “Red Books” are issued by the Ministry of Natural Resources and Environment whilst the ownership of construction works was recognized via another certifi­cate, issued by provincial construction departments or People's Committees. So in order for a home owner to formalise his paperwork, he needed to duplicate everything in the applications, and officials from the two departments duplicate every mea­surement, survey and registration. The Ministry of Justice have now suggested that a new Blue Cer­tificate be issued as legal proof of registration of immovable assets on land to record the ownership of houses and subsequent sales or other transac­tions, whereas the Housing Law states that home ownership rights be recognised through a “Green Paper”. Fortunately, the Prime Minister has expressed his wish for a simplification of the whole process by the use of only one universal document that is registered at the local Land Registry.



4.4     FOREIGN OWNERSHIP RESTRICTIONS                                           


Technically there is no private ownership of land. Individuals and organisations may only be granted land use rights for pre-determined purposes and periods and have to pay land rental to the Government. Land Use Rights can be transferred, except where this is not permitted or is restricted under the law eg by foreigners. Hence, the main channel for foreign investment to date in property projects has been through foreign invested enterprises (FIEs), typically as Joint Ventures with Vietnamese land owners but very occasionally as 100% foreign owned enterprises. Depending on the scale and purpose of the project different regulatory approvals are required, including Prime Ministerial approval for particularly large projects. It is also possible to invest in domestic Vietnamese enterprises engaged in the property sector, although the ownership terms and conditions are restrictive and limited to minority shareholdings in practice, since investment in the property sector is conditional ie subject to appraisal by the licensing authorities. Unless otherwise specifically stated in the company’s business licence (eg to develop an office building to rent), foreign invested enterprises cannot deal in or trade in real estate. The law further provides that: -



  • Foreigners cannot sub-lease


  • Foreigners cannot assign


  • Foreigners cannot obtain mortgages


  • There is no landlord and tenant legislation, so no automatic right to renew leases.


  • ‘Sale & Leasebacks’ are not possible as companies cannot reduce their legal capital, which for most manufacturing companies represents the value of the land, buildings and plant & machinery. However, we understand that this restriction maybe lifted.


  • Lease contracts are often extremely one-sided in favour of the landlord and include (additional) prohibitions against assignment and sub-letting; prohibition against mergers; prohibition against “threatening to cease occupation”; a duty to pay the landlord an annual service fee “as shall be imposed;” and restrictive user covenants.



4.5     FINANCING                                                                   


Loans : -                     Foreign bank loans must be approved by the State Bank.


Security : -                  Onshore security over assets and rights is limited and primarily defensive to : -


·        Mitigate the possibility of other creditors to seize assets.


·        Enhance negative pledge obligations in other financing documents.


·        Maximise the use of offshore security.


·        Buttress security over onshore assets and rights with appropriate direct agreement.


Types of security : -  


·        Mortgages and pledges


·        Guarantees - a type of security but no rights over assets


·        Performance bonds


·        Security deposits


·        Escrow account


·        Assignments by way of security, charges, trusts and liens not recognized


·        Concept of an agent holding security not clear


·        No concept of receivership: lender step-in rights are crucial but depend on approvals from the relevant authorities, which may not always be forth-corning


Commercial banks loaned USD$6.4 billion on property against only USD$1 billion lent on securities and the stock market in 2007.






The commercial property market in large cities such as HCMC and Hanoi has seen a strong recovery after a stagnant period between 1998 and mid-2000’s. Office space is in very short supply and the occupancy rates have reached over 95%. If the pre-1997 financial crisis period witnessed a booming commercial property market fuelled by foreign investors, this time, the development is coming much more from domestic investors. The residential property market is also seeing solid development with many large projects to meet the increased demand in the large cities. All sectors have seen extremely robust growth in rentals and capital values in 2007, with many sectors experiencing 30+% increases, reflecting the acute shortage of supply and burgeoning demand.


A detailed up-to-date sector-by-sector and region-by-region analysis is beyond the scope of this analysis.



4.7     TOURISM                                                                                



In 2005 Vietnam received 3.47 million international arrivals, up from 2.93 million the previous year and 2.43 million in 2004. The annual increase represented a strong rebound from a slight decline in 2003 attributable to the severe acute respiratory syndrome (SARS) epidemic in Asia. Most of the visitors came from China, the United States, Japan, and South Korea, and Europe.



The Vietnam Hotel Sur­vey 2007, issued by the financial and accounting firm Grant Thornton Vietnam, looked into the performance of 29No. 3-5 star hotels in big localities in Vietnam's 3 regions in 2006. Vietnam now has some 25No. 5­ star hotels, 64No. 4 star and 135No. 3 star ones with a total of 45,000 rooms spreading in 3 regions. Among types of guests, tourist groups made up 31.5% in 2006 (up 4.7% year-on-year), in­dividual tourists made up 28.4% (up 3.5%), but businesses made up 22.7% (down 2.4%). In 2006, the av­erage room rate at deluxe facilities from 3-5 stars increased to US$60.06 per room night, 7.7% higher than that in 2005 (US$55.78). The average room rate saw an in­crease of 21.1% in the North and 15.7% in the Central while the South remained the same. The North was also the leader in occu­pancy with 74.4% while the South took the second position with 59%.



Regarding the growth compared with 2005, only the Central saw the increase of 5.6% (to 57.8% from 52.2%) while the North and South saw the decreases of 5.3% and 5.4%, respectively. The peak business falls between October and March and the occupancy is between 90-95%, and even 100%, while in other months, the rate is much lower. Ex­penses for sales and marketing, in 2006 increased 5.7% in the central region; the figure was 3.4% in the North and 4.6% in the South compared with 2005. An employee working at a 5 star hotel earns US$330 a month while those working at a 3-4 star hotels can get US$159 and US$328 a month respectively. It is noteworthy that hotels in the central region spend more than those in other regions because there are 1.9 employees working for a room; the number is only 1.4 in the South and 1.3 in the North. Explaining this, some said that it is possibly because along the central region, there are more de­luxe resorts, which require a large number of employees to maintain specific characteristics of the es­tablishments.



In 2005, the revenue from rooms made up 63.4% while that from food and beverages was 26.4 %. However, in 2006, the revenue from food and beverages increased 4.9% to 27.7% while that from rooms decreased 3.6% to 61.1%. Compared with the northern and southern counter­parts, the food and beverages in the central region accounted for 37% of the total revenue.



4.8     TIMING                                                                                    



Many of the reforms and developments outlined in this document have only occurred since 2000 but the timing for investing in Vietnam is now better than previously for several reasons: -


1.      Key reforms supporting private enterprise and foreign investment are now in place.


2.      The large number of private entrepreneurs still have limited domestic financing opportunities and are less sophisticated thereby creating a role and a need for foreign investors.


3.      Many of the successful business models seen in other more developed countries are not yet visible in Vietnam, with many industries being small and fragmented and exhibiting a lack of economies of scale and ability in marketing, branding and distribution.


4.      Valuations are comparatively low when compared with those in China and elsewhere in the region.



4.9     FORECAST                                                                             



The economic, legal and demographic changes occurring in Vietnam are similar to those that fueled the explosive growth of China's real estate market which began in the late 1990s. In 2000, at the trough of Shanghai's property market prices, China’s impending World Trade Organization accession prompted a series of financial, regulatory and legal reforms. China's GDP growth at the time was 7.5% while Shanghai's was 10.8%. Similarly, Vietnam's World Trade Organization accession in 2006 has spurred legal and financial changes, at a time when the country is achieving GDP growth that is comparable to China's. As the legal and financial enablers for the development a robust real estate market have only recently been put in place, Vietnam's property cycle is just beginning and we believe that potentially attractive investment opportunities exist for real estate developers and investors.


However, although capital in­flows into Vietnam will re­main strong they will eventually slow down due to the forthcoming capi­tal gains taxes on property and equity transactions, ac­cording to a reported by the ANZ Banking Group. The new tax laws that will come into effect in January 2009 require that all prop­erty transactions incur a 25% capital gains tax, while all earnings from securities trades are taxed 20%. Capital gains taxes were likely to have a negative short ­term effect on the property and equity markets. The de­mand among locals and for­eigners will decrease as a result of the taxes, which will cap the recent growth in as­set prices. "While strong domestic growth and financial market development will keep Viet­nam an attractive destination for foreign investors, the external and internal climate is now less favorable. The new capital gains taxes in the country will certainly put the brakes on offshore inflows.”

Last Updated ( Thursday, 30 July 2009 )
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