Increase in Legal Capital of Real Estate Businesses: How Much Is Enough?

5:29:17 PM | 9/2/2014

To improve the operating quality of property companies in Vietnam and build and develop a healthy and stable property market, the Ministry of Construction has recently proposed increasing the legal capital of real estate businesses. Accordingly, the legal capital is proposed an increase from the current VND6 billion to VND50 billion.
According to an official from the Ministry of Construction, this proposal aims to restrict easy permission for construction investment as well as easy construction halt on capital shortage. Incomplete or abandoned projects will leave bad implications on the property market.
Sorting out businesses
Deputy Construction Minister Nguyen Tran Nam said that, according to the current law, an organisation or an individual only needs at least VND6 billion to set up a real estate company. With this capital level, a lot of real estate companies have been founded. But, a lot of companies have nothing left but their big names and the legal capital of VND6 billion.
This low legal capital has posed enormous risks and difficulties to the real estate market. To a certain extent, the people have to bear these risks which become clearer when the market is lacklustre as now. A series of projects are incomplete because of capital shortfall. In many projects, people contribute their investment capital but investors fail to keep up with the committed progress, thus eroding the public confidence in the property market. Therefore, the Ministry of Construction will have measures to sort out property companies and bring the property market to the trajectory of stability and sustainability.
The Ministry of Construction said that if the rise in legal capital is not approved soon enough, it will be much more difficult to manage operations of property companies. Many projects will be abandoned because of capital shortage. However, the capital hike is still controversial.
Is VND10 billion too high?
Nguyen Ngoc Thanh, Vice President of Vietnam Real Estate Association, said that the rise in legal capital aims to select potential businesses to implement projects but this hike will prevent us from accomplishing other goals. Legal capital is different from conditional capital of a project. If this capital is pushed up too high, it will weaken operations of companies while most of Vietnamese companies are small and medium-sized. As such, we will not be able to attract capital from these companies for the property market while our objective is socialising investment and construction activities to diversify housing products.
The Law on Investment also defines basic legal barriers to project involvement. Accordingly, a company must ensure 15-20 percent of the total project investment capital. Given that, the lifting up of legal capital to VND50 billion is not very effective, even detrimental to SMEs in accessing investment projects. In reality, we not only make big projects but we also carry out small projects which are suitable for SMEs. Mr Thanh said if a company registers to open a property exchange, it will not need such a big amount of legal capital as VND50 billion.
Many real estate companies said that VND50 billion is a very small amount of money to businesses that deploy projects worth of trillions of Vietnamese dong but it is a huge challenge for companies that only involve in property brokerage and sale.
To dodge the new capital regulation imposed by the Ministry of Construction, some companies may join together or even ask capital guarantee from other companies.
To boost the efficiency of businesses to the economy by classifying them (first-grade, second-grade and third-grade companies), the hike in legal capital must ensure all grades of companies will involve in projects. For third-grade companies with a legal capital of VND10 billion, the Ministry of Construction only needs to hike its legal capital by VND10 billion and these companies can still join in projects.
He suggested that the hike of VND10 billion in legal capital is the best option, citing the current economic and business conditions and contexts. Besides, this is a way to support businesses when the market still faces a lot of difficulties as now.
Luong Tuan