Challenges in establishing foreign-invested real estate companies in Vietnam

Vietnam presents an attractive destination for Foreign Investors in the real estate sector, driven by its rapid urbanization rate, high demand for housing and infrastructure, and market opening. However, establishing a foreign-invested real estate company in Vietnam also poses numerous legal challenges and demands strict compliance. Companies not only need a clear understanding of regulations concerning foreign investment and ownership but must also meticulously prepare for the registration procedures and conditions. Below are some challenges faced by Foreign Investors when initiating the establishment of a foreign-invested company for real estate business in Vietnam. 

See more: Scope of real estate business for foreign-invested companies

1. Challenge of establishing a Real Estate Company via the direct method

To establish a foreign-invested company in any sector in Vietnam, Foreign Investors must sequentially carry out procedures to obtain an Investment Registration Certificate and an Enterprise Registration Certificate. However, to be granted an Investment Registration Certificate for a real estate business project and subsequently establish the company, the Foreign Investor must clearly identify the project implementation location and sign agreements with property owners to secure the right to use the real estate for the project. This represents a significant challenge because the Foreign Investor has no guarantee that the competent state authority will grant the license to establish the company, making them hesitant to pay a substantial amount to property owners. Meanwhile, property owners are often unwilling to wait for the lengthy approval process, which consequently delays payment. 

Therefore, Foreign Investors often opt for an indirect method to establish a Real Estate Company. Firstly, a Vietnamese individual is typically appointed to establish a company with 100% Vietnamese capital, usually with a small charter capital amount; this establishment process is generally smooth and takes about a week. Subsequently, the Foreign Investor acquires the entire capital contribution of this company and contributes additional capital to increase the charter capital to an amount suitable for the business plan. After completing the transfer and capital increase procedures, the Real Estate Company can proactively select suitable properties to implement projects and apply for approvals as required by law.

2. Challenge of obtaining the approval of real estate projects

Obtaining licenses for real estate investment projects in Vietnam poses significant challenges for Foreign-Invested Companies, involving complex legal requirements. Foreign-Invested Companies must adhere to numerous strict and intricate legal regulations. To implement a real estate project, the company must fully satisfy requirements ranging from investment policies, land use regulations, and construction codes, to standards related to environmental protection and public safety. These regulations demand that the company possess a thorough understanding of the Vietnamese legal system and strictly execute each step to avoid violations. 

Consequently, Foreign Investors may choose the option of seeking and acquiring Target Companies that already possess real estate projects licensed by competent state authorities. These Target Companies are often domestic enterprises that have successfully navigated the complex initial licensing stages and obtained the right to implement the real estate project. This helps Foreign Investors save time and effort on initial legal procedures while mitigating risks associated with regulatory approvals. 

Target Companies often encounter difficulties in project implementation for various reasons, such as capital shortages, lack of experience in managing large-scale projects, or difficulties in mobilizing capital from banks and other investors. For these companies, the transfer to a Foreign Investor is a feasible solution to continue project development, meeting financial and management capacity requirements. Foreign Investors acquiring these Target Companies gain a significant advantage by inheriting the company’s existing assets and rights, including land use rights and necessary project approvals. 

Furthermore, acquiring a Target Company also allows Foreign Investors to leverage the personnel, experience, and local network previously established by the Target Company. Retaining the Target Company’s key personnel can also smooth the transition process and facilitate project implementation. However, to mitigate risks, Foreign Investors must conduct thorough due diligence on the legal and financial status, as well as the commitments of the Target Company, to ensure there are no potential hidden issues that could affect the project. 

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