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MOC attempts to set higher capital requirements for real estate developers
The Ministry of Construction is planning to set up higher requirements on the legal capital that real estate development companies have to have, in an effort to stabilize the market.
Under the currently applied Real Estate Business Law and Enterprise Law, institutions and individuals only need to have the minimum capital of six billion dong to be able to establish a real estate trading company. Meanwhile, in order to develop a real estate project with medium scale, enterprises will need huge capital sums of hundreds or thousands of billions of dong. It is estimated that more than 30,000 enterprises now have the function of trading real estate products.
Nguyen Tran Nam, Deputy Director of the Ministry of Construction, has pointed out that low requirements on capital volume required of real estate companies is one of the most important causes of the problems in the market. A lot of enterprises reportedly registered to implement projects, called for capital from different sources and then escaped from the market. Many other enterprises were not financially capable enough to develop projects, and they had to mobilize capital from the public even when they were not allowed to. Many real estate developers are called “barehanded investors”, because they still wanted to develop projects even when they did not have enough capital.
According to Nam, it is necessary to raise the required level of capital for real estate developers in order to make the market “healthier”. Real estate developers must prove that they are financially capable enough to run projects.
MOC has emphasized that if the required capital does not increase, it will be very difficult to manage the operation of enterprises.
“The main goal setting higher requirements on the legal capital of real estate enterprises is to make the market become more transparent and stable,” Nam said.
He went on to say that the main goal of the proposal is to install a “technical barrier” in order to weed out the enterprises which do not have sufficient financial capability.
Professor Dang Hung Vo, former Deputy Minister of the Natural Resources and the Environment, said that to some extent, the requirement on the legal capital will help prevent incapable enterprises from joining the market. However, Vo said that the requirement alone will not be enough to assess developers’ capability. He said that it is necessary to use many other tools, including the auditing and inspection, to ensure the financial capability of developers.
Though MOC has proposed to increase the legal capital of real estate enterprises, how high the capital should be remains questionable.
Tran Huynh Thanh Nghi from the HCM City Economics University, has pointed out that businesses follow a very complicated procedure to have their legal capital certified.
Under the Circular No.13 issued by MOC, enterprises must show the certificates granted by banks regarding the deposited money of founding members of the companies. Nghi said that here he can see the misunderstanding between the concepts of “legal capital” and “deposit money”.
In case shareholders contribute capital in assets there must be certificates on the valuation of the assets. In other cases, enterprises must show certificates granted by auditing firms. “The regulations make the procedures of having certified legal capital become very complicated, and time consuming,” Nghi said.
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