Chaotic condotel business

07-Dec-2019 Intellasia | The Saigon Times | 6:02 AM Print This Post

All are in a mess for State agencies, localities, businesses, and property buyers after the owner of the property project Cocobay in Danang City announced that it could no longer live up to its promise of paying an annuity of 12 percent for buyers of its condotel units. The shockwave is felt, not only because of the extent of imminent damages caused by the project’s failure as Cocobay is probably the biggest condotel project in the country. Rather, it is because the collapse of this business model at Cocobay is seen having a domino effect on a business sector that has shot to “stardom” lately. Confusion is also seen as authorities rush to handle projects that are now moving to brinksmanship in the absence of a legal framework.

The collapse, say experts, is just a matter of time.

The case surfaced last week when Empire Group, the owner of Cocobay Danang, wrote to customers saying it could not afford paying the promised annual sum equivalent to 12 percent of their investments as committed to customers from next year due to market upheavals.

Cocobay Danang in the central coast city was licensed years ago with a pledged investment of $5 billion to build some 10,000 condotels plus villas, hotels and apartments. Empire Group is said to have sold thousands of condotels to secondary investors, who then authorised the company to operate such units with committed interest of 12%. In the first couple of years, the commitment was honored but the developer now fails to maintain the business as expected. The collapse, therefore, is inevitable.

All observers point to the steep interest, which is said to be by no means obtainable.

“A profit margin twice the bank’s interest rate is simply baseless,” says Nguyen Tran Nam, chair of the Vietnam Real Estate Association, in Lao Dong.

At a regular government press briefing this Monday, the Ministry of Construction also referred to the high interest as the main cause of the collapse. “The maximum profit margin for condotels should not exceed the bank rate,” deputy minister of Construction Le Quang Hung is quoted by Tuoi Tre.

There has existed a fierce competition among condotel developers to offer steep profit margins to lure buyers.

Nam of the Vietnam Real Estate Association says project owners have resorted to high annuity to stir up customer greed. Most companies offer a rate of between 10 percent and 15 percent to sell their products, and the market has over the past few years seen overheated development.

The problem in this profit-margin issue is that it is just a civil contract between the project developer and secondary investors, so competent agencies cannot intervene, according to experts.

Lawyer Nguyen Sa Linh of Gia Linh Law Office explains on that the condotel leasing contract has nothing to do with the condotel purchase agreement. “Condotel developers separate the leasing contract from the purchase agreement… and developers often use the leasing contract with eye-popping annuity to attract buyers,” Linh says in the news site

To date, over 30,000 condotels have been developed, especially in coastal areas. The Ministry of Construction at the aforesaid news briefing stated that the business segment was first known in 2015 and saw a boom in 2016-17.

“The ministry has released a report, and advised provinces and cities against the overheated development of condotel projects, asking them to tighten control,” deputy minister Hung says in Tuoi Tre.

In the condotel segment, secondary investors as buyers always hold the shorter end of the stick, and stand to suffer when the developer fails to keep their promise on high returns, given the absence of laws governing the condotel business as well as regulations on operating condotels.

Condotels are not recognised as residential apartments, and therefore, buyers are not issued ownership certificates, according to the HCM City Real Estate Association (HoREA). No regulations governing condotels are found in the Land Law, the Law on Real Estate Business or the Civil Code, and State agencies are confused when dealing with this type of property.

Soon after the first few condotel projects were developed a few years ago, many experts and real estate associations have called on the government to create a legal corridor to safeguard the interests of both investors and customers. The government in April this year also urged relevant ministries to quickly draft regulations to this effect, demanding that such rules be ready in the third quarter of this year. No rules have come out, though.

As risks build up, certain provinces seek to take provisional measures to remedy the situation.

Danang City government in particular has issued decisions allowing Cocobay to convert thousands of condotels into residential apartments, according to Thanh Nien. The move, however, has come under fire.

Le Hoang Chau, chair of HoREA, says the conversion of tourism land into residential land would result in grave consequences in the long term, not only for tourism development but socio-economic development, according to Tuoi Tre. “Land zoned for tourism must be for tourism. Any conversion should only be allowed after a thorough study by a scientific council,” he is quoted as saying.

Citing other experts, the paper says that the conversion of tourism land into residential land would exert pressure on urban infrastructure, from technical facilities like transport, water and power supplies to social facilities like schools and clinics. It will also set a bad precedent for other localities countrywide, and will make the business more chaotic.

In an encounter with the media, the owner of Cocobay has admitted to the business collapse. “The collapse is inevitable,” Empire Group’s Board Chair Nguyen Duc Thanh says in Lao Dong. “I am brave to concede this. I know that in many other places, the business has collapsed, but they refrain from speaking out. I am the first to say so,” he explains.

In fact, the business collapse has been earlier reported at a condotel project developed by Bach Viet in Khanh Hoa Province’s Nha Trang City. Bach Viet promised a profit margin of 15 percent for condotel owners, and when the business turned sour, it failed to pay the sum and sought to reduce the rate to 8%, which could not be realised either. Tuoi Tre says hundreds of buyers have occupied condotels at Bach Viet project and turned such units into residential apartments beyond authorities’ control.

The domino effect will most certainly occur to other condotel projects in the near future, the property market researcher Savills says in a report. A few years ago, promises of high profits were a popular trick among condotel developers to woo buyers, but such promises are now seen unviable. “Certainly there will be more condotel projects failing to pay the promised profits,” quotes Savills deputy general director Troy Griffiths as saying.

The “failure to pay the high profit as promised is a matter of course,” the news site reports, quoting Dang Hung Vo, former deputy minister of natural resources and environment.


Category: Business, Vietnam

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