Government to work on laws for condotel model

As the fallout from the recent Coco Bay condominium scandal continues to roil the Vietnamese real estate market, there are increased calls from local authorities, developers and investors for the national government to create a regulatory environment for condominium sales that will bring transparency to the condotel business model, manage developer operations and protect investors.

In response to calls from investors and media, he Ministry of Construction says it will enact new laws to regulate the condotel sector. According to reports, the MoC plans to develop a standard contract between condotel developers and secondary investors, setting out specific rights and responsibilities for buyers and sellers, 

Le Quang Dung, Deputy Minister of Construction spoke at a press conference several days ago and said that in addition to regulating the responsibilities for buyers and sellers, the new regulations would also place regulations on banks and their investments in condotels.

Dung said that the biggest problem is that there are no legal regulations related to the condotel business model and that neither the Law on Tourism, Land Law, or the Housing Law have identified this type of business. Because of the lack of regulations, condotels and their business model are unregulated and buyers and investors have few legal rights when there are disputes.

The governments announcement came 10 days after Empire Group, the developer of the Coco Bay Da Nang Resort Complex said that due to the company’s financial difficulties that it will cease paying buyers of condotel units and owners of shophouses the annual annuity payments that it had promised them.

As a component of their investment, buyers of condotel and shophouse units had been promised “guaranteed annual payments” of 12% until 2026.

Earlier, investors in the Bavico condotel project in Nha Trang, had gone through the same problem after being promised 15% annual returns. As Bavico faced financial difficulties it renegotiated the annual rate of return down to 8% before defaulting on them altogether.

Dung from the MoC said in the government press conference that, “A condotel pledging annual returns between 12 and 15%, which is two or three times higher than bank deposit rates, is far too unreasonable. Condotel returns should at most only be equal to deposit rates.”

However, a legal expert who specializes in real estate noted that the annual returns and other financial commitments between condotel developers and secondary investors are a civil matter, and the regulatory agencies can only intervene when there are problems, which is already too late.

A condotel is normally a mixed-use real estate project that involves both a condominium and a hotel. Investors buy units in these developments and then allow the hotel management company to rent the investor units to hotel guests.

The first condotel project in Vietnam came online in 2013 in the seaside resort town of Nha Trang. Because these projects allow developers to receive money before the development is open, they became an investment craze in 2016, as condotels projects started appearing in resort areas across the country. 

Under the normal condotel business model, investor units are rented out on an equal basis, and owners received income, minus a hotel management percentage, and typically, there was no guarantees on how much money an investor would receive each year.

With more than 30,000 condotel units now online, and more being added each year, developers have faced increased competition and have been enticing investors with promise of high guaranteed returns on their purchases. While an investment of 5 ~ 8% could be considered reasonable, many of the new condotel developments are promising investments of 15 ~ 18% per year for a 5 ~ 10 year period. 

For a developer to provide this return amount, most condotels would need to have average occupancy rates of 90% throughout the year, and no mater how much advertising and marketing these developments execute, they are unable to achieve the occupancy levels needed to provide the high annual returns that they have promised investors.

The new regulations that the MoC plans to create will need to outline rules on transparency and will also need to see developers provide transparent information as to their business models and how the rates of return will be effected by occupancy, thereby providing potential investors with information to base their investment decisions on.