Cancellation of costliest land lot purchase exposes legal loopholes

Vietnam’s regulations on property auctions are loose and need to be tightened so that real estate developers don’t “blow up” prices and cause market disruptions, Le Hoang Chau, chairman of the Ho Chi Minh City Real Estate Association (HoREA), told VnExpress.

Chau was referring to real estate developer Tan Hoang Minh’s recent decision to cancel the purchase of a land lot in HCMC’s Thu Thiem Peninsular for which its winning bid was VND2.45 billion ($108,000) per square meter, the highest ever real estate price tag in Vietnam.

Thu Thiem New Urban Area in the namesake peninsula is a 657 hectares (1,623 acres) megaproject to develop the city into an international financial hub, located on its namesake peninsula in the south-east of HCMC.

The company accepted to forfeit its deposit of over VND588 billion to pull out of the deal, saying such a price tag could lead to “negative consequences” for the real estate market.

Property auctions should be conducted with sealed instead of oral bids so that the winning bid price is close to the real value of the lot, Chau said.

This could mean that the winning bid might be double or quadruple the reserve price (which was bid by most developers at the auction), and not 8.3 times, which is what happened, he added.

Authorities need to issue regulations to ensure that the winning bidder completes the project within a specific time frame, Chau said.

Developers should also be required to prove that they have enough cash to implement a project if they bid prices that are 150 percent higher than their deposit.

“The goal of an auction is not to reach a high price but to find the most capable developer to work on the project,” Chau stressed.

Tan Hoang Minh made headlines in December after its chairman bid VND24.5 trillion to buy a land lot on the Thu Thiem Peninsula in District 2, an area the city has reserved for the development of luxury projects amid dwindling land resources.

But just a few weeks later its chairman Do Anh Dung said in a letter to top government and Party officials that he had made such a bid because he did not want a foreign developer, Capital One Financial, to buy the 10,060 square-meter land lot.

The CEO of a real estate developer in HCMC, who asked not to be identified, said that city authorities were distracted by the high bid and did not carefully consider the ability of the developer who bid 8.3 times the reserve price.

The city’s coffers might gain from the high price tag but authorities will soon be overwhelmed by the concern of a “land fever” in the area, which causes prices of surrounding lots to soar, he added.

Echoing him, Huynh Phuoc Nghia, senior analyst at business consultancy GIBC, said that besides putting down a deposit a bidder needs to show its project development capabilities, including their cash resources and design ideas.

“A one-time billion-dollar gain cannot exceed gains of billions of dollars obtained from sustainable growth.”

Le Duy Binh, CEO ofbusiness consultancy Economica Vietnam, said that in developed markets like the U.S. and Hong Kong, developers with low credibility, such as those having cancelled purchases in the past, will be disqualified right at the beginning.

In June 2015, Tan Hoang Minh had won an auction for a 3,000-square-meter land lot at 23 Le Duan, District 1, for VND1.43 trillion, 2.6 times the reserve price.

It had canceled the purchase then, too, saying the auctioneer had made mistakes in the incremental bidding rates.

Binh said the current case shows that in Vietnam, companies with such a history can still make bids, which means more comprehensive and detailed regulations are needed to ensure similar issues are prevented in the future.