By Ton That Hoang, Legal Assistant

Background

On 01 April 2021, the Government issued Decree No. 49/2021/ND-CP (“Decree 49”) amending and supplementing Decree No. 100/2015/ND-CP (“Decree 100”) on the development and management of social housing, which came into effect immediately upon promulgation. Despite its quick adoption problems with Decree 49 have been discovered. This Special Alert will discuss some of the inadequacies of the regulation requiring the use of 20% of the land fund of total residential land area allocated to commercial housing investment projects for social housing.

Problems menacing social housing

The procedure for investing in social housing is too strict. In addition, the construction of low-income housing does not achieve economic efficiency and the ability to recover capital is slow. Despite enjoying many incentives such as land use interest exemption, VAT preference tax rates and loans at 1/2 the commercial loan interest rate investors must still pay for ground clearance, apartment prices appraised by the State, and a restricted buyer market. The State does not have a regime of direct financial support for these subjects.

Article 5.2 of Decree 100 stipulates that: “If a commercial housing project or urban development project uses less than 10 hectares of land, the investor may decide between using 20% of the land area for construction of social housing as set out in Clause 1 of this Article, or convert a quantity of housing equivalent to 20% of the land area (according to land price) into social housing, or pay an amount of money equivalent to 20% of the land area (according to the land price).” In reality, most investors choose to transfer the equivalent housing fund or even split the project so that neither project is larger than 10 hectares to dodge their responsibilities. Decree 49 has narrowed this scale to 2 hectares in order to prevent investors from trying to “circumvent the law” for setting up 20% of the land fund at the project for social housing development.

Under the existing regime, investors must build infrastructure that is appropriate for both commercial housing projects and social housing. Commercial projects, especially high-end housing, require higher standards with stricter investment rates. Social housing requires lower standards in an effort to reduce costs and low investment rates to meet the payment conditions of low-income people. By requiring commercial projects to develop social housing, which sells at a lower price, the State is requiring the developers to eat a large amount of their investment.

Proposed solutions

Instead of forcing projects of 2 hectares or more to set aside 20% of the land fund in that project to build social housing, the State should flexibly allow the investor to transfer the land reserved to build social housing to another project in accordance with the general planning which is designed specifically for the lower cost investment.

In case the investor is willing to build social housing, instead of forcing investors to cut the land to build social housing, it is possible to allow the investor to pay the money equal to the land value of 20% of the infrastructure built in the project. This money is currently included in the local budget. It should be added into a separate fund for the construction of social housing in that area. In this way not only will investors have opportunities to comply with the law and facilitate the implementation of social housing, but also protect residents in high-end commercial housing projects from residential establishments which may affect property prices. Middle and low income people will be able to have access to social housing projects and have living conditions suitable to their living standards, while reducing negative effects in the distribution of social housing.

Conclusion

The ultimate aim of Decree 49 is to promote investors to make land funds for and invest in social housing. To some extent, Decree 49 is considered as a remarkable amendment, preventing investors from “circumventing the law” to avoid having to set up 20% of the land fund at the project for social housing developments in order to increase supply in the market in the short term and solve the housing problem for low-income people. However, it also raises new problems for investors. The government should balance between the need to develop social housing and the convenience for investors in order to best facilitate low-income people.