According to Dr. Vu Dinh Anh, surplus is determined by subtracting the purchase price from the sale price to define the profit. In the real estate sector, surplus is the method of taking the total projected development revenue minus the total projected development costs of the land plot or plots. “I don’t understand why when drafting Decree 12, the Ministry of Natural Resources and Environment “forgot” the two important costs that investors have to pay, which are land use cost and capital cost”, Mr. Anh emphasized.”
According to Mr. Anh, with projects related to land, land use fees are an extremely large cost, which can amount to trillions of VND per project. At the same time, capital costs are not small either because real estate is characterized by high value and businesses usually have to use borrowed capital. Even when an investor only uses their own capital, when accounting, it must be considered as a loan because in the economy, capital must generate profits. If they do not invest, they can deposit it in the bank for interest.
“The costs must be the sum of all the expenses that the investor has to pay to create the final product. The extremely large and extremely important costs for land are being left out, which is not true to economics”, Mr. Anh emphasized.
Dr. Vu Dinh Anh.
Mr. Anh also pointed out Point c, Clause 3, Article 5d, Decree 12/2024 stipulates: “The investor’s profit (including the cost of capital ownership and the cost of borrowed capital) is calculated as a percentage of the construction investment cost stipulated in Point a of this Clause”. This is also an absurd provision when defining the investor’s profit. All “expenses” must be included in the cost, and only “revenue” is included in the profit. There is no such thing as profit that includes costs. Profit also includes cost is a distorted, incorrect understanding. This provision is completely wrong in economic essence.
“The incorrect interpretation and implementation of the surplus method is also synonymous with the act of giving up a very effective tool for land valuation. Land valuation is stuck right from the source because even the valuation method is distorted. The foreseeable consequence is that many segments of the real estate market will not be valued appropriately, causing the problem of supply congestion to become increasingly severe, the goal of reducing house prices becomes impossible“, Mr. Anh emphasized.
“Currently, the Ministry of Natural Resources and Environment is drafting a new Decree on land valuation, I think this is a good opportunity to correct mistakes before it is too late”, Mr. Anh said.
Previously, when discussing this issue, the Chairman of the Vietnam Valuation Association, Nguyen Tien Thoa, also assessed that Decree 12/2024/ND-CP amended and supplemented has absorbed the opinions of experts and businesses when retaining the Surplus Method to determine land prices. However, this absorption is not thorough, leading to incorrectness, insufficient reasonable cost items for investors, causing businesses to potentially suffer losses/waste trillions of VND.
Along with that, the construction of input factors to determine land prices that are not really true to the economic nature can keep the bottleneck in supply uncorked. Besides, insufficient cost items for businesses can lead to the cost of project development being inflated, causing house prices to only increase, not decrease.
Faced with some shortcomings of Decree 12, on April 1, 2024, the Vietnam Valuation Association sent Official Letter No. 33/2024/CV-HTD to the Vietnam Chamber of Commerce and Industry, the Ministry of Natural Resources and Environment to provide comments on the Draft Decree Regulating land prices drafted by the Ministry of Natural Resources and Environment to guide the implementation of the 2024 Land Law.
Accordingly, regarding the method of calculating land valuation according to the surplus method, the Vietnam Valuation Association also recommends that the Ministry of Natural Resources and Environment review some regulations in Article 8. Specifically, as stipulated in Point c, Clause 3, which stipulates that the investor’s profit (including the cost of capital ownership and the cost of borrowed capital) is calculated as a percentage of the construction investment cost, is considered incorrect by the Vietnam Valuation Association.
In addition, the Vietnam Valuation Association also recommends that the Ministry of Natural Resources and Environment review and write more clearly Point d, Clause 3, Article 8 in the direction that if this cost is deducted by the State for compensation and site clearance into the financial obligation to the State according to the plan approved by the competent authority, then it shall not be included in the total development cost.
