Decree 12: What obstacles need to be removed to unblock real estate?

Mr. Nguyen Tien Thoa, Chairman of the Vietnam Valuation Association, pointed out 3 major problems and shortcomings of Decree 12 that need to be specifically guided by the Ministry of Natural Resources and Environment to resolve, especially in the calculation of the surplus method.

Firstly, according to Mr. Thoa, when applying the comparison method, the Decree stipulates that calculating both types of costs "depreciation and depreciation" to deduct from the value of new construction of assets to find the current value of assets attached to land according to the instructions on the order, content, and formula for determining land prices is unreasonable.

Because calculating both "depreciation value" and "amortization" in parallel by writing "depreciation value, amortization", with a "comma" between the two phrases will lead to the understanding that both types of costs must be calculated, not optionally calculating depreciation or amortization, making the calculation confusing.

According to Mr. Thoa, although wear and tear and depreciation are related to each other, only when the asset is worn out can it lead to depreciation, they are different. Wear and tear is an objective phenomenon, a natural characteristic of assets, the value of assets will gradually decrease over time of use. Depreciation is a subjective measure of the manager to recover the value of worn assets.

"On the other hand, according to current regulations, the depreciation method and the asset depreciation method are different, which may lead to different land price calculation results if two land valuation consulting units value the same land with assets on the land when one unit chooses to calculate according to depreciation value, the other unit chooses to calculate according to depreciation.

Therefore, in our opinion, it is necessary to guide to calculate only one type and should follow international valuation standards which is to only calculate the "depreciation value" of the asset at the time of valuation," said Mr. Thoa.

The second problem that needs to be resolved, according to Mr. Thoa, is that Decree 12 has not correctly and fully calculated the total cost of investment and real estate development to create revenue assets of the project according to the surplus method.

According to the principles and current regulations of the law on prices, the total cost that investors must spend to produce and trade products must include the total direct and indirect costs. That is also the total reasonable and valid cost to calculate the price.

"For real estate, these costs will include the costs that investors must pay to have the right to use land to carry out the project (unless the investor implementing the project is exempted from land use fees) and the costs of investing in real estate development on the land.

The regulation that does not include land use fees in the total investment cost - a reasonable and valid "input" cost that investors must pay in advance to the State budget according to the law - to have land but only allows the calculation of real estate development costs on land after having land is an underestimation of a fairly large cost.

On the other hand, not calculating other input costs that form the total cost such as "capital costs" which are the costs that investors must pay to their lenders to invest in construction is also a shortcoming," Mr. Thoa affirmed.

Third, Mr. Thoa said that Decree 12 did not correctly and sufficiently calculate profits for investors, and even confused costs and profits.

According to the provisions of the Decree: "Investor's profit (including equity capital cost and loan capital cost) is calculated as a percentage of construction investment cost specified in Point a of this Clause".

This profit calculation regulation means that profit is not calculated on total cost (including land use fee plus investment cost for real estate development on land) but only on investment cost for real estate development on land.

The elimination of costs for land use rights and business costs including advertising costs, sales costs, and operating management costs is not in accordance with the principle of price formation when calculating profits according to the cost method, which must be calculated on total costs (except in cases where land is allocated by the State and land use fees are exempted).

At the same time, this calculation method also denies the principle of "Time value of money" and "Future value of money" (the value that can be received at a point in the future including the principal and all the interest up to that point) when people with money invest in any field, including depositing money in the bank to earn interest. Therefore, to calculate the correct profit for investors, the profit must be calculated on the total cost mentioned above.

On the other hand, according to Mr. Thoa, the investor's profit includes the cost of capital (equity and borrowed capital), which is a confusion between cost and profit. The cost of capital is considered or taken into account (not included in the investor's profit) as a ratio to calculate the investor's investment efficiency when investing or borrowing capital to decide to invest, but its nature is the interest on the borrowed money that the investor must pay to the lender to carry out the project. It is an interest expense that must be included in the total cost of the project.

"It can also be said in another way, the cost of capital is the expected profit that the capital owner will receive when providing capital to the investor. This is the investor's cost, not the investor's profit; the investor does not enjoy this cost of capital. Therefore, it is necessary to exclude the cost of capital from the investor's profit", the Chairman of the Vietnam Valuation Association affirmed.

Sharing the same view, according to Dr. Vu Dinh Anh, although it is still called the "surplus method", the regulations in Decree 12 have had many inappropriate changes.

Specifically, according to Mr. Anh, surplus is simply understood as taking the selling price minus the purchase price to determine profit. In the real estate sector, surplus is the method of taking the total development revenue (estimated) minus the total development cost (estimated) of the land plot or land area.

"For some reason, when drafting Decree 12, the Ministry of Natural Resources and Environment "forgot" two important costs that investors must pay: land use costs and capital costs," Mr. Anh emphasized.

According to Mr. Anh, for projects related to land, land use fees are a huge expense, which can amount to thousands of billions of VND/project. At the same time, capital costs are not small because the characteristic of real estate is high value and normally businesses have to use borrowed capital. Even if investors only use their own capital, when accounting, they must consider it as borrowed capital because in economics, capital must generate profit, if not invested, then depositing it in the bank will also generate profit.

"Costs must be the total of all expenses that investors must pay to create the final product. It is not economically correct to leave out extremely large and important costs for land," Mr. Anh stated.