Will foreign ownership laws spur FDI?

Content image - Phnom Penh Post
A view of Phnom Penh can be seen from above.. Cambodia has more relaxed housing laws than other countries in ASEAN, but cannot acquire ground-floor levels. Heng Chivoan

Will foreign ownership laws spur FDI?

As the ASEAN economy is slated to be the next engine of growth as China’s economy slows, matures and is likely to become consumer driven, Southeast Asian countries are clamouring to attract foreign direct investment. While foreign capital represents a huge engine for growth, with a cumulative average of 9.2 per cent annual rise spread out across Cambodia, Vietnam, Myanmar and Laos, countries are now relaxing long held property restrictions in order to boost their market appeal.

It is believed that as rules are eased, companies such as property developers, banks and providers of property-related services, like construction, maintenance, insurance and security, would naturally flow into the economy and boost it from within.

However, industry experts suggest that foreign investors in the region need more than just attractive ownership provisions to lure them into frontier markets.

“When referring to FDI, it’s more related to multinational companies investing in manufacturing, agriculture, infrastructure, the financial sector and commerce in general. Many of these companies do not want to own freehold property; if a company can secure a long term lease of 20 to 30 years and above, they are generally able to source financing from banking institutions and also payback on their initial investment,” said Ross Wheble, country manager for Knight Frank Cambodia

For this reason, Wheble suggests that “small alterations to foreign ownership laws on real estate in neighbouring countries won’t have significant impact on FDI flows into Cambodia. There are more pertinent factors that affect FDI such as political stability, skilled labour force, infrastructure, ease of doing business, and anti-corruption policies.”

Nevertheless, there has been much talk about how Myanmar’s recent historic elections, allowing for the country to be the predominant frontier economy in the region – which could be boosted if US sanctions are lifted.

Currently, Myanmar’s constitution establishes the state as the ultimate owner of all land. Yet, under the new Myanmar Foreign Investment Law, an investor may lease land for up to 50 years, with two possible 10-year extensions.

A Condominium Law that is currently in development in Myanmar but not yet in force, likely inspired by the Singaporean model, would allow a foreigner to purchase a condominium on the sixth floor or above of a co-owned building, up to a quota of 40 per cent foreign ownership of the total units in the property.

Now whether this law will come to fruition is speculative, Matthew Rendall, senior partner at ZICOlaw, believes even if they are adopted, implementation would take a long time before results could be quantified.

“The laws themselves will not be such a decisive factor for foreigners in deciding where to invest, but rather the market conditions and the implementation of those laws on the ground. Whereas ownership is usually a secure form of tenure, a test often comes in the legal security offered by leasehold,” he said.

Meanwhile, in Vietnam, freehold ownership by foreigners over land is prohibited by the constitution. Yet state authorised leases of between 50 and 70 years are widely available, especially for development projects, and renewable at the discretion of officials.

Further, pursuant to the Vietnamese Law of Housing 2014, a foreigner may now own a unit in an apartment or condominium building - if it is a no-more-than 30 per cent foreign owned building.

Cambodia, unlike its three neighbouring counterparts, has a freehold land ownership system for its citizens. Foreigners based in Cambodia are also allowed rights of ownership over certain properties, subject to 2010 Law on the Provision of Ownership Rights. These rights, however, are restricted to buildings that have obtained a “strata title,’’ which is available only to newly completed apartment buildings. Foreigners cannot acquire a ground-floor unit legally, and any foreign ownership allocation is limited to a maximum of 70 per cent of the units in any one co-owned building. Nevertheless, a foreigner lease term over landed properties can still be up to a 50 year maximum, with a 50 year renewal option included.

“It is very important that each country ensures that its lease agreements receive the full protection of the law and that possession acquired through leases receives the same protection as ownership offers,” said Rendall.

But competition further afield could also shake things up.

In Indonesia, Southeast Asia’s largest economy, foreign nationals are not allowed to buy property under current laws. However, recent statements from the government indicate that restrictions could be loosened by the end of the year. These new laws are expected to allow foreigners to buy apartments priced above $375,000, although they will still not be able to buy landed property.

But despite all these changes, Rami Sharaf, CEO of World Bridge International, believes that Cambodia doesn’t offer singular incentives, but the whole package, secure itself as prime destination for investors entering the frontier market.

“In Cambodia, there is very little discrimination between foreigners and locals in regards to company registration, taxes and customs duties. Meanwhile, the country is geographically central, with a young and motivated labour pool, and, of course, buoyed by the US dollar. Furthermore, Cambodian-based manufacturers still enjoy tax-free export to Europe because Cambodia is still classed as a less developed country.”

James Whitehead, Director of Content at Realestate.com.kh


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