Vietnam - Land and factors for lowering land prices

VietNamNet Bridge - There are three essential factors that affect the value of agricultural land: time for land allocation, restrictions on land conversion and the underdeveloped land market.

Major assets

As being mentioned before, the Constitution and the Land Law stipulates that land is owned by the people. Personal ownership of land has no value. The value of land is only for the access to the use of land, which is worth billions of US dollars.

It is estimated that the value of land in Vietnam is about $200 billion. The estimation method takes into account the following things: in 2009 the value of the stock market was $35 billion; fixed assets and equipment of $240 billion; supply of money $115 billion (of which $20 billion was foreign exchange reserves); gold reserves of $24 billion.

The main economic activities generated $94 billion and $127 billion was the total import-export turnover. By any measure, the cumulative value of land in Vietnam is huge.

For most Vietnamese farmers, land is a major asset and a fundamental part of their wealth. The current Land Law allows farmers the right to use, transfer, lease, inherit, mortgage/present land and use land as capital contribution.

Farmers cannot use agricultural land for non-agricultural purposes. According to the law, farmers need the local government’s permission to use rice land to other agricultural purposes. The time of land use is limited. For individuals and households who cultivate annual crops and aquaculture, they are allowed to use land for 20 years and 50 years for perennial crops and forest land.

The law also sets the land limit for each household in each soil type. For annual crops, the land limit in the North and Central Region is two hectares and three hectares in the South. For perennial crops, the land limit is 10 hectares in the plains and 30 hectares in the midlands and mountainous.

In fact, the farmer's land use rights are restricted, narrowed and closely supervised.

The value of agricultural land depends on the demand for land use in the present and in the future. This demand will depend on the efficiency of agricultural activities, and the number and quality of services to support agricultural production.

Land prices are also affected by the institutions that regulate the forms of land use and limit the ability to convert land use purposes.

The main agricultural activities include production of food (rice, fruits, vegetables, maize and cassava), livestock, aquaculture and industrial crops (rubber, coffee, pepper). Farmers can increase the value of their land through investment in raising production capacity of land, such as improving irrigation systems, the fertility of land, practicing good husbandry, fertilization, controlling weed and invasive species, to protect crops and livestock from disease and insects. Farmers can enhance or maintain the value of land by working with neighbors to improve the anti-flood infrastructure, plant trees or build protection perimeter, maintain roads for production.

The above discussion shows that the non-agricultural activities affect the productivity of agricultural land and thus affect the value of the land. Agricultural costs are affected by the quality of infrastructure services (transport, storage, irrigation and communications), the level of competition in the market for the input, the output of agricultural production, and the availability of appropriate market information. Labor productivity of farmers, their families and agricultural support services depend on the quality of public services in health, education and security (to protect the property of people).

Finally, the prices of output are directly affected by income growth of urban areas and the expansion of the export markets for agricultural products.

Land used for non-agricultural purposes, namely for urbanization and industrialization, also affects the price of agricultural land.

Along with the process of modernization and economic restructuring, land use for non-agricultural purposes will increase the opportunity cost of individuals and society as a whole if land continues to be kept for agricultural production. Income and population growth in urban areas promotes the demand for real estate in the area adjacent to the main urban areas and the areas on the corridors connecting these urban areas. This demand makes about 600,000 hectares of agricultural land be converted into non-agricultural land in recent decades.

A fundamental part of the value of the converted land is "the rental conversion." This land rent depends on the location of the land, the growth of the local economy, the quality of the accompanying infrastructure, and the potential for industry, commerce and other potential. This land rent is also affected by the "overflow effect" from the market of the property that can replace.

The "overflow effect" has directly connected the value of land with macro-economic management. In the period of macroeconomic stability, as being proven by stable economic growth, balanced budgets, low inflation, moderate money supply growth, balance of payments stability, reasonable exchange rate, and the ability to repay foreign debt on a sustainable basis, the holder of property (both domestic and overseas) have very little desire to adjust the portfolio. They are easily satisfied with existing forms of accumulation, having regard to the liquidity and risk by holding combination of different properties including the local currency, banking credit, stocks, gold, real estate, foreign currencies and other assets including land.

However, with budget deficit, domestic credit supply being much higher than real economic growth, high inflation, the exchange rate remaining high compared with real value, balance of payments worsening, and public debt growing faster than GDP, the property owners will be looking for safe solutions. Vietnamese people tend to switch to investing in gold, foreign exchange, imports and real estate. Extending the land market in the 1980s brought the ability to obtain land use rights in the above portfolio.

Macroeconomic management in Vietnam has caused the inflation trend that makes those who have assets adjust the portfolio. And this trend has been persisted from the 1990s to the present. More specifically, in the period 2005-2008 when the economy grew at 7.8 percent per year, total credit increased by an average of 34 percent per year. This is partly related to the "official" budget deficit and non-budgetary expenditure and is equivalent to 5 percent of annual GDP.

Inflation increased from 8.3 percent in 2005 to 23.1 percent in 2008. At the same time, the current account deficit in the balance of payments increased from 1 percent up to 10.3 percent of GDP and the nominal exchange rate fluctuated from VND15,907/$1 in 2005 to VND17,486 /$1 at the end of 2008. Inflation rate fell down because the world economic crisis made the reduction of demand of the external market. Land and real estate prices, thus, also reduced.

The factors such as the increase of income, productivity and export expansion, urbanization and industrialization in general make the increase of land value. However, farmers are the group that benefits the least. Limitations on agricultural land reduces the productivity and value of land.

Three key limitations

There are three essential factors that affect the value of agricultural land: time of land allocation, restrictions on land conversion and the underdeveloped land market.

For cropland, the land use right certificate is valid for 20 years. Under the 2003 Land Law, the deadline is 2013. Short time of land allocation make people are not interested in long-term investment in land to increase the productivity of land. Vietnam will learn a lot if it is interest in international studies, which show that short-term allocation of land will inhibit investment and reduced farm incomes.

Deeper consequences of the short-term allocation of land is the obstruction of the inheritance, mortgage of land use rights. Many farmers can die within 20 years, and if they know that their children are entitled to inherit their land in the remaining term will reduce the value of land. The Land Law of 1993 says that the Government may extend the time of land allocation after 2013. However, this also implies that farmers will only be voluntary land tenant.

The restriction of the ability to convert paddy land for other agricultural purposes also reduces the value of land. Numerous studies in Vietnam indicate that income from rice is usually 3-5 times lower than the income from other seasonal products such as vegetables, fruit and seafood. The Government has paid attention to this matter and the Prime Minister has asked two state-owned food corporations to calculate the floor price to make profit for rice farmers of at least 30 percent.

This requirement makes clear the inequity of land use restrictions. Having to plant rice means farmers have to support the Government to achieve rice self-sufficiency in national food security policy. Farmers do not get the tangible reward for their service for the common benefits. 30 percent of the profit is calculated based on the narrow definition of the actual production cost so in fact, people are not being paid properly for their efforts.

With income from rice production of only about $28/person/month, half of the farmers who plant 4 million hectares of rice in Vietnam are adjacent to the poverty threshold of the country.

Land use restrictions also reduce the attractiveness of land in the market. Low-income prevents rice farmers from accumulating land for production. More importantly, while the land is locked with rice planting, people are not interested in buying more land. They realize that if they expand land and when their land is revoked, compensation will not reflect the real value that they have to pay when buying.

The above injustice in the above restrictions will be further demonstrated when a number of farmers participating in the game with the current system. Although there are many risks, some farmers have accumulated more land by dividing their land into many "red books" in the name of their relatives and friends.

Ho Dang Hoa, Le Thi Quynh Tram, Pham Duy Nghia and Malcolm F. McPherson

Business & Investment Opportunities
YourVietnamExpert is a division of Saigon Business Corporation Pte Ltd, Incorporated in Singapore since 1994. As Your Business Companion, we propose a range of services in Strategy, Investment and Management, focusing Healthcare and Life Science with expertise in ASEAN. Since we are currently changing the platform of www.yourvietnamexpert.com, you may contact us at: sbc.pte@gmail.com, provisionally. Many thanks.