By Keith Hilden, Squawk Advisors
Contrary to other nations, Vietnam is primarily reliant on bank loans and associated bank guarantees. This both plays to the current inefficiencies plaguing other capital access points and is characteristic of a nascent market in a developing frontier-status market country, as well as reveals an additional point of risk developers currently take on.
For the most part, developers in Vietnam are beholden to the quality of the negotiated bank loan and associated bank guarantee that they receive. In many cases, a bank guarantee can make or break many a real estate development project. This leaves many developers in a position where they aim to diversify their funding streams as much as possible in order to avoid reliance solely on the whim and funding decisions of domestic and international partner banks.
Constraints to contracting and private equity
Private equity does play a special role and is a component of funding, but generally is not the main source. This is due to lengthy transaction deals, negotiations, and, at times, education about the country. There is also no verifiable way to record the transaction besides that of paper contract. Another thing that is particularly unique to the Vietnamese investment environment is the recognition of physical paper contracts, as the interpretation of contracts electronically has less sway than that of physical paper contracts. It is arguable then if a contract signed online via email is actually an enforceable contract in Vietnam – paper contracts are more legally enforceable than all other forms of agreements, and is the most rock-solid approach to inking agreements in Vietnam.
Difficulty or ease of getting the correct paperwork across to the authorities or the investors is something else that tends to be glossed over in investment analysis, but it is a key determinant if the deal is smooth enough to go through and actually translate into GDP and FDI gains versus the deal being perceived as a headache and the registered FDI being shelved semi-permanently or cancelled outright.
The fact that anything beyond a paper contract is questionable regarding its enforcement should bring one to pause. This is why companies overwhelmingly prefer to sign Vietnam-related agreements in person, with the same color ink, and with all the dressings that come with traditional contract signing. Or risk the chance that technically the contract isn’t legally enforceable.
Blockchain’s growing potential in Vietnam
We have so far laid out that the whole ecosystem revolving around the investment environment in Vietnam is in need of improvements in the areas of contract verification, transparency of funds, and a more streamlined process to receive investor funds rather than proceeding through the lengthy paperwork on a redundant basis.
But what if the dynamic was changed, and the paper contracts were signed yet enhanced by being digitalized on the blockchain?
Chicago-based startup Relex aims to change this by way of verifying the contract process once rather than thousands of times and distributing the benefits of ownership as well as commissions and other incentives onto the blockchain for a fully verifiable real estate development and investment efficiency overhaul. Therefore, this is not just a market entry solution as it is a solution streamlining the process necessary to bring investors into a project in Vietnam. By digitizing existing paper contracts onto the blockchain with the developer, Relex is able to provide a streamlined and quick way to gain exposure to the burgeoning Vietnam real estate market.
As the entire country is undergoing a shift away from bank loan funding and spearheading initiatives designed to widen the streams of capital available for real estate developers here, we see a bright opportunity ahead for real estate investment in Vietnam, an underleveraged market with high GDP growth and plenty of room to grow.
Coupled with a supportive government that is very much keen on both blockchain as well as streamlining investment laws in order to further improve speed of transactions and efficiency, we see this as a prime opportunity to grab the market opportunity by the proverbial horns, and investors would do well to heed the call of the prospects afforded to a full market blockchain entry into the Vietnamese real estate market.
Disclosure: Squawk Advisors hold a minority stake in Relex.
Squawkonomics is a crowdfunded frontier market investment research firm that handles investment into over 10 industrial areas in Cambodia and Vietnam, and provides a wide array of investment research reports concerning the Asia Pacific and Latin American investment opportunities. Squawkonomics also assists investors with our portfolio of private equity investments, laying out promising opportunities throughout the APAC and LATAM regions. For investors in need of finding their next investment destination in Southeast Asia, contact us for details.
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