LEGAL ISSUES OF FRACTIONAL REAL ESTATE IN VIETNAM 2025
LEGAL ISSUES REGARDING THE MODEL OF FRACTIONAL REAL ESTATE INVESTMENT ON THE BLOCKCHAIN TECHNOLOGY PLATFORM IN VIETNAM
Phan Hoai Thien Kim
Huynh Minh Quan
Sai Gon University
Abstract: Real estate tokenization has emerged in Vietnam in recent years. By examining and assessing the existing regulations on ownership rights and the forms of real estate business contracts, this article analyzes the legal risks that investors need to be fully aware of before participating in this investment concept. Consequently, it offers recommendations for establishing a legal framework to protect investors’ interests and promote transparency in the real estate market in the digital age.
Keywords: Blockchain; fractional ownership; investment; real estate; real estate tokenization;
Introduction
Real estate has long been one of the most attractive and popular investment channels in Vietnam. However, capital remains one of the most significant barriers for investors wishing to enter the real estate market. In light of this situation, alongside the development of digital technology, the model of fractional real estate investment on the Blockchain technology platform (real estate tokenization) has emerged and become an inevitable trend in many countries. This model is seen as a method to “democratize” real estate investment, enabling investors with limited financial capacity to own a part of the real estate’s value.
In Vietnam, the model of fractional real estate investment on the Blockchain technology platform first appeared in 2020 but was not effective and ceased operations. By 2023, this model has returned and garnered the attention of investors. Despite advantages such as flexible transaction methods and breaking down capital barriers, this model still poses many risks for investors due to legal gaps, even in the context of the amendment and enactment of crucial real estate documents.
This article addresses three main aspects: (i) An overview of the model of fractional real estate investment on the Blockchain technology platform; (ii) The current state of Vietnamese law regarding the model of fractional real estate investment on the Blockchain technology platform; (iii) Some recommendations for improving the regulations of Vietnamese law regarding the model of fractional real estate investment on the Blockchain technology platform.
I. Overview of the Model of Fractional Real Estate Investment on the Blockchain Technology Platform
- Definition of Fractional Real Estate Investment on the Blockchain Technology Platform
Fractional real estate investment involves investors purchasing a small portion of a property’s value instead of acquiring the entire property’s value. Simply put, fractional real estate is the division of a property’s value into many smaller value portions, sold in the form of shares.
With the advancement of blockchain technology, these value portions are digitized into tokens. Each token represents the portion of real estate value that the investor has purchased, or in other words, an investment share. The investment process under this model can be summarized into two main stages:
Stage 1:
The online real estate exchange business issuing tokens (the managing company) seeks real estate investors (property owners), evaluates and divides the property’s value into token units.
Stage 2:
To obtain an investment share, investors register as members on the managing company’s online exchange system, deposit money into an e-wallet to buy tokens, and are issued an account to manage their investment share.
Using the P2P protocol, real estate information is posted on the managing company’s online application for investors to monitor. Real estate transactions under this model are recorded into the system via smart contracts on the blockchain platform.
Figure 1. Diagram of the fractional real estate investment model on the blockchain technology platform in Vietnam |
From the above analysis, it can be observed that:
Advantages:
The emergence of the fractional real estate investment model is an inevitable trend, opening up opportunities for new investors with limited capital to access the real estate market, addressing barriers of the traditional investment model, such as shortening transaction speed (procedures, paperwork, etc.), and saving costs like transfer fees, exchange fees, brokerage fees, etc.
Additionally, real estate transactions conducted through smart contracts based on blockchain technology ensure transparency, openness of transactions, and the integrity of information.
Disadvantages:
- Lack of Legal Framework to Protect Investors’ Legal Rights:
Land is a special type of asset, thus it is strictly regulated by the legal system. In the context where real estate laws (the 2023 Law on Land, the 2024 Law on Housing, and the 2024 Law on Real Estate Business) have been amended and passed, these laws still do not recognize real estate tokenization or provide a comprehensive legal framework on the rights and obligations as well as sanctions for the parties involved.
The success of investing in this model depends on the credibility of the managing company issuing tokens and the credibility of the real estate supply. For instance, in terms of valuation, the selection and assessment of the real estate value depend on the token-issuing enterprise, which could lead to a situation where the valuation is higher than the market price. This results in losses for buyers and negatively impacts the real estate market.
- Low Liquidity:
Under this investment model, investors can profit in two common ways, both of which are inherently risky:
– First, selling or leasing the real estate and sharing dividends according to the investment share ratio.
However, since the investor is not the sole owner or the only investor in the real estate, when wanting to sell the real estate, it is done through an online voting mechanism based on a certain ratio. Voting can be complicated due to hundreds or thousands of investors “co-buying” a property.
Moreover, there may be cases where the accounts of other investors are just fake accounts of the managing company, or these investors are secretly connected to manipulate the voting mechanism for selling or keeping orders.
– Second, selling the owned investment share (token) to another investor.
However, token transactions are not necessarily easy. Since the token’s value is essentially derived from the real estate’s value and divided, this means the token’s value is not constant and fluctuates depending on the real estate’s actual condition.
Investors face the risk of not being able to sell the token at the initial price or even not being able to sell it at all if the real estate is an off-plan housing that halts construction. Additionally, these tokens lack full market liquidity since token transactions only occur among investors who have registered accounts on the online exchange.
- Practical Implementation of the Fractional Real Estate Investment Model on the Blockchain Platform in Various Countries and Vietnam
Generally, the fractional real estate investment model shares many similarities with Real Estate Investment Trusts (REITs). The formation of these trusts aims to mobilize capital from small investors by issuing fund certificates or shares, allowing them to directly invest in real estate projects. REITs in the United States have developed into the largest market and serve as a model for countries worldwide.
In the Asian market, according to Cushman & Wakefield (2023), there are 225 operational real estate investment trusts, with a total market value of 252.1 billion USD. Among them, Japan, Singapore, and Hong Kong are the three largest REIT markets in Asia, accounting for over 80% of the region’s value.
Conversely, in Vietnam, there is currently only one real estate investment trust, which has not attracted much interest from investors. In practice, Vietnamese law currently lacks specific regulations for real estate investment trusts and only provides general regulations for real estate funds (Clause 43, Article 4 of the 2019 Law on Securities).
Despite this, the fractional real estate investment model on the blockchain platform and REITs have notable differences, primarily that REITs operate under the supervision of competent state agencies and are governed by a strict and transparent legal framework.
In contrast, the fractional real estate investment model on the blockchain platform involves real estate business enterprises. In the United States, fractional real estate investment using blockchain technology is a sector of the asset tokenization industry in the real world (Real World Asset – RWA Tokenization), with RealToken (RealT) being the most prominent system.
Asset (token) tokenization in the real world is the process of creating digital tokens on a blockchain to represent ownership of tangible assets like gold or real estate. Although there is no unified federal legal framework for tokenized real estate assets, the United States has applied relevant existing legal provisions.
Accordingly, the U.S. Securities and Exchange Commission (SEC) approaches each type of tokenized asset specifically; if they meet the criteria to be classified as securities, all related activities (issuance, offering, establishment of exchanges, etc.) must comply with securities laws.
Simultaneously, at the state level, U.S. law has specific regulations on blockchain technology and smart contracts, laying the groundwork for the model of fractional real estate investment using this technology. Meanwhile, in Singapore, the Monetary Authority (2020) has issued comprehensive guidelines on token issuance, including case studies to specifically illustrate MAS regulations related to real estate tokenization.
In Vietnam, the model of fractional real estate investment first appeared in 2020 and attracted the interest of investors amidst the prolonged Covid-19 pandemic, which stalled real estate transactions.
Pioneering enterprises for this investment model include Century Group JSC – CenGroup, which announced the Revex real estate co-investment platform with an investment starting from just 1 million VND (2020); Moonka LLC (2021); VMI Real Estate Management and Investment JSC (2022).
Most recently, in June 2024, VPS Securities cooperated with FNEST to implement this investment model, with each share equivalent to 10,000 VND.
Currently, Vietnamese law does not prohibit the fractional division of real estate into parts and issuance in the form of securities. In principle, enterprises have the freedom to conduct business in sectors that are not prohibited by law; however, in relation to specialized laws like the 2023 Law on Land and the 2024 Law on Real Estate Business, this model fails to meet the criteria for subjects, land use rights, and ownership of assets attached to the land (analyzed in the following section).
Consequently, the State Securities Commission has required these companies to cease operations due to the lack of a comprehensive legal framework, posing risks to investors. Halting this model is necessary to give the regulatory authorities more time for thorough inspection and evaluation.
II. The Current State of Vietnamese Law on the Model of Fractional Real Estate Investment on the Blockchain Platform
- Provisions of Vietnamese Law on Real Estate Exchanges
In reality, current real estate exchanges have not yet achieved effective operation. According to the Real Estate Market Report by the Vietnam Association of Realtors (VARS) (2023), up to 20% of real estate exchanges face dissolution, while 40% are striving to maintain their operations. Although the operational state of exchanges showed signs of recovery in the first quarter of 2024, there still exist limitations such as insufficient capability to ensure safety, transparency of information, and behaviors causing market disruption.
The 2023 Law on Real Estate Business, which officially took effect on January 1, 2024, has added specific provisions regarding real estate exchanges. Notably, it supplements the principles of organization and operation of real estate exchanges (Article 53); adds regulations on operational conditions of real estate exchanges, conditions regarding management and operation personnel (Article 55); and Decree No. 96/2024/ND-CP, detailing several articles of the 2023 Law on Real Estate Business, specifies the confirmation of real estate transactions via electronic means (Clause 2, Article 16).
These regulations have been developed to encourage real estate transactions through exchanges, particularly allowing exchanges to carry out electronic transactions. However, there are currently no provisions regarding online real estate exchanges.
- Legal Risks from the Model of Fractional Real Estate Investment on the Blockchain Technology Platform
Currently, Vietnamese law does not have specific regulations governing the model of fractional real estate investment using blockchain technology. Referencing the general provisions of existing laws, the legal obstacles of this model are concentrated on two main issues:
– First, Ownership Rights Over Real Estate.
The idea of fractional real estate or “co-buying” real estate is not entirely new in Vietnam; however, previously, co-buying real estate only occurred among acquaintances.
Vietnamese law acknowledges the form of fractional ownership as per Articles 207, 208, and 209 of the 2015 Civil Code, where ownership is defined as the possession of many entities over an asset.
Fractional ownership is established by agreement, by law, or by custom. Fractional ownership refers to co-ownership where each owner’s share of the ownership is determined with respect to the common asset.
The legal risk in participating in the model of fractional real estate investment on the blockchain platform primarily stems from the fact that investors do not obtain actual ownership of the real estate.
The 2024 Law on Land does not change the legal value recognition of the Certificate of Land Use Rights, Ownership of Housing and Other Assets Attached to Land (Clause 21, Article 3) and the principles for granting this certificate (Article 135).
Consequently, in cases where a plot of land has multiple co-users, or a property attached to the land has multiple co-owners, each person is issued one Certificate of Land Use Rights and Ownership of Housing and Other Assets Attached to Land (Certificate). If those with co-ownership request, a single Certificate can be issued for the common use and given to a representative.
It is clear that Vietnamese law does not limit the number of co-owners for real estate. When a plot of land or property attached to it has multiple co-owners, the Certificate must include the names of all those individuals.
Relating to the model of fractional real estate investment, in theory, the situation where hundreds or thousands of people own fractional shares of a property is not prohibited by law. However, investors are only holding tokens – units that represent an investment share or portion of the property value they have purchased – which have no legal value. In other words, buying and holding tokens does not equate to owning the property.
Essentially, the model of fractional real estate investment on the blockchain platform is a form of capital mobilization by enterprises, specifically by dividing capital contributions into smaller parts to raise funds more flexibly.
The capital contributors do not actually own, nor are they listed as owners of the property. Thus, there are no legal obligations between the investors (buyers) and the property developers (sellers).
– Second, the Legal Value of Smart Contracts.
Real estate transactions under the model of fractional real estate investment are conducted through smart contracts. In Vietnam, the legal recognition of smart contracts remains uncertain.
In fact, the 2023 Law on Electronic Transactions has introduced a concept similar to smart contracts, known as electronic contracts in Clause 16, Article 3. According to this, an electronic contract is a contract established in the form of data messages.
The law also introduces concepts related to electronic transactions, electronic means, and data messages. Although the term “smart contract” is not used, under this regulatory direction, a smart contract can be considered an electronic contract.
However, the application of smart contracts in the model of fractional real estate investment is not in compliance with Vietnamese law when considering the following aspects:
+ One, the Form of Real Estate Business Contracts.
The 2023 Law on Real Estate Business has not changed its provisions regarding real estate business contracts (including contracts for the sale of housing, construction works; contracts for the transfer of all or part of real estate projects, etc.). According to this, real estate business contracts must be in writing (Clause 4, Article 3) and must be notarized and authenticated (Clauses 5, 6, Article 44). Additionally, the law still requires these contracts to comply with standard contract templates.
According to Article 9 of the 2023 Law on Electronic Transactions, data messages have the value of written documents if the information in the data message is accessible and usable for reference.
According to the study by the Law Commission of England and Wales (2021), smart contracts can be divided into three types: (i) natural language contracts (with automated obligations), (ii) hybrid contracts, and (iii) contracts entirely in code.
Thus, in cases where a smart contract uses natural language, meaning there is a traditional contract version in natural language and the code only automates the contract’s obligations, it fully satisfies the written form requirements. However, for contracts where the terms are entirely encoded in programming language that not everyone can understand, whether this form is considered equivalent to a written document is not yet regulated by the law on electronic transactions.
+ Two, Transaction Authentication.
The parties involved in smart contracts or investors participating in the model of fractional real estate investment possess an inherent characteristic of anonymity. When transacting on the blockchain platform, investors interact with each other and with the managing company through an online registered account.
With modern technology, tracing the address of the account that conducts the transaction is entirely possible, but identifying the actual user of this account to enter into the contract is not straightforward. This leads to an inability to determine the capacity of the party and the voluntariness when entering into the contract.
Furthermore, the execution of smart contracts may pose a risk of legal evasion by foreign investors. Vietnamese law imposes regulations on restricting land access rights and real estate investment business forms for foreign investors.
For instance, under the 2013 Law on Land, foreigners were not considered land users in Vietnam (Article 5). Accordingly, foreigners could only own assets attached to the land but did not have land use rights. The 2024 Law on Land has added the category of “overseas Vietnamese.”
The 2023 Law on Housing also specifies conditions for foreign individuals and organizations to own housing in Vietnam (Articles 17, 18); it limits the percentage of housing that foreigners can own to no more than 30% of the total number of apartments in a condominium and no more than 250 separate houses in an area (Clause 1, Article 19).
Meanwhile, with the P2P protocol, investors, regardless of their location, can participate in real estate investment in Vietnam through an account. The implementation of smart contracts risks creating a cross-border real estate investment market, surpassing the conditions set by Vietnamese law.
III. Recommendations for Improving Vietnamese Legal Provisions on the Model of Fractional Real Estate Investment on the Blockchain Platform
It is undeniable that the model of fractional real estate investment on the blockchain technology platform has advantages, providing opportunities for small investors to participate in the real estate investment market.
However, from the above analysis, it is evident that legalizing this model is relatively difficult at the present time due to various legal obstacles in relation to the existing specialized real estate laws.
Nevertheless, with the advancement of digital technology, businesses are becoming increasingly creative in establishing new investment models. This necessitates the urgent development of a basic legal framework to protect the legal rights and interests of the participating parties.
– First, Regarding Real Estate Exchanges.
In addition to the positive supplementary provisions in the 2023 Law on Real Estate Business concerning exchanges, it is necessary to consider adding regulations on the operations of online real estate exchanges. These should include the rights and obligations, and the sanctions for the parties participating in real estate investments on these exchanges. Online real estate exchange businesses must be obligated to identify and assess the risks of customers (investors) and real estate developers.
One crucial piece of information that needs to be determined is the nationality of the participating parties. Online exchanges should establish a system for screening user information to categorize investors into domestic and foreign groups to ensure compliance with legal conditions regarding real estate investment and business entities.
Additionally, online real estate exchanges must provide information assessing the credibility of real estate sources. To achieve this, exchange businesses need to establish mandatory information standards that real estate developers must provide; develop a mechanism to calculate credibility scores or ranking lists for real estate developers.
From this, developers should be classified based on their risk levels and apply separate control measures for each group. The businesses must also monitor and provide periodic reports on the status of the real estate, financial situation, and any unusual transactions to ensure legal compliance and timely detection and handling of risks or violations, if any.
– Second, Legal Value and Form of Smart Contracts.
Firstly, it is necessary to acknowledge the concept of smart contracts in the Civil Code and the Law on Electronic Transactions. Explicitly recognizing the legal value of smart contracts will lay the groundwork for the model of fractional real estate investment to operate within the legal framework.
Regarding the form of smart contracts, it is possible to consider recognizing and adding an equivalent written form for smart contracts in real estate business contracts, where one party is a real estate business enterprise.
Accordingly, if a smart contract is entirely expressed in programming language but can be read and interpreted by experts, it can still be considered “accessible and usable for reference” according to Clause 1, Article 9 of the 2023 Law on Electronic Transactions.
– Third, Authentication of Transactions via Smart Contracts.
To ensure the safety and transparency of these transactions, regulations on subject identification are necessary. Accordingly, biometric authentication can be considered.
Biometric authentication is a highly secure form of verification, difficult to counterfeit, as it uses human biological characteristics.
Clause 4, Article 4 of the 2023 Law on Electronic Transactions also stipulates that the use of other forms of electronic authentication to demonstrate the signatory’s approval of a data message, which is not an electronic signature, should comply with relevant legal provisions. Therefore, biometric authentication is entirely feasible.
IV. Conclusion
The model of fractional real estate investment on the blockchain technology platform is an inevitable trend in the era of technological development, opening up many attractive investment opportunities. However, given the legal risks, investors need to carefully consider and prepare thoroughly with legal knowledge, an awareness of risks, and the selection of reputable platforms.
In the future, it is essential to rapidly develop and complete the legal framework for this model to protect the legal rights of those participating in transactions, thereby promoting the development of the real estate market and the application of scientific and technological advancements in Vietnam.
References
- – National Assembly (2015), Civil Code No. 91/2015/QH13, issued on November 24, 2015;
- – National Assembly (2019), Law on Securities No. 54/2019/QH14, issued on November 26, 2019;
- – National Assembly (2024), the 2024 Law on Land No. 31/2024/QH13, issued on June 29, 2024;
- – National Assembly (2023), the 2023 Law on Electronic Transactions No. 20/2023/QH, issued on June 22, 2023;
- – National Assembly (2023), the 2023 Law on Real Estate Business No. 29/2023/QH15, issued on November 28, 2023;
- – National Assembly (2023), the 2023 Law on Housing No. 27/2023/QH15, issued on November 27, 2023;
- – Government (2024), Decree No. 96/2024/ND-CP detailing several articles of the 2023 Law on Real Estate Business, issued on July 24, 2024;
- – Alexander Crous, Justin Kaufman & Mark Cianci (2022), Tokenization: Real Estate Interests On the Blockchain, last accessed on August 19, 2024, from (https://www.prea.org/publications/quarterly/tokenization-real-estate-interests-on-the-blockchain/);
- – Bình Khánh (2024), “State Securities Commission requires VPS to stop fractional real estate investment with 10,000 VND capital”, Tuổi Trẻ Newspaper, last accessed on August 19, 2024, from (https://tuoitre.vn/uy-ban-chung-khoan-yeu-cau-vps-ngung-chia-nho-bat-dong-san-von-10-000-dong-20240619102030946.htm);
- – Cushman & Wakefield (2023), REIT Market in Asia 2023 – 2024, Ho Chi Minh City;
- – Han, J., & Liang, Y. (1995), The Historical Performance of Real Estate Investment Trusts, Journal of Real Estate Research, 10(3);
- – Vietnam Association of Realtors – VARS (2023), Vietnam Real Estate Market Report Q3/2023, Hanoi;
- – Law Commission (2021), Smart Legal Contracts – Advice to Government, United Kingdom;
- – Monetary Authority of Singapore (2020), A Guide to Digital Token Offerings, Singapore;
- – Moriarty, C. (2022), Is RealT Reality? Investigating the Use of Blockchain Technology and Tokenization in Real Estate Transactions, Minn. JL Sci. & Tech., 24, 471.
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