Reform of the Construction Industry. Transition to a New Mechanism of Housing Construction
KEY CONCLUSIONS
Reform of the construction industry is comprehensive and diversified
“We are carrying out a fairly complex reform in a limited period of time. Just a year ago we were in a state of shock and panic, but then gradually we developed an understanding of the direction and step by step came to where we are now,” Vladimir Yakushev, Minister of Construction, Housing and Utilities of the Russian Federation.
“There are certain achievements of this reform; among them market transparency, global reforms of adjacent markets, banking society, reform of court-appointed managers, and these systemic changes should keep working,” Nikolay Nikolaev, Chairman of the Committee of the State Duma of the Federal Assembly of the Russian Federation on Natural Resources, Property and Land Relations.
“The task set by the President must be accomplished, without any damage to the construction sector, but at the same time citizens’ rights must by 100% protected,” Alexander Plutnik, Chief Executive Officer, DOM.RF.
Transition to project financing is underway
“If we talk about escrow figures, 206 credit deals with a total value of 193 billion roubles have been approved. In residential buildings these are 3.3 million square metres, 316 buildings. There are 5.5 billion on escrow accounts, with 2,655 opened accounts. 301 requests are being considered,” Anatoly Popov, Deputy Chairman of the Executive Board, Head of the Corporate Business Block, Sberbank.
“Today the banking system is almost ready for a gradual transition to project financing. 1,000 developers working in 72 regions submitted 1,557 requests to 18 authorized banks. To date, credit agreements for 75 billion roubles have been signhed, with 8.5 billion roubles placed to escrow accounts,” Olga Polyakova, Deputy Governor, The Central Bank of the Russian Federation (Bank of Russia).
Project financing is favourable for consumers and developers
“In the nearest future the residential housing market in our country will become much safer for consumers. Transition to project financing is a huge step forward. We did not reinvent the wheel, we just looked at how this works on other markets. In the UK, for example, in order to buy an apartment during the construction stage, prepayment of 10% of the total cost in needed. The rest is paid after the construction is completed, and warranties from bank and insurance company are obligatory. The same mechanisms are used in India and Canada,” Alexander Ivlev, CIS Managing Partner, Deputy Regional Accounts Leader for Central, Eastern and Southeastern Europe & Central Asia, EY.
“For us, the transition to new market regulation rules using escrow accounts will be fairly painless. When we made calculations for almost each project that our company is implementing and put them through indicative offers of different major banks that offer working through escrow accounts, we saw that the financial model is improving due to reduction of loan debt burden,” Maxim Sokolov, Chief Executive Officer, Chairman of the Board, LSR Group.
“The mechanism of project financing, of escrow accounts was in the first place designed to protect citizens – that was the task set by the President, and this mechanism does this. But the main thing is that this mechanism is functional, favourable for business and for developers. It provides guarantees for project financing. It is lucrative for banks; we can already see that it is one of the major segments of bank crediting. Now around 600 billion roubles from banks are involved in construction, and in the next 3–4 years this figure will reach approximately 7 trillion, which is more than a tenfold growth,” Artem Fedorko, Chairman, Bank DOM.RF.
PROBLEMS
Challenges of the transition period
“The biggest problem that we will have to carefully go through is that there will be a massive flow of requests in the regions seeking confirmation of construction readiness of the object to get the right to work according to the old rules. The initial volume of documents that will be received by the regions will be massive. However, there is nothing to panic about,” Vladimir Yakushev, Minister of Construction, Housing and Utilities of the Russian Federation.
Getting funding for low-margin projects is becoming more complicated
“One of the problems that can impede reception of project financing is low marginality. There are very responsible developers who build in regions, but there the cost of a square metre of residential housing is much lower than in Moscow, Moscow Region and St. Petersburg, where the marginality is high,” Olga Polyakova, Deputy Governor, The Central Bank of the Russian Federation (Bank of Russia).
Lack of standards for financing of individual construction
“The industry of low-rise and individual construction has certain problems. We do not have standards for mortgaging for individual residential houses as well as no legislative regulation for communal facilities in towns that are being developed. As a result, real estate items become nonliquid for banks, because roads and infrastructure that are being constructed are not subject to the security deposit,” Valery Mishchenko, Chairman of the Board, Kaskad Family.
“There is an instruction by the President. When he addressed the Federal Assembly, he set a task to develop a product equivalent to mortgage: when a person can borrow with an appropriate rate for a long term to build an individual house. Indeed, there is no such product yet, but we are working on it. There are quite a lot of problems here. Banks are cautious about land plots and future houses – this is not enough to issue enough money for construction. Apartment is more liquid than individual house,” Vladimir Yakushev, Minister of Construction, Housing and Utilities of the Russian Federation.
SOLUTIONS
Prompt solutions for emerging problems
“If developers apply for project financing to one of the banks on the list approved by the Russian government that must work with escrow accounts, and it does not accept the application, they need to report that. Such things should not happen. All banks from the list must do this type of work,” Vladimir Yakushev, Minister of Construction, Housing and Utilities of the Russian Federation.
“After 1 July we need to be ready to promptly introduce amendments to the legislation in order to remove all impediments for developers working with this new model,” Nikolay Nikolaev, Chairman of the Committee of the State Duma of the Federal Assembly of the Russian Federation on Natural Resources, Property and Land Relations.
Launch of ‘pilot’ bank programmes for individual construction
“On 19 April, we launched a pilot project. The downpayment for this type of construction used to be 25%, now it is 20%. There used to be some additional requirements: a cost sheet, land cheques, security deposit, now they are lifted. Before the credit was divided into tranches, now it is immediately provided in full. The rate is 10.9% per annum. We are testing this product,” Anatoly Popov, Deputy Chairman of the Executive Board, Head of the Corporate Business Block, Sberbank.
For more information, visit the Roscongress Foundation's Information and Analytical System at roscongress.org/en
