Heart attack treated with an aspirin

Ukraine’s economy is feeling the crisis much more acutely than its European neighbours, with the situation exacerbated by continuing political instability. The Ukrainian Parliament has decided, as something of a counter-measure, to give a helping hand to residential developers

Emil Górecki

The Ukrainian hryvna (UAH) has been steadily losing value against the US dollar, and the banking sector has almost come to a complete halt – getting your hands on a bank loan is now regarded as something of a miracle. Residential developers had got used to financing their projects with advance payments from buyers. This source has, unfortunately, dried up. In response to this, one of the Ukrainian government’s measures has been the passing in late December of an ‘Act to oppose the influence of the global financial crisis on the growth of the building and residential development sector’ – a long and rather enigmatic title. What the Ukrainian parliament really has in mind is to support residential developers and, furthermore, to support Ukrainian families during the crisis in their desire to move into the homes they have waited so long for.

Several lifelines

The firms this applies to can expect assistance of various forms. The state may buy unsold homes from developers or even buy back those have already been sold through mortgages to private individuals. These homes will then be rented out, although not all of them will remain for long within a city’s or local government’s social resources. Moves are afoot to allow homes to be rented out on principles similar to return leasing, under which a tenant will be able to purchase the home they are renting. Another way of providing assistance is to allow companies experiencing problems to obtain preferential loans to finish the construction work. The act also allows for aid to be granted to individuals by paying the mortgage interest, although this conflicts with a later restriction to 30 months of the period in which the payment of a mortgage may be delayed.

As much as UAH 3 bln (USD 366 mln) has been earmarked for the next two years for this aid package, with this money coming from the national budget and central bank for the time being. Access to this assistance is still possible in 2009 if 70 pct of the construction work on a residential project has been completed. Next year, projects which are 50 pct finished will also satisfy the conditions. However, it should be noted that the Ukrainian central bank does not have a single kopiyka to spare for this scheme. Sergey Fedoruk, director for strategic growth and marketing of developer Gerc, feels that “UAH 3 bln is not a lot of money to bring relief to the entire sector.” Gerc has a project called Pulsar in its portfolio in Donetsk ,which has qualified for state assistance of UAH 11 mln to finish the building.

It is also worth bearing in mind that this programme is exclusively intended to assist the development of affordable housing, which means there should be no more than 21 sqm living space per resident, although an additional 10.5 sqm for a whole family in one apartment is permitted. Assistance will be granted by regional committees through organized tenders, but the starting price in each region will be set as the average home price by sqm. Aleksey Kucherenko, minister for housing and communal economy, remarked in an interview that the price, generally speaking, should not exceed USD 500 per sqm.

Not enough for everyone

Around 60 projects in which the sales process is most advanced will qualify for aid to finish construction. This is not a lot. The remaining projects which fail to qualify for grants will have to be put on hold for an indefinite period. Added to this is the fact that the state has limited the period during which it will give individuals loans, to allow developers to obtain loans more easily. Nadia Petruniak, press spokesperson for the Ministry of Regional Growth and Development, has declared that: “Ukraine’s State Mortgage Fund is planning to generate UAH 1 bln by issuing government secured bonds. This finance will be used to finish the construction of buildings which are at least 70 pct ready. We have indentified 415 such projects in the entire country.”

If the total space in homes completed throughout Ukraine in 2009 is similar to that of 2008 (somewhat more than 10 mln sqm), then around UAH 14 bln will be required to support the sector – according to calculations of the Ukrainian Ministry of Regional Growth and Development. Without state assistance, developers would on their own only be able to finish the construction of 10-15 pct of these buildings by 2012.

Alexey Govorun, vice-president for marketing, development and construction of TMM, reveals that: “We have two projects in Kyiv and four in Kharkiv which satisfy the conditions for state support in 2009. But it wouldn’t be our most important source of finance.”

Putting fate in our own hands

The Act also offers opportunities to those projects developed by companies that are nearly bankrupt today or those which have already declared bankruptcy. In such cases a project may be taken over by those who bought homes in it. Should they set up housing cooperatives and assume the right to build their block or estate as well as the right to the land, they will have a good opportunity to finish the project with state assistance if it is at an appropriately advanced stage of construction. The important thing is that by setting up such cooperatives projects may be finished at a substantially reduced cost. A specific problem does exist, however: the legislation does not regulate the legal standing of such communities, which means that even such a civic initiative does not guarantee success and the steps taken so far to guarantee this have been haphazard. The Ministry of Regional Growth and Development seems to be aware of this. Several further acts and ordinances are already in the pipeline which will also regulate this area. 
 Alexey Govrun is of the opinion that: “Direct state assistance is not a good long-term concept for supporting the sector. I would prefer the authorities to support construction and development companies by cutting red tape, simplifying the acquisition of attractive building sites and assistance in constructing the infrastructure. What we really require are state guaranteed loans. We would also like to be offered tax relief for constructing urban infrastructure surrounding our housing estates.”
 The legal basis for such assistance is still not ready and it is very difficult to obtain adequate finance with almost the whole world screaming for money. And a few days ago, prime minister Yulia Tymoshenko announced that only those projects which are 80 and not 70 pct ready will be given aid in 2009. ν