Politicians, who have so far failed to protect consumers, want to buy prime real estate in newly built complexes. Having introduced a legislative ban on signing investment agreements (Based on such documents investors of the Kyiv Elite Center hoped to finally get their square meters) but did not in the end), the parliament proposed an even more dubious scheme in the form of housing bonds.

Based on such a scheme, future apartment owners will receive such housing bonds in exchange for their investments in the construction of a particular building. As it turned out, this mechanism works only in theory.

In Kyiv it is to this day impossible to register an apartment as property bought from a developer in exchange for housing bonds. For more than the year that local builders actively used this scheme for the sale of real estate, the local authorities failed to include the bonds on the list of documents on the basis of which prime real estate purchased in Kyiv is officially registered.

According to industry experts, this means that such bonds that do not in fact provide any guarantees to private investors are an even shadier instrument on the prime real estate market.

Viktor Dubko, Director of Miskzhytlobud Construction Company, told KW that the absence of any standards regulating the right of ownership of residential property on the prime real estate market sold through the attraction investors’ capital through housing bonds became a problem for both real estate developers and investors. Dubko says the Kyiv City Administration today controls only the procedure of registering the right of ownership of residential property built on the money of physical and legal entities within the framework of investment activity (i.e. investment agreements) and regardless of the fact that starting in 2006 such a form of investments was prohibited by the Law On Investment Activity. “The law prohibits investing through the conclusion of investment agreements, though such an agreement is included on the list of documents required to register the right of ownership. Moreover, agreements on the purchase and sale of bonds today often used in the sale of a large number of new homes in Kyiv are not included on the list,” Head of the Supervisory Board of the Synergiya Development Company Oleksiy Markus explained.

Oleksiy Kotenko, Executive Director of the Planeta Obolon Real Estate Agency, says that today all rights of ownership of completed property sold for targeted housing bonds registered in the developer’s name. After the completed apartment buildings are commissioned, the bond bearer is obligated to turn in his bond to the real estate developer and conclude a so-called notarial agreement on the purchase and sale of the property, according to which the value of the property paid for with bonds. But this is precisely where there is a danger that the developer might not fulfill his obligations, regardless of the fact that the construction of a number of similar buildings in Kyiv is almost complete.

Real estate developers note that this is not the only drawback of purchasing real estate via housing bonds. Kotenko explained that the problem for buyers and developers arise at the stage when investors enter the picture. Firstly, the address of the apartment purchased by an investor is not even written on the housing bond. In the majority of cases, in order to solve this issue investors draw up and sign a reservation agreement with the buyer of such bonds.

However, signing of the agreement is not envisaged on the legislative level or by any other legislative acts. “This means that a reservation agreement cannot give a 100% guarantee because all bond bearers are the same level as the developer. Theoretically, every investor can demand an apartment on any floor or even one square meter in different apartments,” Kotenko noted.

On the other hand, developers can also cheat. For example, they can provide the buyer with an apartment outside the city instead of the best district in town in which the future owner invested his money. The result is that the parties to the process have to rely on the honesty of a realtor or developer rather than on clear rules regulated by laws and other legislative documents.

At the same time, Natalia Dotsenko-Bilous, a lawyer with Konnov and Sozanovskiy law firm, says that practice in the real estate business in Kyiv has already demonstrated the carelessness of the two sides to the process. “Investing a lot of money by an individual expecting honesty on the part of the other party to the deal is totally irrational,” Dotsenko-Bilous explained, noting that most often the problem can occur regardless of who the sides to the deal are.

For instance, if some company that sold an apartment and issued the buyer a targeted housing bond proving their right to the ownership of a certain piece of property goes bankrupt or is shut down (like a fly-by-night company, for instance), the size of the company’s obligations to buyers are limited to the authorized capital of the company in the form of office equipment. Again this situation is due to imperfect legislation as the State Securities and Exchange Commission (SSEC) strictly controls the circulation of housing bonds only at the stage when they are issued. When it comes to fulfilment of obligations the commission steps out onto the sidelines arguing that it does not have the respective authority.

Incidentally, the authorized rating agency Kredyt Reiting had already warned about the possibility of defaults of housing bonds. The agency assessed more than 90% of all papers circulating on the real estate market as speculative. This in turn increases the danger that the developers who issued such bonds will not be able to fulfil the obligations they undertook.

The source: Kyivweekly