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Tatyana Polidi – About illegal attracting of construction co-investors and a new scheme of share participation

In Russia there has exacerbated the problem of hoodwinked investors – for the first time within several years this topic has been included in the federal agenda, causing a stir. "SU-155", one of the country's largest construction holdings appeared on the verge of bankruptcy. This means that dozens of thousands of its customers risk being left without the apartments, for which they have already paid off.


Tatiana Polidi, Director of the Real Estate Market Department of The Institute for Urban Economics notes that, in general, the number of hoodwinked investors has decreased in Russia in recent years, which, however, does not cancel the facts of illegal forms of raising co-investors’ funds for construction.

Tatiana Polidi: In recent years, the share of construction, which was carried out with involvement of the citizens’ funds according to the law 214, has been increasing. This law has been in force just over 10 years, before that there were possible different formats of bringing citizens to construction, but after the adoption of the Federal Law 214 that is possible only under a contract of participation in shared construction. And although there were preserved illegal forms, yet the share of a legal format of raising the citizens’ funds was increasing. And this trend has been observed in the recent years. In connection with this the problem of hoodwinked investors, of course, became less acute. But, as I have already said, illegal forms are preserved . for example, the case with the "SU-155". They raised funds through a housing construction co-operative. According to the law such a form exists, but initially HCC is a non-profit association of citizens. That is when citizens gathered together, whipped round and went to hire a contracting organization for construction of the house. Some of our major developers instead use this mechanism to collect money from people without entering into a contract of shared participation with each of them, as required by law 214. HCC mechanism is easier, it is less controlled and so on. And it was the source of problems, which came out in the situation with "SU-155".

RFI: How effective is the law on securing developers’ obligations before the participants of shared construction?

Tatiana Polidi: We currently provide such forms of securing obligations as a bank guarantee and insurance. With these there is a problem as well, because a bank guarantee is very expensive and banks are not willing to provide all the developers with it, therefore, this mechanism is rarely used. And a newly entered option of insurance of the builder’s obligations shows its imperfection as well. Because there are a few companies at the market, which are willing to insure these risks.

According to Tatyana Polidi, a way out from the situation may be implementation of a new scheme of shared construction, in which the investors’ funds, a certain percentage of the cost of the future apartment, will enter the escrow account. It will give confidence to a developer that any difficulties with the sale of apartments in the subject that will be constructed will not arise and for the bank, granting the loan to the developer, such a scheme can also serve as a guarantee of the borrower's credit worthiness. Truth to be told, there is a high possibility that in non-competitive market conditions the interest on bank loans will come upon the customers, but such is the price of risk reduction. After a while, if competitive environment arises in the real estate market, developers will be forced to reduce prices by reducing their surplus profits. It is assumed that this mechanism is widespread around the world and it will work in Russia simultaneously with the already existing schemes of shared construction, and gradually the market itself will determine the viability and relevance of each of them. A corresponding bill has already been approved in the first reading.

French news radio station RFI