Builders want to get rid of risks

The demographic situation in Ukraine remains tense to a large extent because young families cannot buy affordable housing. How can this problem be solved? Lev Partskhaladze, the head of the board of directors of the Ukrainian Building Association (UBA) thinks that rising prices for new homes can be halted by modernizing the insurance market. The well-known builder made this statement at a recent conference devoted to insuring building investments.

The skyrocketing prices for real estate stem from the many risks facing builders, which constitute one-third of an apartment’s cost. Partskhaladze thinks they can be easily eliminated by insuring building investments against financial risks. After signing on the dotted line, an insurance company will keep a careful eye on the transparency of all procedures, starting from the quality of materials to the number of apartments sold because the insurance company will be the one to pay in the event of miscalculations.

Strict control and greater responsibility for project participants will reduce financial risks. This will help increase foreign investments in the construction field. The increase in housing supply, creation of optimal prices, and the possibility of index planning are the main advantages of using this mechanism. The “elimination” of unfair players on the market can also be expected. So-called amateur building, which covers 95 percent of the entire volume, will either play fair or simply die, says Oleksandr Filoniuk, the president of the League of Insurance Companies.

However, this will not happen any time soon. The head of the board of directors of Slav-Invest Company, Milan Paievych, thinks that most insurance companies are not ready to work this way. Only 10 percent of Ukrainian insurance companies issue policies for building investments. This instrument has long been in use elsewhere in the world.

This expert has a simple explanation for the reluctance of Ukrainian insurers to fulfill their obligations as set down in their regulations: construction is not a sphere where one can easily get a luscious slice of the pie. You have to work and, according to Paievych, “only 50 percent of insurance organizations are doing this” in our country. However, foreign indexes of financial reports record a 10-percent share of this type of insurance. Meanwhile, this “passivity” is costing the Ukrainian building market dearly.

That is why Partskhaladze is inviting builders to agree to “single, civilized rules of the game by granting building-assembly jobs obligatory insurance status.” A special law will probably have to be passed, and Paievych is all in favor. He also proposes some changes to banking legislation. In his opinion, banks should prohibit uninsured investment projects.

Andrii Peretiazhko, the head of the board of directors of the Ukrainian Insurance Alliance, says that formulating a law is only half the battle. One has to develop interest among market players in following the law, and this does not require introducing any new innovations. “The era of project financing is approaching, when a bank takes on a complex project and finances it for 5-10 years, from start to finish. It is unquestionably interested in developing a type of procedure that would minimize all risks,” he says.

Paievych calls the decision to hold the final games of the European Soccer Championship in Ukraine and Poland another positive factor. Now builders will be obliged to adhere to international standards. The number of insurance companies accommodating builders will also increase, according to Filoniuk, who says that it is realistic to expect that in the next five years 20 percent of Ukrainian insurance companies will insure investments in construction. He also says that financial insurance (also called title insurance) costs between 2.5 and 5 percent of the total cost of a building, and real estate insurance, between 0.15 and 0.4 percent. These are large sums of money. But they are much lower than dishonest “extra charges.”