Housing market

The topic of reviving the Ukrainian housing market is once again gaining momentum. The government promises to be its financial donor. Recently the procedures of such financing were formulated by the Ministry of Regional Development and Construction (Minrehionbud) in the draft cabinet resolution “On the Adoption of the Procedure of Using the Stabilization Fund to Issue Loans for the Completion of Housing Construction Projects Involving Mortgage Credits.”

Under this document, government loans can be issued only to developers who will agree to have their unfinished projects partly financed by banks. Government funds will be allocated only after auctions. To begin with, the managers of the construction financing fund (i.e., the customers) are to apply to the Cabinet of Ministers for financial aid. The application package must contain, among other things, information on the construction project, the customer’s written consent to such aid, and other expected sources of financing.

How much the state will allocate in aid to the construction industry and when this will happen remains to be seen. Previously, at a conference with developers, Prime Minister Yulia Tymoshenko stated that completing the unfinished construction projects requires 14 billion hryvnias, while maintaining last year’s construction rate will cost 33 billion. The government is not likely to channel so much money into the construction sector as a lump sum, what with the problems with the budget deficit.

This problem could be solved by providing government guarantees to foreign investors and entering this into the budget as a deficit financing clause. In December 2008 Ukraine ranked second in the world in terms of returns on public bonds sold on the market for dollars. For the the expert community this level of returns points to likely default, but Ukraine’s leading experts insist that this cannot happen because Ukraine’s public debt is relatively low as compared with GDP. The political risks are a different matter.

“Today it is obvious that housing construction using short money is history. New financial tools and an essentially different construction model must appear,” says Yurii Kostohlodov, chairman of the board of the Avantazh building company. He believes that investments in housing construction projects must be made by a special investment institution and investment funds rather than the end consumer.

Serhii Biriuk, chairman of the State Commission on Securities and the Stock Market, says this mechanism is impossible to have today. He recommends that the Ukrainian developers do not expect their projects to be financed through the stock market, not for the next couple of years anyway. Money for such projects will materialize only after the economy and the purchasing capacity of companies and the population have been revived.

He is echoed by DTZ CEO Nick Cotton who explains the inactivity of foreign investors on the Ukrainian market: “During the growth phase of the world economy there was a big drive for investments in the Ukrainian market. At that time no one was bothered by, for example, corruption and political instability. Today, all risks are being considered very carefully.” Besides, during that favorable period the investors made some reserves, so now they can sit back and wait for the financial problems to pass — or join the ranks of those who are asking governments for help.