Where there is a will, there is a way
Feliks Blinov, CEO of the RWM Capital Investment Group, told Stroitelnaia Gazeta about new ways of financing real estate development projects:
“Since 1 July 2018, it will be against the law to participate in shared construction or buy a piece of residential property at an early stage of its construction. It is not going to be easy as now about 80% of all the residential properties in Russia change hands thanks to shared construction participation agreements. For real estate developers, it means that they have to start looking for other ways to raise money for their projects. In this situation, REITs seems to be an obvious solution.
By the Russian Government’s design, it will take not more than a couple of years for the market to adjust to the new rules and start raising money without applying to a sheared construction principle. During the transition period, the remaining options are going into project finance or setting up an escrow account (with a sheared construction participation agreement still partially possible to use for the purpose). In practice there will be a sort of a tripartite agreement between the buyer, the bank, and the builder. The buyer puts their money into the bank, while the builder does not have access to it until the construction is over.
In the meantime, the construction project is to be financed by the bank with project loans. It is still a big question how this scheme will be working . But what is clear is that after the transition period it will be definately hard especially for smaller companies to go on.
One of the alternative ways of fundrising is a REIT (Real Estate Investment Trust). Although it has been wide-spread abroad for decades by now, in Russia it is an absolutely new thing.
REITs can provide a range of important benefits to companies and investors. However, players in the Russian real estate market do not trust these Trusts much. The number of professional managers able to attract potential investors to REIT or explain to them how this fundrising tool actually works is scarce.
For investors, participation in a REIT is primarily characterised by it security. On the one hand, investment does not mean possesion of some particular property which is not so easy to sell on. It is partnership units that they own. Besides REITs are usually managed my an asset management company. The quality of this management is scrupuously checked and regulated.
For real estate developers, participation in a REIT has its plus sides, too. REITs do not pay corporate income tax. It means that more money may be invested in project development. Besides REITs are a collective investment scheme – the circumstance that makes them very attractive to private investors.”
