Thanks for being raw 2. Amendments to amendments to Federal Law No. 214-FZ

Thanks for being raw 2. Amendments to amendments to Federal Law No. 214-FZ
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On July 1, amendments to Federal Law No. 214-FZ are to come into force. A month is left — and despite this, much in the matter of project financing remains unclear, which raises concerns for both business and some of the MPs themselves. 

That is why the most significant aspects of the amendments were recently discussed at a roundtable entitled “Acute issues of the construction industry development” held in the Federation Council.

It is not clear why the Committee on the federal structure, rather than one on the economic policy was tasked with discussing “acute issues of the construction industry development”. This might be due to the fact that the first Deputy Chairman of the Committee, Stepan Kirichuk and the recently appointed Minister of Construction, Housing and Utilities, Vladimir Yakushev, know each other from their joint work in the city administration of Tyumen. It seems that there could be no better mediation between lawmakers, builders and the Ministry at this stage — this is encouraging, especially since the issue under discussion is a cornerstone one for the industry and requires a comprehensive discussion.

The roundtable started with a report by Deputy Minister of Construction, Nikita Stasishin. According to the official, since the annual monetary investments of citizens in construction have already amounted to about 1.7 trillion rubles and will grow due to the reduction of the mortgage rate, while the construction risks insurance is handled by the State Fund for Protection of the Rights of Citizens Participating in Shared Construction — risks of the federal budget should be mitigated because of the work on Federal Law No. 214-FZ. “We have no right to allow the massive appearance of distressed construction sites,” the Deputy Minister said. At the same time, the report notes that the index of problematic shared-equity construction sites today accounts for 6.8%. The percentage is rather modest. Nevertheless, the Ministry insists on the introduction of bank support for construction and project financing at a rate of 11%.

As for changes in accordance with other criteria that the developer now has to meet, Nikita Stashin has suggested that that 10 % of the project cost that is required for obtaining a building permit should not be prohibited from being allocated to the construction financing. It has also been noted that the provision of law requiring 10,000 square meters of commissioned housing might not be applied to small developers. The Deputy Minister has come up with an idea of changing the approach to the limitation of the construction scale: one developer — one planning design. As well as allowing developers to attract private investments before the building is put into operation.

Summing up, Nikita Stasishin has outlined ways to increase the volume of construction. These are the following: optimization of the costs of developers, involving urban land with a completed infrastructure and creating an institutional lease. The official sees the main problem of the construction industry in the absence of long-term cheap money at a construction site. At the same time, Nikita Stasishin has assented to an opinion of Arkady Chernetsky, First Deputy Chairman of the Committee on the Federal Structure, that reducing the mortgage rate down to 8% was not enough for reaching the annual construction volume — 120 square meters by the year 2024 — announced by the President. At the moment, no roadmap for the plan implementation has been elaborated yet.

One of the effective tools for increasing the construction volume is improving housing construction co-operatives, says Deputy Director of AO Dom.rf, Denis Filippov. In accordance with the amendments to Federal Law No.161-FZ “On the assistance in the development of housing construction” of September 1, 2016, conditions for the establishment of a housing construction co-operative have been substantially simplified for young specialists in the public sector. In the words of the official, savings in construction under a housing co-operative can reach 50% of the market value, which is achieved due to the absence of costs for the administrative staff, marketing and the developer's profit rate, as well as due to construction of cooperative housing on federal lands allotted without recompense. According to the official, more than 3,000 hectares of land is involved in the turnover for this purpose annually, with mapping by satellite imagery used to search for idle sites.

The state also seeks to increase the number of standard planning decisions. So, in mid-May, the corresponding international architectural contest was launched with a prize fund of 47.5 million rubles. The organizer is AO Dom.rf JSC (AIZhK), which website also features the Unified Information System allowing a real-time monitoring of statistics on commissioning all housing construction projects. This year, 50.7 million square meters of housing in residential apartment buildings are planned for commissioning, which is 11% higher than the actual rate of 2017 — 45 million square meters. The total volume of construction is also projected with the excess of last year's rate of 79 million square meters.

However, both the community of professionals and representatives of the Federation Council are concerned that in connection with the new amendments, activities of many small and medium-sized companies will be jeopardized. According to Sergey Lukin, a member of the Federal Structure Committee, today even large developers are short of working capital, while a mass problem of the non-fulfillment of co-investment contracts is largely explained by the same: the market lacks effective demand and the developer is forced to build financial pyramids in order to complete and sell their previous projects.

The new amendments will further restrict the internal sources of financing since the model “One builder — one house” makes transfer pricing impossible, because, for each project, the developer needs to create a separate legal entity. Also, the need for having 10% of the construction cost on the account, provided that the developer operates through several subsidiaries in dozens of projects, will turn into a huge burden for any holding, Sergey Lukin says.

According to a member of the Committee on Economic Policy, Vladimir Kravchenko, real incomes of citizens have not been growing for four years. Along with that, state support programs for the acquisition of housing by young families and veterans have been frozen. From the senator's point of view, Russia — with its donor subjects excluded — is not ready for the proposed changes, while the adoption of amendments, which, as the senator put it, have been promoted by MPs “with Chapaev's assault,” should be postponed for at least a year.

Representatives of the banking sector who attended the roundtable have declared their readiness for changes. Thus, Oleg Melnikov, Vice President of AO Gazprombank, has pointed out that since 2009, when on Vladimir Putin’s instruction, the bank support was arranged for the first time on a pilot basis, a service for managing the pyramid of isolated accounts allowing to effectively control a cash flow has entered the line of banking products and today it is in demand not only for work on state contracts, where banking support is required but for private entities as well. At the same time, the cost of a service is inversely proportional to the amount of a cash flow — for Gazprombank, the commission fee accounts for 0%, given that the amount is over 400 million rubles.

As Svetlana Nazarova, Executive Director of Sberbank of Russia, has emphasized, an important and still unresolved issue is the establishment of unified banking rules for working with developers. They are necessary for preventing an unfair competition for such high-profile customers between 25 authorized banks. At the same time, the Deputy Minister of Construction, Nikita Stasishin, who left the roundtable, did not object to the general opinion shared by the participants that the banking rules should be set by Central Bank. However, it appeared later that, according to Vladimir Markelov, Deputy Director of the Banking Supervision Department at Central Bank, the regulations will be drawn up by the Construction Ministry since Central Bank is “not an expert” in this matter.

First Deputies Chairman at the Committee of the Federal Structure, Stepan Kirichuk and Arkady Chernetsky, went in skeptical of the bankers’ words that small and medium-sized businesses would not experience difficulties with lending. As Andrey Kirsanov, Deputy General Director of AO MR Group, has noted, considering that the bank lending volume will be less than the current funding for co-investment agreements, the task to increase twofold the number of commissioned sites is seen as infeasible. Executive Director of the Moscow Investors' Club, Vladislav Preobrazhensky, echoed what was said, adding that under the new conditions, large business would begin to reduce the construction volume, switching to financing projects from their internal funds.

“All the developers said they would start dying,” Vladimir Gorbunov, Director at the Center for Real Estate Market Development, shared his concerns. Citing an example of St. Petersburg, where in the 70s, 2-3 million square meters of housing were built per year, as it is the case today, one can see that if not for the lack of financing and supervision, with the modern construction technologies the amount of new housing could be doubled. Administrative barriers, Vladimir said, in connection with project financing, jeopardize developers with big costs — these words were echoed by Director of the Chelyabinsk Inter-regional Union of Builders, Yury Desyatkov.

According to Executive Director at the Union of Building Associations and Organizations of St. Petersburg, Oleg Britov, the community of professionals prepared its draft amendments long ago, which the business hopes to bring to the legislators. However, at present, as Deputy Chairman of the City Planning Committee of the Moscow City Duma, Oleg Soroka, has stressed, out of all the proposals of developers, only three documents land on the legislator’s desk. Summing up the event, a moderator of the roundtable, Stepan Kirichuk, has invited the participants to set up working groups in all areas of the amendments’ improving, with the voiced comments summarized in a joint letter to the newly appointed Minister of Construction, Utilities and Housing — in the hope that Vladimir Yakushev “will come through”.

Petr Larin

Editorial note: Many agree that the ultimate beneficiaries of the ongoing reform are banks and large developers, what you can learn in detail from an interview with the honorary builder of the Russian Federation, Azary Lapidus, titled “Mechanisms of construction: in the USSR, in the West — and what is now in Russia?”.