Because of new law, Russian construction companies face increasing costs

Because of new law, Russian construction companies face increasing costs
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A new law, which provides for bank support to financing housing construction, will lead to increased costs and will help consolidate the industry, Reuters reports.

To date, companies engaged in housing construction, put up apartments for sale, once the activities on their construction sites are launched, with most of the apartments typically sold until the building is completed.

Russians spend hundreds of billions of rubles a year on the purchase of apartments in under-construction buildings. Since they act as effective co-investors of the projects, developers do not have to raise debt financing, Reuters notes. An apartment can be purchased at the initial stage of construction at lower cost — 40% below the price of the finished apartment. Therefore, this practice is very popular in Russia.

However, this scheme was misused, Reuters continues. The Russian authorities had to help out about 30,000 clients of an insolvent developer, which could not complete the paid apartments. Against the backdrop of growing protests, President Vladimir Putin instructed the government to develop measures to restrict the financing of housing construction with the use of co-investors’ funds. Instead, the companies will have to use bank loans and other financial instruments.

The new rules aimed at protecting home buyers will come into force in July 2019. From this moment, construction companies will no longer be able to use the funds of clients until the house is put into operation.