How to peo­ple buy apart­ments with­out mort­gages?

Kyiv Post Legal Quarterly - - Contents - By Aisha Down down@kyiv­

It's one of Ukraine's great real es­tate mys­ter­ies: How do peo­ple buy homes when the mort­gage op­tions are few and ex­pen­sive? The short an­swer: Most have to save up a lot of money, get very cre­ative or stay in debt for a long time.

When Ana­toly Sch­mar­gun got a job near the Com­fort Town res­i­den­tial com­plex in 2012, its brightly colored apart­ment build­ings on the left bank of the Dnipro River im­me­di­ately caught his eye.

“When I saw the place, I was like—‘wow! In Kyiv, such col­or­ful build­ings, and not too high!”

He de­cided to buy an apart­ment there and took out a mort­gage. Six years later, and still ow­ing tens of thou­sands of dol­lars for his apart­ment, Sch­mar­gun’s opin­ion has changed.

“This is not a good sys­tem,” he told the Kyiv Post. “It’s theft. Ukraine is a poor coun­try. But we have such high prices for ev­ery­thing.”

The 2008 global fi­nan­cial cri­sis brought the near-col­lapse of Kyiv’s mort­gage lend­ing. Af­ter years of eco­nomic and po­lit­i­cal tur­moil as well as war, dur­ing which time the hryv­nia lost most of its value, the credit mar­ket still hasn’t re­vived. This makes buy­ing a home, for most Ukraini­ans, dif­fi­cult and costly.

But with trust in the banks still low, real es­tate remains Ukraine’s pre­ferred store of value. De­spite there be­ing few op­tions and bank loans be­ing wildly ex­pen­sive, many, like Sch­mar­gun, are still weath­er­ing the costs and sink­ing their money into houses and apart­ments.

Pay­ing up front

The break­down of how peo­ple fi­nance their homes in Kyiv hasn’t changed much since 2015, says Tim Louzo­nis, a part­ner at AIM Realty, an elite real es­tate agency.

He es­ti­mates that about two-thirds of Ukraini­ans pay en­tirely up front. One third, he says, use short-term fi­nanc­ing of­fered by a de­vel­oper — like Com­fort Town, which ini­tially of­fered Sch­mar­gun a seven-year pay­ment scheme.

Three to four per­cent, he says, take out a bank loan. With in­ter­est rates around 20 per­cent an­nu­ally, it’s the last re­sort.

“Ba­si­cally, they ask all their rel­a­tives, they ask their grand­mother, and then, for the dif­fer­ence, they go to the bank and say, ‘we’ll take that out and pay it back as quickly as pos­si­ble.’”

The loans aren’t mort­gages, says Louzo­nis — they’re short-term, usu­ally less than 10 years, and the sum bor­rowed is gen­er­ally small. “The amount bor­rowed is usu­ally more like ‘bridge fi­nanc­ing’ than a home loan,” he says.

For his part, Louzo­nis ad­vises clients — al­most all

Pricey fi­nanc­ing

ex­pa­tri­ates — to pay for apart­ments up front. “This is not a place where you can spec­u­late,” he says.

Bas Schuil­ing, from the Nether­lands, is one such ex­pa­tri­ate. The em­ployee of an Amer­i­can IT com­pany, Schuil­ing paid some 80,000 eu­ros — or about $94,000 for an apart­ment in Podil, af­ter sav­ing up for some time. “I didn’t try to get a mort­gage here,” he says, ex­plain­ing it was pro­hib­i­tively ex­pen­sive. With av­er­age salaries in Kyiv now at around $350 per

month, pay­ing for an apart­ment up front isn’t an op­tion for every­one.

A slew of de­vel­op­ers — Com­fort Town, Fina Town and Crys­tal Park, for in­stance — of­fer another way to pay: an in-house fi­nan­cial struc­ture, in which res­i­dents can pay for their apart­ments over five to seven years.

The pres­i­dent of KAN de­vel­op­ment, Com­fort Town’s par­ent com­pany, de­clined to an­swer the Kyiv Post’s ques­tions about how ex­actly Com­fort Town’s fi­nan­cial plan worked.

Sch­mar­gun says his apart­ment, up front, would have cost $110,000. In 2012, he made a $23,000 down pay­ment. He takes out a cal­cu­la­tor to fig­ure out how much he will have to pay in three years, af­ter his pay­ments are com­pleted. “$170,000. More than 50 per­cent more,” he says. Short-term fi­nanc­ing through a de­vel­oper may soon be­come more rea­son­able.

Va­le­ria Malakhova, head of Oschad­bank’s re­tail depart­ment, says that the bank part­nered with five de­vel­op­ers in Jan­uary — Com­fort Town, Faina Town and Crys­tal Park among them. De­clin­ing to give specifics, Malakhova says that the partnerships will of­fer longer pay­ment plans -- 10 to 20 years.

But in­ter­est rates will still be high, says Malakhova, at around 19–20 per­cent an­nu­ally, al­though some might be lower, de­pend­ing on the part­ner.

Mean­while, al­though most don’t see bank loans alone as a vi­able way to fi­nance a house, Malakhova says Oschad­bank is managing to at­tract cus­tomers with or­di­nary loans for pe­ri­ods of a few years.

In­ter­est on these loans is, again, 19 to 20 per­cent, some­times higher. “It’s a very high in­ter­est rate from (a west­erner’s) point of view,” she says. But, with the Na­tional Bank of Ukraine set­ting its own de­posit rate at 15 to 17 per­cent, it’s about as low as Oschad­bank can go.

“(Loans) give a client an op­por­tu­nity to buy their own flat and live in there. Rent pay­ments are, any­way, just as much as monthly credit pay­ments.”

Flight to suburbs

While Com­fort Town and de­vel­op­ments like it of­fer more ac­ces­si­ble pay­ment plans, Louzo­nis casts doubt on whether they’re the best op­tion — at least from an in­vest­ment stand­point.

“Ukraini­ans want to live in new build­ings, with un­der­ground park­ing,” he says. “Not Stalinkas,” he adds, re­fer­ring to Soviet-era build­ings built from the 1930s-1950s.

But, with no em­i­nent do­main laws in Kyiv’s city cen­ter, molder­ing his­toric build­ings re­main stand­ing, and new apart­ments have to be built far­ther and far­ther away from the cen­ter, says Louzo­nis. In the long term, as com­mute times go up, their value as in­vest­ments — prop­erty to rent out — is questionable at best.

“It’s not an in­vest­ment. It’s a place to live,” he says. “The sale price isn’t lower — but the rent will be lower, and the in­vest­ment yield will be low.”

For Sch­mar­gun, de­spite the years of ever-in­creas­ing pay­ments, his home pur­chase is still worth it.

“Our last apart­ment, when we rented, we paid $550 a month. You paid for…we call it for noth­ing. You’re pay­ing, but you don’t get any­thing. But when it is your apart­ment, every­one hopes that in five or seven years — it’ll be yours. You won’t have to pay,” he says. And three years from now, his apart­ment will be his. “I can spend that (money) on trav­el­ing, a Macbook, etc. Thank God that I’ll have the pos­si­bil­ity to do this.”

A man looks from his bal­cony at brightly-colored apart­ments be­long­ing to Com­fort Town, a 2010 de­vel­op­ment with its own fi­nan­cial struc­ture. (Kostyan­tyn Ch­er­nichkin)

My cow is worth a lot! Bank As mort­gage rates re­main high in Ukraine – around 20 per­cent – many Ukraini­ans try to find al­ter­na­tives such as bor­row­ing cash from rel­a­tives, us­ing short-term fi­nanc­ing from de­vel­op­ers, or pay­ing up­front.

Con­struc­tion pro­ceeds on a Kyiv res­i­den­tial de­vel­op­ment built by Ukr­bud, Ukraine's state con­struc­tion com­pany, which has built tens of apart­ment build­ings around Kyiv. (Volodymyr Petrov)

Kyiv has one of the high­est prime yields – re­turns on in­vest­ments – for of­fice, re­tail and lo­gis­tics real es­tate as its mar­ket is con­sid­ered to be high risk. Ukraine’s yields, how­ever, are un­lever­aged, mean­ing that they are not com­bined tak­ing into ac­count fi­nan­cial obli­ga­tions such as debt. As the econ­omy showed signs of sta­bi­liza­tion and an in­crease in in­vest­ment de­mand in 2017, the mar­ket wit­nessed a de­crease in risk for its com­mer­cial real es­tate mar­ket low­er­ing the yield rates, ac­cord­ing to Cush­man & Wake­field real es­tate ser­vices firm.

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