Ukrainian property developer Igor Nikonov shares his thoughts about housing and construction
The founder of KAN Development, Igor Nikonov, told Focus about the risks of investors, mortgages, the ideal model for the development of residential construction, as well as about rising real estate prices and who should save unfinished construction projects.
The Kyiv company KAN Development has been operating in the construction market for 20 years. Among its famous projects are the residential complexes “Comfort Town”, “Faina Town”, Tower, Unit.home, as well as the Ocean Plaza shopping center.
The founder of the company, Igor Nikonov, is convinced of the following: a reliable developer never hide the names of his beneficiaries, the reduction of risk in the primary real estate market can be brought about by the participation of partner banks in construction projects, as well as with a personal guarantee of the owners of the companies.
About Igor: A skilled businessman with many years of experience in development, an expert in construction and architecture, adviser to the Kyiv mayor Vitaly Klitschko.
Q: Real estate prices in Kyiv and major cities have increased significantly over the past nine months. What is the reason?
A: We are witnessing high inflation in Ukraine and around the world. This is noticeable in the cost of labor, materials, some of which have risen in price by 50% over the past six months. This is due to the massive printing of money. Salaries are increasing rapidly, and there is a shortage of personnel in the industry.
The construction market is developing, as in the domestic real estate market, in fact, there is a tax on withdrawn capital, which does not officially exist in Ukraine. But this is how the system works in this area [institutions of joint investment]. This explains the huge number of investors seeking to invest in this business. The market is very profitable, prices will rise, as inflation is still high and is spinning further.
Q: Some experts in the construction industry are confident that there is a shortage of good complexes in the capital, hence increasing prices. What is your opinion?
A: The COVID-19 pandemic brought some corrections. After staying in quarantine at home, people reassesed their approach to the quality of the real estate. They realized that buying an apartment cheaply was not the ultimate dream. To buy an apartment that is a little more expensive, but in a complex that has everything you need, it is a more reasonable step. Because now a convenient infrastructure is important so that the kindergarten and the school are close by. There are really only a few good complexes in Kyiv, and the demand for housing is now steadily high.
Q: There is an opinion that today there is a boom in investment purchases in large cities. Is it so?
A: There is no alternative to such investments in Ukraine, because deposits are taxed and interest rates on them are decreasing. Real estate is one of the available and understandable types of investment. Moreover, such investments justify themselves: when investing at the excavation stage, the investor’s profit after the sale of the constructed property can exceed 60%. And when renting out, you can receive from 10 to 20% per annum – not a single bank can offer this today.
“The implementation of indirect methods of determining income may affect the real estate market. Increasing rates and tightening control will only reduce business activity.”
Q: According to your estimates, what percentage of sales is with an investment purpose, and what percentage is for personal use?
A: Historically, our company has had a lower share of investment purchases than in others, aswe do not have a huge difference between prices at different stages of construction. And we do not need to attract investors’ money for implementation at the start, while some put the price below the cost price, selling at the stage of the excavation. We don’t do that because we have working capital. The share of investment sales for some companies is more than 15%, but we have a little less.
Q: In recent years, the government has been pushing for a de-shadowing of the economy, as an example – the law on financial monitoring. How has this increased focus on transactions affected developers and clients?
А: Yes, it has complicated the transactions because many people cannot go through financial monitoring, so they are not allowed to carry out a transaction for the purchase of real estate. The banks require proof of the origin of funds. I think this is wrong until the moment of the campaign of required general zero declaration. It hurts the economy. It is not worth it to so zealously follow the commandments of international partners. In our country, it was only this year that the introduction of the zero declaration [capital amnesty] began.
Q: Recently, the Ministry of Finance announced that they are preparing a bill on the indirect determination of income. How will this affect the real estate market?
A: The implementation of indirect methods may affect the market. The Ministry of Finance considers it its duty to collect more taxes, not thinking that raising rates and tightening control will reduce entrepreneurial activity. And this is a proven fact. If taxes increase, activity falls, and this was proved in Hungary, which raised the VAT on real estate transactions, and a year later the rate had to be lowered again. In general, it does not work like that in economics.
We have to compete in the tax field. With whom? With Bulgaria – there is 10% corporate tax, all the rest – also 10%. We have to compete with Poland. We should have fewer taxes. This is how the development of the economy begins. There should be a conservative industrial policy. Only later, when GDP per capita reaches $ 30 thousand, and not as it is now – $ 3 thousand, it is possible to increase social programs, to make promises, to engage in populism. With $ 3,000, it is necessary to arrange a “tax haven” so that all investors rush to Ukraine.
A LACK OF LAND. Igor Nikonov notes the shortage of interesting sites in Kyiv for the construction of good residential complexes.
Q: There are regular discussions in the capital that Kyiv is being built up chaotically. What is the reason?
A: Kyiv city does not have much power regarding construction, and I believe that all the levers of management should be with the local authorities. They are responsible for their actions with mandates, and this keeps the balance. As for the scandals around construction projects, more than half are paid groups of “activists”, there are no real grounds for a scandal there.
On the other hand, the architect of the city today does not know how the project will fit into the environment, there is no 3D visualization, although I have been saying for a long time that there should be a law for the architect to sign the project.
Now the city’s role ends with the issuance of urban planning conditions and restrictions. But the project must be approved by the authorities, and this is not in the law. A developer goes to a government agency (formerly SACI, now SIAUP), but the state, in fact, does not care what the project is and how organically it will fit into the space of this or that city.
Q: But the city has bigger problems – new buildings are going up, but new infrastructure is not there. What to do?
A:There will always be criticism, whatever the infrastructure of the city. Well, for example, the share participation was removed. It was a mistake. By means of a share participation, the city could force developers to build infrastructure facilities.
I would do this: if you are building a new district, there should be a school or a kindergarten in the second or third phase. Our company does this, it is important for us. Although this is not in the law. And the city has no leverage to create infrastructure now, the authorities can only ask the developer to build something voluntarily.
“The participation of the bank in financing construction and in lending programs would reduce the risks of projects, in the end, everyone would win.”
Q: Previously, many problems in the construction industry were associated with an organization such as SACI. Now the State Inspectorate of Architecture and Urban Planning has started working. What is your assessment of the reform?
A: I participated in the development of the draft law on the SIAUP. I don’t know yet how it works, we haven’t contacted SIAUP yet, but it should work fine. Construction is such a business that you can formalize everything, but somewhere human participation is still needed. The idea now is to do everything without human presence, I wish them the best because I want it too. But, on the other hand, without a person there can be massive refusals on formal grounds. The comma is not there – and a rejection. In general, working with government agencies is not the biggest problem.
Q: What are the real estate developers still missing? What changes can positively affect their work?
A: Now we need to focus on two things. The first is mortgages. The second is bank lending to projects. In fact, there is neither the first nor the second in the country. Banks are absolutely not interested in lending to this business, they do not want to get involved with construction projects. They would rather buy government bonds and earn interest them, while the banks’ money does not go into the real economy. If bank lending appears, this will solve a lot of issues, particularly regarding control, insurance and, most importantly, affordable mortgages.
Now a mortgage can be obtained at the stage of completed construction, when the price is already different, and people are interested in buying an apartment at the initial price. If the bank took the project, corporate rights of the owner, personal guarantees of the developer as collateral, it could provide loans at the stage of foundation. The bank could also provide resources for infrastructure around the complex. As a result, everyone would benefit, and the level of risks of such a business would be much lower for clients and investors.
Q: Problematic construction projects are something for which parliament, which does not pass imputed laws to control construction, and local authorities have been criticized more than once. Remember the liquidated (developers) “Ukrbud”and “Arkada”. What are the chances that such stories will end in Ukraine?
A: There is a chance if there is bank financing and personal guarantees from the developer. We need such a structure so that the developer could not take money from the project for some of his own purposes. Arkada had its own bank, they arranged everything so that it would be convenient to withdraw money from investors. Now there is a draft law, they want to force everyone to sell real estate through the Construction Financing Fund, that is, the bank managers. But this is not an option.
The way out is for other banks that are not associated with developers to provide loans. Then the bank understands the price of the issue and will precisely regulate and control everything. It’s also worth remembering the risks. Usually the developer is a limited liability company. People themselves should understand: if you want to take risks and buy cheaper, these are your risks. One should not assume that the State should guarantee for the developer. No, it shouldn’t.
Q: How should investors themselves assess real estate developers, what to look for in order not to get stuck with an unfinished construction project?
A: People are themselves responsible if they buy from scammers. Because of stupidity and greed, they buy in projects that most likely will not be completed. Free cheese is only found in a mousetrap. Investors are just as guilty as, for example, the well-known developer Voitsekhovsky. The investor should pay attention to the reputation and the completed infrastructure. If the infrastructure is being built in parallel, then the company has reserves. If only the building and the infrastructure “later” – this means that there are little or no funds. You can always wait if in doubt. Yes, it will be more expensive, but the risk is lower.
“Now we need to focus on two things. The first is mortgages. The second is bank lending to projects. There is virtually none in the country.”
Q: When a major scandal happens, the local authorities, together with the Ministry of Internal Affairs, the Prosecutor’s Office, the SBU, and the ministries, actively begin to discuss how to help investors. Who and how should resolve the problematic construction?
A: The decision is up to the investors. People can be active, there are situations when the investors themselves have invested and completed the building. An example is the Fundukleevsky residential complex of the “Consol” company, where investors invested additional funds and as a result the building was commissioned. That is, people admit that they were scammed, the authorities help them, and the utilities are hooked up.
Where there are active people, everything will be completed there. The state can help, but it is definitely not obliged to decide everything in the interests of investors. The state must create a system in which scamming will become impossible. That is why the participation of banks in construction schemes would be extremely important.
Q: There is a lot of talk about your company’s complex on Khreshchatyk. What’s happening with this project now?
A: We are at the design stage, and we hope to start the work in early 2022. These will be apartments with a public environment for people, and there will be shops, restaurants like in Passage. The target audience of the project is people for whom it is important to have their own property with the address: Khreshchatyk, 5. This should be very high-quality premium housing.
Q: In the spring you told about the company’s entry into the suburban housing market. What has been done since then?
A: We have already gone out of town, we are working on a subdivision project in Koncha-Zaspa, which, in my opinion, will be the best in the region. There will be all the infrastructure facilities: a marina, a restaurant, a sports club, a kindergarten, pharmacies – everything you need for life outside the city. In my opinion, the trend in demand is increasingly shifting towards suburban real estate, and there is a shortage of good projects there.
Q: Your company has never been involved in the completion of an unfinished project. Why?
A:I’m not interested in this. Some companies see this as a business, although it is a risk, since even fulfillment documentation there can be faked.
Q: In recent years, many companies are looking more actively towards business class and premium housing. What is the reason for this trend?
A: Finding land is becoming more difficult and more expensive. It makes no sense to build an economy class building on such expensive land. Many realized that it is possible to build lower and smaller,but more expensive, and not build 25-story buildings with profit of $100 each. Surroundings should be created for people. A person pays once, and he should not regret it.
Vestor.Estate hopes that you learned something useful and could look at the real estate industry from a different angle. What is your opinion on this score? Do you agree with the developer’s reasoning? Maybe you are ready to object? Please share your thoughts on this topic on our Facebook. It is worth your attention and needs for change in Ukraine.