A bill on financing the construction of private houses through escrow accounts has been submitted to the State Duma
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A bill providing for the possibility of financing the construction of private houses by contractors outside organized cottage settlements through escrow accounts has been submitted by the government to the State Duma. The mechanism can be used if the house is built according to a standard design or using a house kit using domestic materials. Experts believe that this will make the individual housing construction (IHC) market more transparent and increase the share of mortgages, but with a high key rate, its application will be difficult.
The government has submitted to the State Duma a package of bills providing for the possibility of financing through escrow accounts the construction of private houses outside organized cottage complexes under a construction contract. Let us remind you that the mechanism assumes that the buyer’s money goes to a special bank account, and the developer receives it only after the completion of the project, while construction is carried out using credit funds. Since 2019, this procedure has been introduced for the construction of housing in apartment buildings – to solve the problem of defrauded shareholders. Since 2022, the method has been extended to the construction of private houses in low-rise residential complexes (see “Kommersant” dated November 24, 2021).
The idea of expanding project financing for individual housing construction in general has been discussed for several years. As well as the standardization of projects, this should solve the problem of low liquidity of such houses and increase mortgage lending to the segment. Currently, when constructing private houses outside cottage villages, escrow accounts are used only in pilot mode. The Ministry of Construction came up with the initiative to legislatively regulate this possibility at the end of the summer (see Kommersant, August 2).
As follows from the bill, project financing, however, will not cover all individual housing construction. The right to use escrow accounts is provided for when using standard documentation or house kits that include domestic products (requirements for them will be determined by the Ministry of Industry and Trade), and the contractor must disclose information about himself and the implemented projects. During the finalization of the project, the authorities abandoned the details – the document is now more framework in nature than initially proposed by the Ministry of Construction (including provisions on mandatory contract conditions have been excluded). Two other projects solve related issues – insurance of citizens’ funds in escrow accounts (similar to accounts for settlements under equity participation agreements, in the amount of up to 10 million rubles), as well as exemption of contractor’s work using escrow accounts from VAT (as and in the case of developers selling apartments).
NOSTROY President Anton Glushkov welcomes the initiative: the market will be “understandable both for banks and developers, and for end customers.” Director of housing development at Dom.RF Evgeny Kvasenkov also believes that as a result, “individual housing construction should become a liquid market product, and transactions should be transparent.” With further standardization of the market and the adoption of additional measures, he says, the level of mortgage penetration in individual housing construction, as in the MKD segment, may exceed 50%. As NAMICS President Elena Nikolaeva notes, the project provides the opportunity to choose a mechanism – with or without escrow, and most citizens will be interested in using project financing. Now, she says, “unscrupulous contractors are the problem (excluding infrastructure issues) that is the main one.”
General Director of CLT Development Group Pavel Karnaukh expects that the mechanism will be in demand among more than half of potential buyers of country houses and will simplify the assessment of houses and plots. According to Oleg Malakhov, a member of the General Council of Business Russia, taking into account the development of individual housing construction, the transition to escrow accounts “looks logical, but will complicate the work of small construction organizations: with the current high rate of the Central Bank (15%). “Kommersant”) attracting loans has become very difficult.”
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