Banks are testing a mechanism for using escrow accounts in individual housing construction

Banks are testing the mechanism for using escrow accounts in individual housing construction (IZHS), which was legally fixed more than a year ago. Escrow accounts could provide an additional incentive to the market by ensuring the reliability of citizens’ investments in individual housing construction. Now the issue of amending the legislation is being worked out to create a mechanism for raising funds to escrow accounts in the case of “spot” individual residential development.

Sberbank announced the launch of a pilot project for lending to individual low-rise complexes through escrow accounts. Such a scheme will be implemented for the Dmitrov Dom project of the Samolet group and, according to the bank, will be widely used in the market.

“This innovation is beneficial for both buyers and developers. Buyers will receive guarantees that the work will be completed on time and in full,” said Dmitry Chernov, executive director for working with partners of the Domclick division of Sberbank.

According to the Unified Housing Construction Information System (UIIS) Dom.rf, the issuance of mortgages for individual housing construction in four months of 2023 exceeded the result of the entire first half of 2022 – 17.9 thousand loans were issued for 75.9 billion rubles. For the year, Dom.rf predicts a further, but more moderate than in 2022, growth in the issuance of mortgages for individual housing construction — up to 50,000 loans.

The first loans for individual housing construction from escrow accounts were issued in December last year by Dom.RF Bank. “Polls by VTsIOM and Dom.RF showed that about 70% of Russian families consider a private house an ideal housing format for themselves, and 79% of families who now live in an apartment and want to move into their own house are ready to consider building it if the appropriate infrastructure is available and transport accessibility,” notes Aleksey Nidens, deputy general director of Dom.RF. “However, it should be borne in mind that developers include the cost of infrastructure in the sale of housing to buyers and to a certain extent this constrains demand.”

According to Ksenia Yakushkina, director of banking ratings at Expert RA, individual housing construction is more risky for both banks and customers compared to purchasing an apartment in an apartment building. “With a classic mortgage, in the event of the borrower’s insolvency, the bank retains the mortgaged apartment, which is usually a fairly liquid object,” she explains. “In the case of individual housing construction, the bank will get the land plot and the house located on it, if it is completed.” Since the quality of independent development, as a rule, is not subject to any regulation and control, the real value of collateral and its liquidity can become a problem for banks, continues Ms. Yakushkina.

“The use of escrow accounts can reduce the risks of the segment for both the bank and the borrower. In particular, the risk of an unfinished facility will be significantly reduced,” says Yegor Lopatin, Deputy Director of the Group of Ratings of Financial Institutions of the NKR Agency. “It will be easier for banks to control the progress of construction, which may lead to a more adequate assessment of the collateral and to a decrease in the interest rate on mortgages on individual housing construction.” The application of the mechanism may have a positive impact on the dynamics of the segment already in the medium term, however, loans for the purchase of apartments will continue to be the driver of mortgage lending growth due to significantly higher demand, as well as the presence of a large number of preferential programs, he believes.

The development of the tool will be facilitated by the standardization of IZHS (Standards for Standard Projects), so that banks can adequately assess risks, since when using escrow accounts, they bear the main risks by financing projects (the developer (subject to the execution of the contract) and the buyer (the money is in the escrow account until the execution the developer of all obligations under the contract) are insured against risks), notes Natalia Bogomolova, an analyst at NRA banking ratings.

For this, adds Alexey Nidens, the issue of amending the legislation is being worked out to create a mechanism similar to the mechanism for attracting funds in the framework of complex individual housing construction projects in the case of “spot” individual residential development by the contractor.

Ksenia Dementieva