Home developers are asking for loan relief

Housing developers, trying to cut costs, through State Duma deputies asked the Central Bank to help reduce interest rates on loans secured by future profits and accrue interest on escrow accounts where funds of apartment buyers are kept until new buildings are put into operation. Developers claim that after the Central Bank increased the key rate, their costs for servicing loans have increased significantly. However, experts believe that the regulator now has no reason to change the practice of financing the construction industry, and besides, the proposed measures are unprofitable for banks.

Kommersant obtained a letter from the first deputy chairman of the State Duma Committee on Construction and Housing and Communal Services, Vladimir Koshelev, sent on April 8 to the head of the Central Bank, Elvira Nabiullina, with a request to limit the rate when lending to developers secured by future profits. In practice, often the amount of funds in escrow accounts, where money from apartment buyers is kept until construction is completed, exceeds the volume of loans. Developers use this difference as collateral for future loans. The deputy notes that banks “earn money from escrow accounts, project financing and when lending to developers.” At the same time, the letter indicates, the current practice has become one of the reasons for the increase in the cost of housing construction. The Central Bank told Kommersant that they would consider the letter.

Vladimir Koshelev recalls that in the last year the credit burden on developers has increased following the increase in the Central Bank’s key rate. According to the Central Bank, in 2023 the rate on project financing for developers increased to 6.39% from 4.3% per annum at the end of 2022. The cost of corporate lending in the construction industry, including loans to replenish the land bank and prepare permitting documentation for the project, according to the regulator’s calculations, increased from 7.7% to 12.1%.

A loan against future profits means an increase in risk for the bank, Sberbank explained to Kommersant. The introduction of restrictions on interest rates on loans against future profits may lead to banks refusing to issue such loans to developers due to low margins, warns Alexander Gutorov, vice president of the Strana Development Group of Companies. This, he said, could lead to a decrease in the investment potential of developers, which is “extremely unfavorable for all parties.”

Mr. Koshelev also asks the Central Bank to consider the possibility of charging interest in favor of developers on funds in escrow accounts that exceed the amount selected under the credit line for a specific project. This could cover part of the developer’s costs for servicing the loan, says Deputy Financial Director of the Granel Group of Companies Yuri Chernoivanov. But Sberbank believes that this issue is becoming irrelevant, since the influx of funds into escrow accounts has begun to slow down. The bank clarifies that if at the beginning of 2022 for projects financed by Sber, the coverage of such accounts reached 100%, then by March 2024 – already 86%.

In addition, Vladimir Koshelev asks the Central Bank to prohibit the inclusion in the list of covenants of a pledge of shares and shares in the authorized capital of developers when providing other security that fully covers the banks’ claims. This forces companies to artificially fragment their business by registering companies for each project, which increases costs, the deputy explains.

For the construction of each residential complex, a separate legal entity is created: this is a legal requirement that has been in effect since 2019, explains Yuri Chernoivanov. This makes accounting easier, reducing legal risks, he continues. “If controversial issues arise during the activities of a particular legal entity, this will be an issue within the framework of one project, and the developer’s other complexes will not be affected,” the expert notes. Now there is a certain practice of financing developers, states Deputy General Director of OM Development Petr Barsukov. Therefore, in his opinion, the Central Bank has no reason to change the status quo or give relief to developers when preferential mortgage programs are being narrowed and the key rate remains at a high level.

Daria Andrianova