The Ministry of Finance has developed a bill to remove builders from lending restrictions at floating rates

The Ministry of Finance has prepared a bill providing for the exclusion of lending for construction activities from the upcoming restrictions on floating bank rates for micro-enterprises. This is explained by the fact that legal entities created for specific construction projects may be subject to restrictions, which will lead to an increase in the interest burden and an increase in the cost of housing. Experts generally see the initiative as beneficial, although some believe rate caps could allow cost increases to be planned for.

The Ministry of Finance proposes not to apply the upcoming restrictions on floating bank rates to loans for developers. Department prepared a bill that would exempt certain activities, including the construction of buildings and engineering structures, from future variable rate provisions. Let us explain what is currently being considered in the State Duma billwhich provides for the establishment of limits limiting the amount of “floating” rates, including on loans for microbusinesses, by no more than four percentage points from the level of the key rate on the date of conclusion of the agreement.

The Ministry of Finance explains the need for an exception for the construction industry by the fact that developers often implement projects “on the balance sheet of a separate, specially created organization,” which can be classified as a micro-enterprise. For them, a floating rate is more profitable and is used as part of project financing. Thus, when lending to housing projects, the rate consists of two components: the base rate, which is floating and is accrued on debt not covered by the funds of shareholders in escrow accounts (the lower the coverage, the higher the rate), and a special rate – a fixed interest accrued to the part of the debt covered by funds in escrow accounts.

In the case of commercial real estate, the Ministry of Finance explains, lending “is carried out with a certain margin of safety – this flow reserve may include a forecast for the growth of the key rate.”

According to the Ministry of Finance, fixed rates for developers will lead to an increase in the interest burden and, as a result, an increase in the cost per square meter of living space, rental rates for retailers and the cost of living when renting hotel rooms.

Chairman of the “Supports of Russia” committee for construction Mark Geller explains that developers create separate legal entities for almost every house for the duration of construction – such organizations have a minimum of employees and revenue at the first stage of construction, so during the construction period they can formally fall under micro-enterprises. Restrictions could lead to banks pledging their risk and, accordingly, rates for such construction organizations will be higher, he warns.

However, member of the General Council of Business Russia, General Director of Vlasta Invest Crimea LLC Lyudmila Lyubimova believes that limiting changes in rates not only for micro-businesses would be a “useful step” for construction companies – introducing a limit will help plan an increase in their costs.

General Director of JSC Yuginvestproekt Ilya Ponomarev does not believe that limiting changes in the floating rate will have a significant impact on builders, moreover, “financing real construction with loans at a floating rate is risky, given the long investment cycle.”

At the same time, Mr. Ponomarev says, the absence of restrictions creates a risk of “dumping” small contractors into significant financial risks, which, with an increased key rate, can become critical for small businesses.

Member of the Public Council under the Ministry of Construction, President of the Institute of Urban Economics Foundation Nadezhda Kosareva believes that the Ministry of Finance’s proposal is “clear and seems correct” – limiting the rate change will lead to an increase in the cost of the loan at the construction stage with a large volume of escrow funds attracted to accounts. “In other cases, which are also proposed not to be subject to restrictions, questions already arise,” she says, explaining that in these situations restrictions reduce risks for the borrower.

Evgenia Kryuchkova