State Actions for the Construction Business

Though the war in Ukraine goes on, it would be hasty and incorrect to say that the real estate market in Ukraine has come to a standstill. Even before the Russian Federation’s full-scale invasion of Ukraine, the construction business had already begun to demand transparent rules of the game from the state: from the registration of rights to land plots to state registration of newly-constructed facilities in the State Register of Rights. In this regard, the processes of reforming architectural and construction control bodies and changing urban planning legislation began. The active phase of these processes took place and continues to take place in the context of the Russian Federation’s large-scale aggression against Ukraine.

As we know, many Ukrainians have lost their homes due to their destruction as a result of Russia’s hostilities. To support the remaining population in Ukraine and facilitate the return of those who have moved abroad, the government is trying to create support programs that provide affordable mortgage lending as well as compensation for damaged or destroyed houses resulting from hostilities in Ukraine. The implementation of the above programs has a direct impact on the real estate market, as it increases demand for property.

In summary, the following topics are relevant in the Ukrainian real estate market:

1) reform of urban planning and transformation of the rules of the game on the real estate market;

2) amendments to legislation on investment in residential property;

3) compensation programs for damaged or destroyed housing;

4) affordable mortgage lending.

We will discuss the main points of each of the above-named topics below.

Reform of urban planning and transformation of the rules of the game on the real estate market

At the end of 2022, the Verkhovna Rada of Ukraine (Parliament) adopted Draft Law No. 5655 On Amendments to Certain Legislative Acts of Ukraine Concerning the Reform of the Sphere of Urban Development, which has been awaiting the signature of the President of Ukraine for more than a year. The aim of the draft law was to ensure the implementation of reform of state regulation in the field of urban development by reducing corruption risks in the provision of administrative services, making such services public, building a transparent and effective system of control of urban development and supervising of state urban development (in particular, to delineate the powers of control and supervision bodies in the field of urban development), applying the principle of alternative choice of urban development control body, etc.

In short, the draft law is partly aimed at digitalising and automating key processes in urban development, where developers are not required to communicate with representatives of controlling authorities in person. It is assumed that the processes in the field of urban development should become transparent and automated. Since the draft law has been pending for a long time, some business communities have called on the President of Ukraine to sign it as soon as possible, citing its urgency and effectiveness.

However, the draft law as adopted has many opponents, including international institutions and public associations. Particular concerns relate to the issue of depriving local authorities of the power to control the development of settlements and the possibility of a choice of controlling authority.

Given that the President of Ukraine has not yet decided the fate of this draft law, the reforming construction industry continues to be under the government’s control, which has the right to carry out experiments in the urban planning sector. Since there is no final decision on the draft law, it is too early to talk about any specific changes.

Although 2023 was not a breakthrough year in terms of reforming urban planning legislation, several anticipated regulations were adopted in 2023 that set the rules of the game for developers. 

Amendments to legislation on investment in residential property

Law of Ukraine No. 2518-VIII On Guaranteeing Property Rights to Real Estate Objects to be Constructed in the Future came into force on 10 October 2022. This law defines the specifics of civil turnover of real estate under construction and future real estate objects and is aimed at guaranteeing property rights to such objects.

The adoption of the law has complicated the activities of builders and developers, who started new construction projects after the law came into force, as well as those who wished to work under the new rules regardless the start date of the construction project. The justification of such complications for business, especially in times of war, is explained by the fact that the law is primarily intended to protect the rights of real estate investors and guarantee their acquisition of ownership of newly-created properties in the future.

Moreover, there was uncertainty on the real estate market for a while as to whether the old schemes for raising funds from investors for the construction of residential property could be used. Within almost one year after the law came into force, the Government adapted the State Register of Rights to permit the registration of special property rights therein and adopted resolutions to implement the law.

The law introduced the definition of a special property right to real estate under construction and future real estate objects, provided for the specifics of their circulation, including mandatory registration in the State Register of Rights, introduced a guarantee share of the construction of real estate objects, which is subject to encumbrance before the object is put into operation in case of insolvency of the customer/developer of the construction (Decree of the Cabinet of Ministers of Ukraine On Determining the Minimum Amount of the Guarantee Share in the Construction of Real Estate Objects sets the minimum amount of the guaranteed share for the cities of Kyiv, Dnipro, Lviv, Odesa and Kharkiv at the level of 10% of the total area of future real estate objects; for other settlements it is 5%). The law also regulates cooperation between the developer, construction customer and private investor, as well as the formalisation of contractual relations between them.

In general, the government views the law as a guarantee of the rights of private investors who raise funds for real estate construction. This statement can be seen in the extension of the law to compensation programs for the population whose property was damaged as a result of military operations. 

Compensation programs for damaged or destroyed housing

Law of Ukraine No. 2923-IX On Compensation for Damage and Destruction of Certain Categories of Real Estate as a Result of Hostilities, Terrorist Acts, Sabotage Caused by the Armed Aggression of the Russian Federation against Ukraine and the State Register of Property Damaged and Destroyed as a Result of Hostilities, Terrorist Acts, Sabotage Caused by the Armed Aggression of the Russian Federation against Ukraine came into force on 22 May 2023. The title of the law makes it clear that the scope of its regulation is the provision of compensation for damage and destruction of certain categories of real estate as a result of hostilities, terrorist acts, sabotage caused by the armed aggression of the Russian Federation against Ukraine. Individuals are entitled to compensation under the law.

The compensation procedure can be divided into two separate groups: (1) compensation for damaged housing; and (2) compensation for destroyed housing. The issue of compensation is quite sensitive in times of war. Therefore, the authorities have developed a fairly consistent and transparent mechanism to record damage and to calculate and pay out compensation. This mechanism is trusted by international institutions, which are regular donors of compensation for damaged and destroyed real estate.

The conditions for receiving aid for the restoration of damaged housing are: (1) the property was damaged as a result of hostilities after 24 February 2022; (2) the property is located in unoccupied territory where active hostilities are not taking place; (3) the property was not repaired by the owner; (4) the property is subject to restoration. The maximum amount of compensation is UAH 350,000 (for owners of apartments) and UAH 500,000 (for owners of private houses).

The conditions for receiving aid in the event of property destruction are: (1) the property was destroyed as a result of hostilities after 24 February 2022; (2) the property is located in the territory that was not occupied before 24 February 2022; (3) the property cannot be restored; (4) the property has an owner. The compensation program for destroyed property shall be implemented in two stages: certificates for the purchase of new housing shall be issued first, and later payments for independent reconstruction shall be introduced. Whereas compensation for damaged housing consists of receiving funds to a special bank account, the result of assistance for destroyed housing is a certificate for the purchase of new housing. The amount of assistance is calculated by a special commission based on an approved formula (currently, the average size of a housing certificate is about UAH 2 million). The certificate is valid for 5 years from the date of receipt. In addition, a person refuses receipt of reparation costs of destroyed housing if he/she receives a certificate for the purchase of new housing.

You can purchase not only housing that has already been built, but also an object under construction. An object under construction can be purchased with the funds of a housing certificate only if there is a state registration of a special property right to such an object in the State Register of Rights in accordance with the Law of Ukraine No. 2518-VIII On Guaranteeing Property Rights to Real Estate Objects to be Constructed in the Future. Thus, the government prohibits the use of housing certificates to those developers who use other schemes to raise funds from the public for construction. Nevertheless, there are still many such developers. 

Affordable mortgage lending

The state program eOselya (affordable mortgage lending program) was launched in October 2022 for certain categories of citizens, and in 2023 almost all Ukrainian citizens who do not possess their own housing were able to take advantage of this program. The main goal of affordable mortgage lending is to improve the housing conditions of Ukrainian citizens by providing them with the opportunity to purchase real estate on preferential terms. The features of affordable mortgage lending were defined by the Decree of the Cabinet of Ministers of Ukraine Some Issues of Providing Affordable Mortgage Lending to Citizens of Ukraine by the Private JSC Ukrainian Financial Housing Company.

It is obvious that the financial capabilities of Ukrainians have been reduced due to Russia’s war. So as to encourage people to stay in Ukraine and return here, thereby strengthening the economy and preserving the Ukrainian nation, the government introduces affordable mortgage lending.

The state program eOselya can be used by: (1) military personnel and law-enforcement officers; (2) healthcare professionals; (3) academics; (4) scientists; (5) war veterans and their families, combatants, etc.; (6) internally displaced persons; (7) all other citizens who do not own their own housing. The interest rate on the loan will be 3% for the first four categories, for all others it is 7%. Moreover, certain territorial communities have decided to cover the interest payable on the loan at the expense of such communities (the majority of such initiatives relate exclusively to military personnel).

The state programs for affordable mortgage lending and compensation for destroyed housing were combined recently, which means that citizens of Ukraine can use housing certificates to purchase housing under the eOselya program and take out a loan at a reduced rate for the remaining funds.

Thus, despite the decline in the purchasing power of the population, government support programs are expected to stimulate the residential property market, especially in the longer term, when the situation becomes more predictable in relation to the security situation in the country. It is anticipated that as the attractiveness of government programs to provide the population with residential property increases, developers should become more active and, as a result, the level of investment in real estate should increase.