An end of the free money era?
New Moscow is in the lead in Russia. These are the results of the first few months of the switch to a new escrow financing model.
Over the past 7 years, 8 new metro stations and 67 public facilities have opened their doors in Moscow, and over 200 kilometers of road have been constructed. Total construction investments amounted to 1.3 billion rubles. In two years, the price per square meter in New Moscow grew from 103,000 to 121,000 rubles – a figure that is expected to grow as new infrastructure in the form of metro lines, kindergartens, schools, and hospitals is erected. Vladimir Zhidkin, Head of the Department for the Development of New Territories, brought up these impressive numbers during a meeting with journalists.
Other experts also took part in the meeting, which was organized by Kommersant Publishing House. All of them confirmed that New Moscow has also become a leader among Russian regions using escrow accounts – a new model for financing construction projects. Mr. Zhidkin also admitted that major construction companies working in New Moscow have already switched to the new escrow accounts model, while smaller construction companies are experiencing some delays.
There are currently 168 projects underway in New Moscow with a total area of 7.3 million square meters. According to Vladimir Zhidkin, 95 of them – about 63% of all projects – are still using the old financing model.
“There are companies that have completed the switch to escrow accounts and it’s their policy, including the Moscow Mortgage Center. Overall, larger companies are switching to escrow accounts now, there are no problems with them. With smaller companies, I’m expecting a number of them to experience delays in switching to the escrow model,” he said.
The meeting took place in the Moscow City Business Center, inside the Insight restaurant on the 84th floor of the OKO Tower. It’s hard to imagine a better location for the event. The attendees walked away with a lot of inside information about what’s happening with the implementation of escrow accounts in Russia.
Deputy Chair of the Moscow Committee for Construction Investment Projects and Co-investment Agreements Alexander Goncharov noted that 25% of all construction companies are using the new model, while 75% of companies have yet to make the switch. He clarified that this ratio will not change by the end of the year. Aside from Moscow and Moscow Oblast, Sverdlovsk Oblast is also a leader in terms of escrow accounts. Since April 2018, Sberbank has approved 368 escrow transactions, primarily in Moscow and Moscow Oblast, as well as in Sverdlovsk Oblast.
Gasan Arhulaev, managing partner at GR Project Group, explained why other regions in Russia are lagging behind. “The rules of the game are clear in Moscow,” he said, “But as soon as you travel beyond the Moscow Ring Road…”. He also added that there is a lot less money in the regions, and major developers are leaving the regions more often.
As of July 1, 2019, Russian construction companies can no longer attract money from equity holders directly. Funds that have been invested by people to acquire housing will be kept in escrow accounts in banks, while construction is funded by bank loans. Construction companies will only be able to access funds invested by equity holders once the building is operating and the Unified State Register of Real Estate Rights and Transactions has registered the rights of ownership for the first apartment.
Companies whose projects meet the criteria for operational readiness and the amount of funds borrowed under equity agreements approved by the Russian government can use the old model, attracting funding directly.