Real Estate Fraud: How Ukrainians pay for flats that don't exist

The real estate market in Ukraine is a challenging one. Thousands of Ukrainians buy a flat every year in newly constructed houses or houses that is only under construction. Yet, since 90s the same problems exist, namely companies use different methods to attract investments and stop building.

Currently, there more than half of a hundred unfinished buildings in Kyiv that were abandoned by the construction companies. Most of them were built without either licensing documents or rights for land usage. Allmost 40 of them belong to the notoriously known developer company UkoGroup, which had dozens of child companies in Kyiv. It was created by the Ukrainian businessman Anatoliy Voystekhovsky, who is now under criminal charges.

One of the examples is the “Pearl of Troieshchyna”, a residential complex started by UkoGroup in 2013. In July 2016 all works were suddenly finished, leaving 800 people without their property. The worst - most of them paid full cost of flats that yet have to be built.

Volodymyr Kharchenko is one of them. He is a leader of the initiative group and a head of the NGO “Our Pearl”, which plans to continue constructions. He bought a flat here in 2014 and planned to have a housewarming party before last New Year’s Eve. But he still waits for when the deadlock would be broken.

What Law Says

Ukrainian real estate market is regulated by several laws, first of all by the Civil Code, the Commercial Code, the Law on Investment Activity and some others. They determine what kind of documents companies must have to start construction, post-construction activities and how to raise funds.

According to the real estate lawyer Vladyslav Kysil, Ukrainian legislation established five main parameters every development company must meet.

First, they must have properly assigned land parcel, namely in ownership or, what usually happens, in rent. Second, developers must receive licenses that give rights to build on this land. Third, the projects must be officially verified and adopted. The last helps to avoid the violation of the general plan of the city. Fourth, they should build in accordance with the construction standards, which are specified in technical documentation. For example, the Law on the Regulation of Urban Development specifies the planning of the territory, activities of the development companies and rights and obligations of the state institutions working in this field.

Moreover, there is a set of requirements which concern investments into construction process. The Law on Investment Activity defines three investment models. “Those three ways are construction financing funds (usually banks), asset management companies and trust bonds,” Kysil explains.

Most Common Violations

There is a set of problems facing Ukrainian real estate market today. “The first problem is that many buildings haven’t been finished. The second one is that we don’t have any effective control over construction activities,” Oleksandr Bosenko, a lawyer at the Union of Investors Protection told.

Vladyslav Kysil lists a range of possible violations developers can have: “They simplify the complexity of a project or they divide a project into several projects and each of them is considered as a simple project, even though it is one big project”. He explains that the bigger project would be, the more documents and expertises it needs. Every huge project have to be carefully analysed and only after a decision by the empowered state authority a company may start construction works.

And this is where the real problem lies. Vladyslav Kysil stipulates that state authorities do not fulfill their obligations. For example, all the licensing activities in Ukraine is done by the State Architectural and Construction Inspection. Its obligations also include verifying real estate projects, approve or disapprove them, monitor their implementation etc. On the contrary, Kysil says that it only grants licenses without even checking those projects. As a result, many of them are built with violations.

“This Inspection does not fulfill its function of urban construction police. It only receives money from the developers,” Kysil said, noting that this is a corrupt institution.

The Inspection refused to comment on this issue.

According to him, many cases of abandoned buildings could be prevented, if this Inspection performed its duties, namely functioned as a construction urban police. “This would reduce the number of illegal buildings to the minimum,” he presumes.

The Main Architect in Kyiv Oleksandr Svystunov acknowledges the problem. He confirms that such companies as UkoGroup developed its projects without documents or with only some documents. At the same time he thinks that fighting them is not an easy task.

“They are arrogant people, who don’t obey the law and believe that this can last forever. They make money selling apartments in buildings without proper documents. It is very difficult to fight, but possible,” he says.

Some development companies like UkoGroup violate the general plan of the city. They can build a house in an industrial area or in a place where a park was planned. This worsens situation, because either a city has to change a general plan or a building must be demolished.

Nevertheless, Oleksandr Svystunov says that the situation started to change. “Now, people started to come to the city council, show their preliminary projects and consult how to do better. I am very pleased when young architects come and show their work. Of course, there are some mistakes, but usually, they are structurally correct and professional,” architect stressed.

The third problem lies in raising funds. Despite the fact that the Law on Investment Activity defines only three possible ways how companies can attract investments, more than 70% of them, says Kysil, work with other methods. “Developers and investors usually conclude investment treaties, preliminary treaties or contracts on the sale of property rights,” he says.

Oleksandr Bosenko agrees. Many investors, who come to him, usually conclude those types of treaties. They provide the least possible degree of protection for investors. One of worst treaties is a preliminary treaty. Bosenko explains that according to it a developer promises to build a flat and to give it to the investor in the future, but its obligations are very fluid. Volodymyr Kharchenko was among those investors who concluded such a treaty.

What will change?

Real estate experts and lawyers emphasize that several steps must be done.

First, Ukraine must adopt a State Register of Property Rights for immovable property. This register will include information about owners of property rights of flats in unfinished buildings. “Every investor will be in this register and only this person will be able to receive a flat. Therefore, we eliminate the possibility of double sales, which take place very often,” Kysil justifies the idea.

Secondly, a general plan of the city has to be updated and publicly available. Easy access to the plan will help to avoid such problems as construction in recreation areas.

Third, the State Architectural and Construction Inspection must be reformed. For instance, every inspector who has a right to issue licenses must be personally responsible for corrupt acts. Moreover, the essence of the inspection must reformed. It must be not just a supervisory institution, but a construction urban police.

Nonetheless, this situation will soon change. According to the newly adopted law, developers won’t have a chance to manipulate with the projects. For example, from July 2017 every building with four floors and more will be considered as an object with substantial class of effects. It means that the developers will have to receive a right for construction. Today, they can build even without a permission by only submitting a declaration of intent.

Kyiv city council also plans to help investors. In 2017, it will launch several online tools helping residents and prospective investors to follow information about all of the legal and illegal objects in Kyiv. Oleksandr Svystunov believes this will halt the practice of illegal constructions in large scale and will help to resolve disputes over currently frozen projects.

Volodymyr Kharchenko also believes that the Kyiv City Council will soon help him and others from the “Pearl of Troieshchyna” to continue construction works. Otherwise, he and other investors will not vote for Klychko next local elections.

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