The Analytical Center must become the main venue for interdepartmental cooperation during the introduction of FZ No. 175 in the construction sector

30 october 2018

That was the proposal that Anastasia Alekhnovich, the Head of the Expert Center of the Authorized Representative of the President for the Protection of the Rights of Entrepreneurs, made at a meeting of the subgroup for cluster policy and territorial-industry projects of the Residential Housing Construction, Housing and Utilities and Infrastructure Development sector of the Interdepartmental Work Group for the development of a road map for ensuring sustainable economic development of the non-resource sector of the Russian economy.

Federal Law No. 175 came into effect on July 1, 2018. It amends the Law "About participation in shared-equity construction of apartment houses and other real estate objects and about modification of some legal acts of the Russian Federation". Under the new regulations, all developers must have banks oversee their deals. Developers must open a bank account for every construction permit with an authorized bank. During the transitional period between July 1, 2018 and June 30, 2019 the old mechanism of raising finances from the public for building new housing will be used alongside the new mechanism utilizing special escrow accounts that the money of the equity holders will be kept in. Should the developer go bankrupt, equity holders will be able to get their money back from the escrow account.

Analysis of economic consequences found that simply banning the current model of financing residential housing construction without offering a viable alternative would result in drastic socio-economic consequences. "Seeing how the industry is going to spend an extra 10% on the escrow accounts, the profitability of development companies involved in residential housing construction will fall to negative 8.2%. We believe it can bring about a number of serious economic effects by 2024 such as a drastic reduction in residential housing construction and a sharp increase in the number of people who have paid into projects that were never completed, " Anastasia Alekhnovich explained. "In addition, the banking system is simply not ready for the new system and that will bring a grinding halt comprehensive territorial development projects, projects to move people from run-down and dangerous housing, with the state having to pay for the completion of mothballed projects."

Experts are of the opinion that in order to reduce the risks of the transitional period a new bill needs to be submitted to the State Duma by the Russian government that would suspend the effect of Federal Law No. 175-FZ of July 1, 2018 (until July 1, 2019). Work must also be started with representatives of the construction industry, the Bank of Russia and the banking community as a whole to look for solutions to streamline interaction for the target models. The Analytical Center should serve as the main venue for expert discussions.

Ms Alekhnovich noted that the residential housing construction sector is a locomotive of the economy capable of making a sizeable contribution to economic growth so it was vital that steps be taken to ensure smooth and effective running of the sector. The result of these efforts will be the road map.

In addition, as part of the efforts to develop the road map, the Residential Housing and Urban Environment national project will be expanded and fleshed out with more details.

The national project is to be implemented in 2019-2024 and envisions provision of affordable housing to middle income families in a number of ways, including through affordable mortgages at rates of less than 8% per year.

The project also calls for residential housing construction to increase to at least 120 million square meters per year, improving the urban environments and significantly reducing the amount of run-down housing.