Chairman of the Management Board of JSC Housing Construction Guarantee Fund Dauren ONAYEV:
WE WILL MITIGATE THE RISK OF PROBLEM CONSTRUCTION FACILITIES
The new Law on Co-investment in Housing Construction was put into effect a year ago in Kazakhstan. The Housing Construction Guarantee Fund has been established at Holding Baiterek in order to protect co-investors' rights. Currently there are already two projects - residential complexes in Astana and Almaty - which is given the fund's guarantee. Dauren ONAYEV, chairman of the Management Board of the Housing Construction Guarantee Fund talked in an interview with Interfax-Kazakhstan how co-funded housing would be developed in Kazakhstan construction under the state guarantee scheme, how much housing would be commissioned, and how the Fund protects co-investors' rights.
- The Fund is currently implementing two projects. When is housing to be commissioned under them?
- The first project for us is the Millennium Park residential complex in Astana, one section is under the Fund's guarantee. We expect that housing under the project will be commissioned in February 2018.
The second project is located in Almaty, this is the first phase, including 6 residential buildings of the Legend residential complex. The scheduled completion date is January 2019. Construction works are on schedule under both projects.
There are 178 flats in the section of the Millennium Park residential complex and 400 flats in the Legend residential complex.
- How many guarantees do you plan to give to developers by the end of the year?
- About 10 guarantees.
- The government has already said that Kazakhstan's GDP could have been higher if housing had been commissioned on time. Can your fund's activities have a difference on this matter?
- Within the framework of the Law on Co-investment in Housing Construction a mechanism is in effect in order to guarantee the construction completion and hand over readily available housing to individuals. We mitigate the risk of problem construction facilities and guarantee that they will not become problem [facilities].
The cause for problem facilities is the breach of housing commissioning deadlines, the bankruptcy of a developer or misuse of money.
The developer's bankruptcy may occur for various reasons, including those not linked with this particular facility, within the framework of the developer's other activities.
The misuse of funds is a relatively manageable risk due to the fact that we monitor the construction progress, targeted use of funds and developers. The law requires only one bank account to be credited with all funds - from a developer and from co-investors. We have access to it, we track all receipts and transfers.
Expenditures are executed only after confirmation of an independent engineering company. It monitors compliance with estimates, and moreover, initially, estimates must have a positive conclusion from a non-departmental experts. Thus, a misuse of funds if it occurs, is revealed within a week or two on the basis of certificates on [construction] works performed by a contractor.
The main risk is the delay in commissioning housing. In this case the laws allow developers to extend the period of housing commissioning 3 times for 3 months.
If the delay exceeds 9 months then a guarantee event occurs, a developer ceases to manage a project, and we become the trustee of the authorized company, as a rule, in the form of a private limited company that is created for this project. This company owns land or land use rights, owns all already constructed facilities, and we, managing this LLP, understand of how much money it is short in order to complete this construction. We provide the funding from our reserves.
Last year we received 10 billion tenge in additional capitalization and this year in a month and a half we will get another 10 billion tenge in additional capitalization. The Fund will have 20 billion tenge in order to settle such guarantee cases and complete construction [projects]. Approximately the average project value is 5 billion tenge -7 billion tenge (334 tenge/$1), that is, 20 billion tenge will be enough for the simultaneous settlement under at least 4-5 projects. However such change to the situation, according to our expert assessment, is unlikely. We quite strictly deal with the selection of a developer within the framework of regulations defined by the government.
- How does an engineering company’s monitoring of the housing quality and construction deadlines look like?
- An engineering company the Fund selects maintains a daily presence on the construction site and reports weekly. More detailed reports are made monthly. Both weekly and monthly reports are posted on our website - hgf.kz.
Our specialists make site visits no less often than once a week or two, and can oversee the construction progress jointly with builders and specialists and reconcile paperwork. We overview all expenditure and have completion works certificates handy. Everyone can find out how the project is being implemented.
A general contractor receives funds only upon submission of a completed work certificate, as a rule, on a weekly basis. Funding comes from a single bank account only upon confirmation by an engineering company.
- Do you somehow recommend that a developer work with which bank and with which it would be undesirable to work?
- There are no restrictions whatsoever. A developer notifies us of the selection of a bank and confirms that there are no bank accounts other than this account. Then we conclude a tripartite agreement: an authorized company- an engineering company- a bank – in order to overview transactions through the bank account.
- Is there a certain list of requirements for a developer?
- Undoubtedly. This is not about the license but about the legislative requirements.
The legislation stipulates a list of requirements that a developer, an authorized company and a project must follow and if it is the case the Fund decides to provide a guarantee.
Requirements for a developer: at least 3 years of construction experience and a housing commissioned area – at the time of construction in Astana and Almaty – should be no less than 18,000 square meters, in the other regions - no less than 9,000 square meters. Developers must also be breakeven for the last 2 years and all of their liabilities must not exceed their equity 7 times.
The main requirements for obtaining a guarantee: the availability of a land plot for a project - it could be owned or leased in the long term – for more than 5 years, a design and estimates with a positive conclusion from a comprehensive non-departmental expert team and the company's own funds in the form of money in the bank account or an incomplete construction site (10% -15% complete) with the possibility of starting the construction of a residential building - before co-investors’ money begins to be credited.
In addition, we assess a developer and a project in accordance with the bylaw entitled Methods for Defining the Guarantee Fee. This guideline is rating-based. These are 10 criteria, 7 of which are financial: sustainability, solvency and others. The other criteria are technical and legal. In 100 points a developer must score at least 60.
But the main thing is a developer’s financial sustainability. [In the past] all fraud-related issues have been linked to the fact that a developer has siphoned money off from a construction project, and therefore there has been not enough money to rectify shortcomings that have arisen.
- How do you assess the situation involving individuals’ money?
- If we talk about co-investments conceptually, not from the legal point of view, then money attraction was massive before 2010 and advertising was under way about many facilities under construction. Then co-investments, according to our unofficial data, accounted for about 60% of the entire housing construction market. Now the process hit bottom. Probably, we must pass through this in the next 3-4 years, rising from this bottom, in order to resume participation in the form of co-investment as a working mechanism for attracting money, for sustainability and diversification of funding sources.
It is interesting for developers, explicitly, from the point of view of profitability to raise funds already during the construction period - the need to borrow money from banks would be significantly reduced.
In addition, we see that now second tier banks are not interested in financing housing construction. There are no mortgages either.
- Almost no.
- Yes, almost no. Commercial banks view significant risks, and mortgage rates, respectively, are high. Therefore, the state comes up with initiatives, including those reflected in the program Nurly Zher [housing program].
The state tries to stimulate both demand and supply in the market. To give impetus to the mortgage scheme stimulating demand. The holding Baiterek’s funds are allocated through its subsidiaries for concessional lending. By stimulating supply the state subsidizes lending rates for developers, that is, the state, in fact, directly participates, by allocating a significant amount of financing to mitigate terms on lending for developers.
These measures cannot be long. This is an incentive for developers to rich the level of business without subsidies and for ensuring the appropriate housing commissioning tempo.
- Can the Housing Construction Saving Bank (HCSB) depositors come to you to become participants in the co-investment construction scheme?
- Yes, depositors can use money deposited with HCSB within the framework of the My Home program. If depositors are interested in a facility offered by a private developer, HCSB creates a pool of depositors and provides lending for the purchase of a stake in a residential building under construction. At the same time, HCSB does not put forward requirements for provision of additional collateral in the form of other immovable property.
- How much does an individual need to save?
- 50%. And then depositors can apply to purchase a flat.
- Interesting. After all, this is another option for those who want to save money for housing.
- Yes, moreover, the co-investment scheme is interesting due to the fact that housing can be bought at a reduced cost. That is, it is possible to acquire stake in a housing project under construction through Housing Construction Saving Bank’s low interest rate loans. In the long run, a flat would cost less.
- How much can you save to the maximum extent?
- No less than 20% of the cost compared to the purchase of readily available housing using a mortgage from a commercial bank.
- It seemed to me that the saving is more, thirty percent.
- I also think that more but my forecast is very cautious.
- Could you try to assess the solvency of the general population?
- This is of interest to us. If we abstract ourselves from the banking financing possibilities, few people can save up for a flat, even under the co-investment scheme. Therefore, we are talking about the need to expand the mortgage lending concept so that the general population can get loans to purchase co-funded housing. Ideally - 10% per annum at preferential rates offered by the [state] program Nurly Zher. The requirement for participation is 30% of the housing cost should be deposited.
For the time being this is a fairly adequate level that the state and the financial sector can jointly offer. It would be possible to talk about a reduction in rates as this scheme expands to achieve some volume.
- "As” means when? Can you specify?
- Hard to say. This is a question for the government, for the Ministry for Investments and Development, and the Ministry of National Economy, which, among other things, are in the process of devising and finalizing the program Nurly Zher. Everything depends on the 2017/2018 real indicators. Everything will depend on how much efficient will be he Nurly Zher mechanisms, what dynamics will be achieved, and which areas need to be strengthened. It is important for the government to draw right conclusions.
- How do you generally assess the situation in the construction sector?
- We observe that the housing construction market is on the rise despite construction resources being diverted for EXPO. Investments in housing construction in January-September 2017 increased by 7% to 591.3 billion tenge compared to January-September 2016. And an average of 10% growth per year was recorded from 2011 to 2016. The tempo secures growth of 0.7 square meters per person in Kazakhstan per year. In world practice, the UN housing standard is 30 square meters per person, we now have about 21 square meters. In order to reach the world standard, we need at least 20 years at a rate of 0.7 square meters per year. It is desirable to increase this rate to 1 square meter per person.
In the [first] 9 months of 2017 the number of residential property sale and purchase deals in Kazakhstan increased by 28.4% compared to the same period last year.
By the end of this year the Association of Kazakhstan’s Developers expects 32,000-35,000 deals or 20%-25% up from 2016. All the above mentioned data indicate that dynamics in the residential real estate market are positive. We believe that with participation of the Guarantee Fund against this backdrop the co-funded construction market is also becoming more active.
The movement of the market towards greater transparency and legitimacy is an important factor. The developers’ practice involving the application of prohibited types of contracts that envisage attraction of individuals' money must be stopped.
For example, citizens who have concluded investment contracts, agreements on assignment of claims rights, and others, ended up in situations unsecured by law that do not ensure transparency and proper distribution of risks between co-investors and developers. Now since October 10, 2016 these contracts have been prohibited by law. But many developers continue to use old practice. The prosecutors’ offices and other agencies crack down on legal violations. We know that developers find workarounds - they create various "agent services" and other schemes to attract co-investors’ money.
The Fund, for its part, is already creating conditions with the aim of developing a mechanism for guaranteeing and enhancing its attractiveness for developers. That is why the Fund decided to cut guarantee rates for developers. Previously, they were 2-6%, since October 2017 - 2% of the project cost less unfinished construction costs.
Moreover, in order to make it easier for developers to understand paperwork requirements we reduced all requirements to one bylaw Rules for the Review of Documents. This is a clear-cut, comprehensive list.
- Throughout this year the Fund has been offered more than 50 construction projects, and how many guarantee applications have been submitted by developers? Earlier you said that some developers failed to provide a package of documents or guarantee fees were high for them.
- I would focus the attention on the fact that drafting documents is a long, time-consuming process. The construction process in principle is very slow. From the moment of the project preparation by a developer prior to the conclusion of a contract for obtaining a guarantee may pass by no less than a year. Therefore, a number of companies that joined in the spring probably will not have time to get our guarantees by the end of the year. A number of companies are already close to reaching the final.
Two thirds of preparatory work required of a developer is to be done at the beginning of any construction [project]. In addition, this is an expert examination of estimates, and not only a design. This sometimes takes 2-3 months. Secondly, the requirement to audit financial statements since we cannot rely solely on the opinion of a developer. It takes no less than one more month. If the construction [work] is already started, then developers should evaluate its scope - hire an independent technical expert and submit to us their report on the evaluation of unfinished construction. Currently we have 10-15 such developers from Astana, Almaty and the regions: South Kazakhstan, North Kazakhstan, Karaganda, Aktobe regions and others.
I want to especially emphasize that after an application is admitted we take a decision on issuing a guarantee within 15 working days, that is, within a very short period of time. And a few days later we sign a contract.
The Fund has no objective to collect a pool of developers and guarantee facilities as soon as possible. The two projects – this is quite a lot.
- Something more to be desired.
- Yes, something more to be desired and there should be more, but the main reasons are related to the fact that the market itself is not yet ready to meet the requirements of law.
We are working; we are facilitating interaction with developers: we are improving and rectifying bylaws, we are arranging the application automated acceptance – work on submitting online applications is almost complete. Actually developers will need to provide only a few original documents; everything else will be downloaded online. Our portal in the information system Digital Baiterek is already working in test mode. I think that we will launch it before December.
In addition, we have a platform for interaction with developers - the Advisory Council on Improving the Guarantee Mechanism. Currently it has an expanded format - with participation of developers, representatives of the Prosecutor General's Office, ministries, administrations and associations.
We hear criticism from developers that the requirements are tough and we are trying to simplify procedures. Of course, simplification has its limits. To simplify unnecessarily means not to take into consideration any risks. This must not be allowed.
Developers must decide themselves where they will get funding. By law, 10-15% of the project cost, depending on whether the developers own land or have the land use rights should be their own.
We must reach that point when the bankers' trust in the developers start growing. Market mechanisms should start working thanks to the developers correctly assessing their strengths - it would be correct to find the balance between the developers' own funds, co-investors' funds and bank financing.
- Thank you for the interview!
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