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How to Stop Worrying and Love the Property Market ISSUE: 229 Remember that there is nothing stable in human affairs; therefore avoid undue elation in prosperity, or undue depression in adversity. - Socrates COVER How to Stop Worrying and Love the Property Market By Jim Hydzik Kyiv's commercial and residential property markets are hot topics. Commercial property here is the stuff of conferences, and there is one roughly every three months dedicated to just that topic. This isn't a surprise; the expertise gained in Prague, Warsaw and Moscow is to a greater or lesser degree applicable here, and Kyiv is following a variation on a lucrative theme. Ukraine's better commercial property consultants have picked up the know-how to interface with investors from all over the world. There are professionals operating on the market; what they do can be measured, and thus comprehended. The residential market, however, is the domain of roughly 30,000 amateurs, more than 99 percent of whom are running mainly on one factor: emotion. The educated hunch or genuine comparison with property already sold or rented occurs, and there is a tiny minority that is actually trying to improve the professionalism of residential property brokers. However, anyone considering investing in Kyiv's mass of dwellings needs to remember that market operators - buyers, sellers, brokers and appraisers - work in an unregulated system, and the overwhelming majority of them see no need to change. Bubble? What bubble? Warnings about a downturn in the residential market appear regularly. Dire warnings about corrections and collapses often follow significant rises in asking prices. And asking prices have been known to rise 10-20 percent in a month. "It's much harder to predict the residential market in Kyiv," says Ruslan Oleksenko, Managing Director of DEOL Partners, a Kyiv-based commercial property consultancy. "The methodology for measuring the market isn't there, and the players aren't professionals who look at whether a transaction makes good business sense." Some of what can be measured doesn't look good; some does. As Prof. Pavlo Prokopovych's article [see page 12, this issue] shows, the estimated average apartment price to average household income ratio in Kyiv grossly exceeds the most overpriced markets in the United States. However, remember this. Kyiv can be compared to Vilnius, Lithuania, in regard to basic demand for housing, as both capitals have roughly 25m2 per capita of living space, compared to 50m2 in Western Europe. Most of the existing housing was built in the 1960s, and had an expected useful lifespan of 20 years. In other words, a large percentage of Kyiv's housing should have been decommissioned when they were building the 4th block of the Chornobyl Nuclear Power Plant. It would take the delivery of 1.4 million square meters (the 2006 figure) yearly for 50 years to bring Kyiv to western European levels in this regard - and that is only the amount of space, not the quality of it. The pent up demand far outstrips what Prokopovych shows is quite inelastic supply. How this demand is met, and paid for, are two separate issues, but the demand objectively exists. Welcome to Kyiv Just as the ultimate weather forecast is, "there will be periods of sunshine and rain, off and on, for a long, long time", one can expect the price of apartments in Kyiv to go up and down for the foreseeable future. "We've been hearing about a burst in London for about 20 years," says Gerald Bowers, President of the British Ukrainian Chamber of Commerce. "And property is still going up by a thousand pounds a month there." Alex Frishberg, in law practice in Kyiv for most of Ukraine's period of independence, agrees that a bubble burst isn't in the offing. "If you compare Kyiv with Moscow, even with some adjustments for the fact that we're in Kyiv and not Moscow, there's room for growth." Frishberg says that prime locations in Moscow are fetching US $ 10,000 per square meter. "The best places in Kyiv are currently at US $ 5,000 per square meter. US $ 6-8,000 isn't unrealistic in the future here." On the other hand, Kyiv is neither London nor Moscow. While investors will find parallels in the commercial property landscape in other European capitals, the secondary market for dwellings is more of its own animal when it comes to human behavior. This is stressed by Artyr Ohanesian, general director of Parker and Obolenskiy, a Kyiv-based realtor. "Downturns are part of business cycles. Kyiv has had three downturns since independence, and will continue to have them as well. But the factor that starts it will probably be something that strikes the hearts of the non-professionals on the market - politics, an economic factor, or even Ukraine's relationship with Russia." Legal issues and the hostile system Stories about new buyers waking up in the middle of the night to find the brick police demanding the papers showing that they have the right to the bricks in the walls are just that: stories. The legal framework for buying a dwelling is amazingly cut-and-dried, and need not present a problem. This same legal framework, though, helped shape the residential market, as Kyiv knows it today. In the early 1990s, when the system was being put in place, realtors were seen as, and needed to be, akin to lawyers who specialized in ensuring the legality of the purchase. "At the same time, realtors decided that it was easier to get commissions from the buyer, since the seller would often be hard to find afterward, or would be moving abroad. It was easier to knock on the door of the place that the realtor just sold and try to collect," Ohanesian points out. This led to a real estate sales system in which the broker is actually at odds with the buyer, who he is supposed to represent. The broker wants the highest possible selling price because he is getting a commission, and is supposed to make use of his knowledge and the legal requirements to that end. However, his client, the buyer, normally wants the lowest price for the services rendered. This has led to a peculiar set of circumstances. First, the use of a commission made more sense at the end of the last market downturn, in 2001-2002, when most apartments in Kyiv were selling for US $50-70,000. "A 5 percent commission wasn't a problem then, but now the same commission can run up to US $20,000 for the same amount of work. Why? The worst legal problems regarding housing are almost always solvable for US $2,000 in a good lawyer's office," Ohanesian emphasizes. Second, because brokers and sellers rarely have a working relationship, there is absolutely no incentive on either part to represent the property accurately. This author's experience includes examining an 'almost Euro-renovated' apartment near Holosivskiy Park. After seeing the old windows, 10-year old carpets and open-market furniture, the realtor, who shall go nameless, was asked why he thought this counted as a renovated apartment. "This was the description the owners gave me over the telephone. I've never seen it before," was the reply. Very, very few real estate brokers in Kyiv make the effort to examine a listing before hawking it, and even for the ones that do, hidden faults are likely to remain just that - hidden, as the owners have no reason to disclose problems. The rest of the crew Unprofessional assessments performed by unregulated operators are open to interpretation. This will include a majority of assessments, since the first question the assessor will ask the homeowner is, "How much do you want it to be worth?" "A professional will need only 5-10 minutes to tear apart an improper assessment," Ohanesian points out, "and luckily, there are some pros doing this kind of work. But not many." When it comes time to close, a notary is required. This is unusual, not because notaries are unusual, but in Ukraine, these people have extraordinary powers and responsibilities related to real estate sales. This came to a head in January 2005, as a new law made notaries criminally responsible for the accurate payment of taxes on the resale of residential real estate units. However, the formulation of the tax calculation was open to interpretation, and no clarification was given by the State Tax Authority (STA). The secondary market plummeted by 75 percent in sales volume. In February 2005, the STA had to issue a formal note addressing the issue, with the effect of temporarily lifting the regulation. A revised law was passed in early 2006, and by 2008, a property tax on the profit from the resale of higher-value flats will come into place. "Now, instead of minimized official prices in order to keep current taxes low, we're seeing actual purchase prices listed in order to minimize future taxes," Ohanesian explains. He advises that any agent hired not only work for the buyer's interest, but has a good notary in mind. "Notaries are number one when it comes to closing a deal. They are responsible for ensuring that the paperwork is in order." The one bright spot in the whole process of buying an apartment is that corruption by officials is generally low, or at least not endemic and systematic. "Changes in the city administration can snag property developers, as a new committee can decide that their predecessors didn't do something correctly, which serves as a mask for corruption. Fortunately, this isn't a problem with buying an apartment," Ohanesian says. "However, the government holds the information regarding real estate purchases, and won't share it with anyone, as opposed to the open computer-assisted systems in the United States." Unwary buyers tend to find themselves at the mercy of realtors instead. "There are two main problems that a buyer will overpay for. The first is information. Many realtors will expect a prospective buyer to sign a contract to engage his services without even disclosing an address or describing an apartment that the buyer hasn't even seen yet. This is unnecessary, " Ohanesian laments. "The second, and I can't stress it enough, is the legal aspect of the transaction. The work is cut and dried, and collecting the documents is the realtor's primary responsibility. It shouldn't cost what most realtors charge." Will it change? Currently, there are over 100,000 realtors in Ukraine. However, the largest realtor organization, the Ukrainian Realtor's Association, has only 600 members. While some members are calling for the creation of standards, accreditation, and even licensing by the government, the overwhelming majority of market operators are uninterested in such changes. The Ukrainian Union of Real Estate Specialists represents owners and directors of real estate companies, and sees itself as a lobbying force, but is not actively interested in certification or strong state regulation. Still, some realtors are interested in changing the landscape of the residential market. Ohanesian has conducted 33 master classes on selling via exclusive seller rights in Russia and Ukraine. Both Ohanesian and Frishberg say that buying an apartment in Kyiv can and should be a relatively straightforward process for someone who does their homework. "Get a full set of documents," Frishberg emphasizes, "and remember that you can buy an apartment yourself. It used to be a popular scam to tell foreigners that only Ukrainians could own real estate here, and con the gullible into buying a place for them." Ohanseian concludes, "Spend a lot of time looking, and find someone willing to take the time to give you advice. In this case, advice is valuable, raw information isn't." How to keep your home Most Ukrainian law firms have prepared and will make available to clients a list of the documents that are most important for relatively trouble-free home ownership. The following is an example of the documents that are needed to make sure that your residential real estate purchase stays in your hands. This particular list was provided by Frishberg and Partners and is reprinted here by permission: "To avoid the various pitfalls, any potential purchaser or lessee must insist on reviewing the background documentation which serves as the ultimate proof of ownership. The various documents include: sale-purchase agreement, gift agreement or privatization certificate for the property; "technical characteristic" certificate from the Kyiv City Bureau of Technical Inventory; and certificate from any licensed notary public that the property is not secured by collateral or subject to encumbrances (i.e., it has no liens or "arrests" placed on it). "Other documents may be necessary, such as a waiver of the children's rights to the property. In case the alleged owner is a legal entity, the seller's foundation documents, among other documents, are most helpful. Of course, if the alleged owner is a physical person (individual), his/her passport must be verified." Read also previous issue' articles: Tourism: Ukraine's Greatest Lost OpportunityCars, Cars - and More CarsThe Long Slide Into InstabilitySex, Money and the Modern DachaSeparating Chornobyl Fact and FictionThe Observer's "Persons of the Year" 2006 CONTACT US UKRAINIAN DAYBOOK Events, Facts, News from Ukraine Strategic Approaches The Willard Group's monthly newslette UKRAINE UPDATE The Ukrainian Observer provides daily news headlines and briefs Monday through Friday. COVER How to Stop Worrying and Love the Property Market COLUMNISTS THE WORK PLACE: The Office Romance RANDOM NOTES: A Presidential Primer: I Want to Be President THE EAR: Old Bad Habits Crop Up Again in Government Farm Policy DIALOGUE AND DEBATE Downfall of a President? 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