Investor Guide: How to Minimize Investment Risk in Real Estate

The second wave of coronavirus pandemic, a changeable year and incertitude are the challenges that the investors face. At the same time, the wish to invest and make money off it remains. However, it is necessary to decide upon the investment direction.

Why it is worth investing in real estate notwithstanding the recent high-profile scandals at this market? What is the best way to estimate all risks? Dmytro Ovsii, Managing Partner, Attorney at law at GORO legal answered these questions to Mind.

You may also learn about what assets are worth investing in and what are not worthwhile from the Developers’ Reliability Rating, offered by Mind.

For centuries the Chinese used an ancient curse: "May you live in interesting times!" The generation of main investors was born, has been grown up and keeps on living in such times.

After the decline of Ukrbud and Arkada no illusions have left – every business is sinkable. Bank deposits are totally insecure and low-margin. Investment in a start-up or operating business may be super profitable, however, it is not also secured with hard assets. Besides, the risk to back the wrong horse is much higher.

Nevertheless, there still are some assets that are worth investing in. The real estate may become the golden mean among security, liquidity and profitability. The demand in this market keeps growing. According to the official statisticsof the capital city, in 2019 in Kyiv there were put into operation 1 113 986 sq.m. The number of meters per person in Kyiv is 22 sq.m. Even though the number of meters per person in Europe is > 40 sq.m., it means that we have great potential for growth.

At present, the deficit in space per person is from 18 sq.m. Considering the fact that the population of Kyiv (according to the data provided by the State Statistics Service of Ukraine) is 2 923 641 people, an absolute deficit for the total population of the capital city is 52 625 538 sq.m. Thus only the official deficit with the present-day pace of construction will be eliminated only in 29 years.

Keep in mind that following unofficial statisticsthe population of Kyiv, according to different estimates is from 4 to 5 million people. The real deficit of square meters is obviously much higher. At the same time, the dynamic pattern of the average price for a square meter in Kyiv for 12 months is +14,3%.

And it does not matter whether we talk about the purchase of one apartment, financial pooling and investment in real estate by a group (crowdfunding) or about collective investments through an investment fund. Anyway, the investments need to be checked and protected.

Advantages and disadvantages of investing in “square meters”

The advantages of real estate purchase are as follows:

• the possibility to use the assets for own needs;
• receipt of hard assets (the investment is secured);
• the profitability is higher in comparison with the alternative investment instruments.

However, there are some disadvantages, among them are as follows:

• stagnation of the real estate market;
• mistake when choosing the real estate property (low liquidity or even worse – «pyramid»);
• construction freeze/ incomplete construction (in Kyiv – Ukrbud, Arkada etc).

Legal investment formula

The purchasers often keep themselves informed about the situation from forums and Google. However, there may be often found the activity of internet bots representing unscrupulous developers, showing beautiful pictures of “a promising future”. Everything is aimed at attracting new victims to their projects. However, if somebody is a skillful marketing specialist it does not mean that he or she is also an experienced developer.

Herewith, many problems of the investors we started with could be avoided if we made assurance double sure and involved specialists.

The later know the chicaneries of legislation and are specialized in checking the real estate property – are up to speed on urban planning documentation, registers, have an access to court rulings etc.

At the same time to control risks, the investor may take some independent steps.

What should be focused on when investing:

• payment is directed to the intermediary with no assets, who has nothing in common with the construction;
• the analysis of the developer’s intentions gave no positive results. There are some defects in planning and building permits;
• ridiculously cheap. Especially if the price is close to construction costs;
• availability of bankruptcy case;
• judicial or criminal cases;
• political factors. Founders or beneficiaries are related to policy;
• part of the settlement is in cash. Money is paid to the company or a person who has nothing in common with the construction.

Checklist for the algorithm of the real estate property analysis:

• check the land title: ownership, lease, superficies, investment agreement etc. It is necessary to pay attention to the land category, designated purpose and kind of land use;
• check the right in a design: city-planning conditions and restrictions and technical specifications. It is necessary to pay attention to the function of the territory according to the general layout and comprehensive plan of the territory;
• expert evaluation of the design documentation. It is necessary to pay attention to the fact whether all the floors are included, the name of the real estate property, number of apartments, parking lots;
• check the building permit. It is necessary to pay attention to the customer and general contractor;
• check the register of judicial decisions: actions against the participants of the construction and criminal proceedings: search, arrest;
• availability of proceeding in execution, sequestration of assets, in particular tax liens.

Study the agreement with a view to:

• the right of the Party to unilateral termination;
• possible fines and sanctions;
• the moment of transfer of rights to the investment instrument;
• the process of measurement after putting into operation and additional payment;
• change of investor;
• inheritance of rights under the agreement;
• availability of liabilities in signatories;
• relations between the party (parties) of the agreement and real participants of the construction. There may be a direct relationship through the intermediaries (for example, investment funds), which is absent.

What to do with risks?

If in the course of analysis there were detected some risks, it would be great (if possible) to:

• introduce changes to the agreement to level the balance and shift it in favour of the investor;
• add the warranties to the agreement concerning the detected risks, at least receive warranty letters;
• get securing obligations from the companies – immediate participants of the construction process (specified in the permits) or the companies with risk assets. Both in the form of surety and security of discharged liabilities are possible;
• it is much easier to achieve preferences if you buy some property units or make an investment as a group.

Investment control and protection

After concluding the agreement, don’t forget to control and monitor the construction process:

• monitor the court register (it is possible to do it using youcontrol, opendata services) and control the appearance of possible problems with judicial processes;
• carry out control over the register of the companies (control over cost sheet, founders and beneficiaries);
• control over the construction business. It is possible to perform face-to-face check in the course of which it would be possible to familiarize yourself with the construction process in person, architectural and technical supervision logs.

I hope that this advice will help you to make the right choice when investing and to control group investments.