A bill allowing the construction of private homes using escrow accounts has been adopted by the State Duma and is due to enter into force from March next year. Market players hope that the remaining time will be enough to work out all the details of the new mechanism
The bill prepared by the Ministry of Construction on the use of escrow accounts in the segment of individual housing construction was adopted by the State Duma in the third reading (we are talking about bill No. 471420-8 “On the construction of residential buildings under construction contracts using escrow accounts”). This event can be called a long-awaited one. According to the official press release of the Ministry of Construction*, “the mechanism prescribed in the new law provides for the attraction of funds from citizens for the construction of private houses under construction contracts using escrow accounts in settlements with an organization engaged in such construction, and the regulation of legal relations arising from such attraction of funds.”
“We have developed a significant regulatory framework aimed at creating a mechanism for the use of escrow accounts in settlements with organizations engaged in the construction of individual residential buildings under contracts concluded with individuals. We strive to balance the interests of citizens and businesses: the adoption of the bill will protect people’s funds from the risks of non-fulfillment of obligations by contractors, minimize the possibility of incomplete construction of the facility, increase the availability of private homes, and create guaranteed demand for businesses. All this is aimed at ensuring that more families can improve their living conditions,” says State Secretary – Deputy Minister of Construction and Housing of the Russian Federation Yuri Mutsenek.
As in the case of apartment buildings, the use of an escrow account ensures the protection of citizens’ funds, since the contractor will receive payment only after completion of construction. In addition, this account will be insured by the Deposit Insurance Agency Group of Companies in the amount of up to 10 million rubles.
It is important that the construction of houses subject to the new law should be carried out using house kits or a standard project. The Ministry of Construction is confident that this mechanism will increase the demand for residential housing among citizens, and the use of standard projects or house kits will contribute to the creation of collateral understandable to creditors, which in turn will lead to a new stage in the development of the residential housing mortgage market. In addition, the entry into force of the law (it is assumed that this will happen on March 1, 2025) will stimulate the production of house kits, which will provide additional development of the domestic wood and metalworking industry.
“The demand for private homes is growing, in the first five months of this year, the share of loans for the purchase and creation of individual residential buildings amounted to 17.8% of the total mortgage volume. With the adoption of this bill, banks will have a clear collateral, it will be easier to take out a mortgage under one of the mortgage programs with state support, the market will become civilized, and the number of loans will increase. Together with the Ministry of Industry and Trade of Russia, we are developing industrial housing construction in this segment: in addition to using escrow accounts, we will “whitewash” demand as much as possible through the use of standard projects and house kits. This will make private housing construction more understandable for people, developers and the banking sector,” says Nikita Stasishin, Deputy Head of the Ministry of Construction.
However, the mechanism prescribed in the law will be optional. In other words, it will not deprive citizens of the opportunity to purchase, and contractors to carry out the construction of residential housing facilities in the current ways, without using exrou accounts.
“Another draft law is also important, which will be adopted in the second reading in the near future and provides for amendments to the Tax Code of the Russian Federation. In accordance with it, the services of contractors for the construction of individual houses using escrow accounts will not be subject to VAT, similar to the activities of developers engaged in the construction of apartment buildings,” the Ministry of Construction additionally reports.
“Legislative regulation of the specifics of the use of escrow accounts in the contract method of building private houses is certainly an important step towards the development of a civilized market. An understandable mechanism of interaction between all key participants — citizens, contractors and banks — will increase the transparency of private housing construction. Funds will be protected, contractors will be able to plan business development thanks to bank financing. Banks, in turn, can provide credit facilities at acceptable rates due to better credit risk management,” the Deputy General Director of Dom shares his opinion.RF” Alexey Nidens*.
The digital base for the implementation of the law will be the stroim.dom.rf portal, which provides for the interaction of all participants in the transaction in an online format. A registry of more than 1,200 contractors and more than 1,500 house projects is already available on the platform. 60 contractors are already ready to offer customers the construction of houses on more than 270 projects using escrow.
“The development of private housing is one of our national priorities. Thanks to the introduction of the escrow mechanism and digitalization of the process, a reliable business reputation of companies will be formed, which was not the case before. This, in turn, will allow citizens to choose a specific contractor more carefully and will contribute to the gradual “washing out” of unscrupulous builders from the market. I would like to clarify separately that the adopted amendments also provide for the possibility of using maternity capital funds for the construction of a private house under a new safe scheme,” emphasizes Sergey Pakhomov, chairman of the State Duma Committee on Construction and Housing and Communal Services.
Photo: Yuri Morozov / Lori Photo Bank
According to Alexey Nidens, the polls are “Home.The Russian Federation” is convinced: thanks to the introduction of a new mechanism, the share of citizens who prefer the construction of a private house with the involvement of a professional contractor will increase threefold — from the existing 13% to 39%. “In addition, according to our research conducted jointly with VTSIOM, the potential demand for residential housing in the next five years will amount to about 1 million private homes per year. Thus, with the participation of professional contractors, about 400 thousand houses can be built annually,” Alexey Nidens believes.
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In continuation, the founder of the expert club “Country Development” Valery Lukinov notes: according to Rosstat data for the first quarter of 2024, 69.9% of residential areas in the country were commissioned by residential housing developers. And the desire of the state and the banking community to make the field of suburban real estate transparent is obvious, and at the same time creating an assessment of the reliability of construction companies operating in the residential housing segment.
Valery Lukinov, founder of the expert club “Country Development”, “I would call the adoption of the law timely: the buyer will receive guarantees of the targeted use of their funds and the quality of the contractor’s work. A contractor can take out a loan at 1% from the same bank for the performance of work, which is very beneficial for all parties. I believe that preferential loans should be issued only using escrow accounts: thus, we will be able to clear the market of cash-out companies, one-dayers who leave behind deceived buyers and unfinished houses. Consumer extremism is a risk for construction companies, therefore, at the development Institute “Dom.The Russian Federation” has been working on an option for an independent system of acceptance of work stages for a long time. On the one hand, it protects the customers of the houses (not everyone understands how to check the quality of the stages of work), on the other hand, it protects contractors from unlawful claims of customers.”
Olga Ivanova, CEO of BN Group, agrees: on the one hand, the adoption of the law on escrow for residential housing will have a positive impact on the construction industry, including the pace of housing commissioning, which has been breaking records in recent years. (It is worth recalling that in 2023, over 110 million square meters were commissioned in Russia, and more than half (53%) fell on individual residential construction.) However, on the other hand, it is very important to work out mechanisms for accreditation of the bank’s interaction with borrowers (at what percentage and on what terms the loan will be issued, by which banks, and so on). And this is just the beginning of the list of tasks that the expert is talking about.
Olga Ivanova, CEO of BN Group, “There are two more important aspects: the cost of construction and the market value of the facilities. We can draw an analogy with escrow accounts in multi-storey residential buildings: here, after the adoption of the law on escrow in the summer of 2019, prices in the market of new buildings increased by about 13% in six months. Depending on the size of the developer and its relations with partner banks, the cost of construction increased by an average of 7-10%, while inflation at the end of 2019 was slightly above 3%, and the Central Bank’s key rate was about 7%. Now, the cost of construction can grow many times more, up to 20-25%, since the Central Bank’s key rate is much higher, and banks will certainly lay an additional premium for the risk of concluding transactions with individuals.”
According to the interviewee BFM.ru All this can cause a further increase in prices in the suburban real estate market by 15-20%, which in turn can lead to a cooling of demand by up to 30% in the coming months. “In the medium term, again, by analogy with the MKD, new projects may adjust the layouts in favor of small—sized cottages (primarily single-storey houses with an area of up to 100-120 square meters) in order to optimize the final cost of the lot,” predicts Olga Ivanova.
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