As Ukraine winds itself up to co host the European Cup in football in 2012, more than one title is at stake. In addition to the obvious, winning the tournament, the other title concerns land and what’s built on it. About a billion euros need to be spent in the next four years to accommodate the legions of fans who will attend the matches. And that’s just to meet UEFA’s requirements. By some estimates, Kyiv is experiencing a deficit of over a million square meters of living space each year, as people from all over the country flock to the capital. Indeed, we are witnessing a virtual explosion in property development throughout Ukraine, as shopping centers, apartment blocks and new housing developments continue to pop up around the country.
This flurry of real estate activity has finally attracted the attention of Europe’s major property players – large institutional and hedge funds, mortgage banks and asset managers interested in the significant opportunities presented by the Ukrainian property market. However, these actors play by rules different from those that have governed the market to date. In the past, many properties under development were conveyed through sweetheart deals between state or municipal authorities and their cronies, by taking advantage of incomplete and inconsistent legislation governing the sale and transfer of land. But unlike speculators, who look to cash out after flipping a property, or developers, who may exit soon after completing a project, institutional investors are interested in growing the underlying value of their holdings. In short, they require a clean, certain and stable title to the asset that they hold.
Therefore, one of the critical challenges facing the new Ukrainian government, whatever its color combination, is to improve the transparency and predictability of the Ukrainian property regime. Broadly speaking, this involves the following:
Implement a land title registry system. Nothing satisfies an investor like a certificate that describes your property in detail, stipulates that you are the owner and lists all of the private and public charges on the property. Best of all, it’s government-guaranteed! Sound far-fetched? Not at all. Such a system, backed by the World Bank and other donors, has been basically ready for implementation for about five years. The regime would involve merging the state cadastre (which provides the legal description of the land) with existing registers of legal rights to immoveable property (such as the register of hypothecs). Nothing, except a small amendment to the Land Code and bickering over which government agency will control the registry, stands in the way of establishing an institution that can ensure market transparency and predictability. As a result, financial institutions will lend money (secured by transparent charges on immoveable property) to businesses at lower interest rates, which will facilitate the development of credit markets and stimulate investment and economic growth.
Make land a commodity. It is time to finally remove the moratorium on the sale of agricultural land. Ostensibly put in place to protect villagers, this cynical piece of populist propaganda has allowed speculators to accumulate vast tracts of agricultural land through the acquisition of leasehold interests and lock-up deals with local village leaders, ready to be exploited once the moratorium is lifted. By establishing transparent zoning procedures and imposing a “use it, or lose it” tax on speculators, agricultural property can be put to its most productive use, and, with the implementation of the land registry, still protect the property rights of villagers. Traded like any other commodity in a proper manner, land will add value to a villager’s legacy, which is otherwise being beggared by the existing system.
Enforce transparent procedures for the transfer of land from state bodies. The flagrant violation by the Kyiv City Council on Oct. 1 of its own rules, in what has been called the ‘dereban’ of about 3,000 hectares of city property, is a striking example of the need to enforce transparency in the procedures governing the transfers of land title from the state. This includes clarifying, standardizing and unifying the rules and procedures in the Land Code regarding the auctions of land plots (much of which is currently left to the discretion of the local authorities). The foreign ownership restrictions in the Land Code should be scrapped all together as an anachronistic restriction on trade.
The European Cup is therefore an opportunity for Ukraine not just to build scores of new hotels and developments, but to secure the country’s future economic development. Political will is all that is necessary to implement these relatively simple measures. The security and enforceability of property rights will determine whether Ukraine can continue to sustain the dynamics of its current robust economic growth. As our neighbors, Poland, Romania and Russia have found, institutional investors and lenders represent billions of dollars of potential property investment. Along with Ukraine’s increasingly credible banking sector, they can also bring market discipline and create a virtuous cycle of investment involving other areas of the Ukrainian economy. But first investors want to see that the property they purport to own is worth the paper it’s written on. Who gets the title goes way beyond football.
Daniel A. Bilak is a partner with CMS Cameron McKenna’s Kyiv office.
