Alex Frishberg, Esq.
Any Ukrainian real estate agent will confirm that the best time to invest in residential properties in Kyiv is in 2024. Due to the war with russia, prices for apartments are at their lowest since 1993, ranging anywhere from $800 up to $3,000 per square meter (depending on the location, size and condition of the unit). But how does a foreign investor go about buying an apartment in Kyiv?
We begin our review with practical considerations that go into deciding where to buy an apartment for investment purposes, and discuss the various options, including unfinished and finished construction on secondary market.
- Practical Considerations
First, you need to obtain a taxpayer registration (tax ID) number from the Fiscal Service of Ukraine. The procedure is rather simple: just submit to the Ukrainian Fiscal Service an application with personal information along with a notarized translation of your passport personal data. The taxpayer registration number is usually issued within five business days. To make things even easier, if you do not want to register in person, you can send an apostilled power of attorney issued abroad or sign a notarized power of attorney while in Ukraine to a trusted representative, who will perform this registration on your behalf.
Second, you need to choose the best location. Not surprisingly, the most desirable locations in Kyiv for are the ones as close as possible to the city center, as many people work in or around the city center. If you are planning on renting the property to foreign tenants, a special category who can afford to pay top dollar (e.g., Embassies, USAID staff, military contractors, etc.), the obvious location is anywhere around the Golden Gates, in the heart of the city. The prices, however, are significantly higher than the rest of Kyiv area.
If you wish to buy less expensive apartments, with a corresponding return, the most convenient public transport connections to Kyiv are on the right bank of the Dnieper river (Obukhivska, Novoobukhivska, Odessa highways). Today, these locations are consistently in high demand, and this will only increase with time as more people return to Kyiv from their exile abroad.
Third, you need to decide whether to purchase an apartment on the secondary market or invest into unfinished construction. The center of Kyiv has a few newly constructed residential buildings available on the secondary market, and they are all unreasonably expensive. For that reason, most investors who insist on buying an apartment in the center of Kyiv usually buy older apartments (with or without repairs).
In our experience, many old apartments have legal and practical problems involving the title (encumbered ownership rights), unregistered construction that does not comply with a property’s registered technical passport, undiscovered fungus (especially in the showers), leaky pipes (sewage, water, gas), etc. That is why in addition to experienced lawyers it is also necessary to have a trustworthy property inspector or at least a knowledgeable handyman, who can assess the depth of all technical problems.
Many investors prefer to purchase apartments in newly constructed residential buildings, where they have the opportunity to design the lay-out of the apartment to their taste. Such new construction is classified as either unfinished or finished (i.e., commissioned). We briefly review both alternatives below.
- Unfinished Construction
Unfinished construction means that the building has not yet been put into commission and, therefore, the premises cannot be used.
From a procedural viewpoint, it is easy to buy an apartment in a new building that is under construction: a foreign investor will need to obtain a tax ID code, open a bank account, and pre-pay a certain amount in exchange for legally registered ownership rights in the future apartment. From a practical perspective, however, the investor could face significant risks.
For example, one of the largest real estate swindles occurred when the owners of a construction group called “Elite Center” had disappeared with more than $100 million in investors’ funds. Lacking the construction permits, yet having procured some of the necessary paperwork from the Mayor’s office, the owners presold future apartments at below market prices. In all, this little housing scam left 1,500 apartment buyers empty handed.
To address this problem, on October 10, 2022 the Law of Ukraine No. 2518-IX “On Guaranteeing Property Rights to Real Estate to be Constructed in the Future” (the “Law”) came into effect. This Law offers several layers of protection to investors in future real estate by setting up a system for registering so-called “special proprietary rights” (“SPR”) for future real estate objects. SPR allows the buyer to sell these rights and to require the completion of construction and its commissioning. After construction ends, and the building is finally commissioned, SPR turns into an ownership title to the relevant real property object (e.g. apartment, parking space, etc.).
First, to assure full disclosure to the purchaser, the funds for construction may be raised only after the SPR is registered in the State Property Rights Register. In other words, the sale of future real estate objects to investors is possible only after the developer acquires land rights, all the necessary construction permits, and registers the SPF to all future real estate objects in a property under construction.
Today, the developer is required to publish information about the construction project, including the anticipated year of commissioning, all permit documents registered in the Unified State Electronic System, information about all planned real estate objects in the building (including those that have already been sold), draft sales contract, information about future real estate objects and the terms of their purchase, etc. The developer also has to provide updates regarding construction progress, publish monthly photos of the construction site, planned work schedule, etc.
Second, in order to protect investors from the ever-present risk that the building may not be commissioned on time, the developer must reserve a so-called “guaranteed share” in the future real estate object in accordance with the Cabinet of Ministers’ “Resolution on Determining the Minimum Size of the Guaranteed Share for the Construction of Real Estate Objects”, No. 8, dated January 3, 2023. This Resolution sets the minimum “guaranteed share” in future buildings, which is reserved and cannot be alienated until the construction is completed. The purpose is to make sure the developer will remain interested in completing construction so that it can sell the “guaranteed share”.
For example, the minimum size of the “guaranteed share” set by the Cabinet of Ministers for larger cities like Kyiv, Dnipro, Lviv, Odesa and Kharkiv is 10%, while for other towns it is 5%. This share represents a portion of the future building that a developer cannot sell or encumber (collateralize) until construction is finished. If a developer faces problems with financing that may prevent the completion of the construction, it has the right to use the allocated percentage of the building to finalize construction by selling it after the court permits the removal of encumbrances over the “guaranteed share”.
Unfortunately, it is still both time-consuming and risky to invest into unfinished construction. First, instead of getting access to the apartment immediately, the buyer has to wait until the construction is finished. Second, and more important, there is no guarantee that the building will be put into commission (i.e., deemed fit for exploitation/operation) on time, if at all. Despite the “reserved share” requirement, there may be insufficient funds to finish the construction. For these reasons, most foreign investors prefer to purchase apartments on the secondary market, as they are already registered with all the proper authorities and allow for immediate move-in.
- Finished Construction
Finished construction always involves a careful inspection of the property’s title and ownership rights. The reason is simple: fraudulent transactions are plenty and, as a consequence, all issues connected with title transfer and the identity of the true owner must be flushed out before the actual execution of a sale-purchase agreement before a notary.
To avoid pitfalls, any potential buyer should review the background documentation that serves as the ultimate proof of ownership. For example, if the ownership was acquired prior to 2013, you will need to review the title document (confirmation of ownership) that is registered with the BTI (Bureau of Technical Inventory). If the property was bought after 2013, you will need to obtain an extract from the State Register of Immovable Property Ownership. Below please find a list of documents necessary for a notary to register a transaction.
The seller’s required documents:
Before signing a sale-purchase agreement before a notary, an investor will need to obtain from the seller and review certain documents. For instance, if the seller is a private individual (not a legal entity), he or she should submit the following information:
1. document confirming ownership rights (e.g., original sale-purchase agreement);
2. technical passport;
3. a list of all registered household members;
4. written consent of all parties to sell the property if the seller has a spouse or other co-owners;
5. official valuation (appraisal) of the apartment;
6. a copy of the seller’s passport and certificate of tax ID number.
The buyer’s required documents:
A foreign investor can be either a “physical person” (individual) or a legal entity (usually an LLC). Below we review additional documents required in both cases.
For individual foreign investors, the following documents are required:
1. passport and tax identification code (or a notarized power of attorney and investor’s passport and tax identification code);
2. if married, a notarized confirmation of consent to the sale or acquisition of property from a spouse;
3. if married, a marriage certificate.
For foreign legal entities, the following documents are required:
1. founding documents of the legal entity and tax registration confirmation;
2. documents confirming the scope of authority of the representative (if company director, you will need to obtain minutes on his/her appointment to the position; in case of any other authorized representative, you will need a duly executed power of attorney);
3. passport and tax identification code of the representative authorized to act on behalf of the legal entity;
4. minutes of meeting of shareholders/participants resolving to acquire the property in question;
5. company seal (if applicable).
Importantly, any documents issued outside of Ukraine are subject to certification by Apostille or legalization at a Ukrainian consulate and require a notarized translation of the document(s) into Ukrainian.
- Conclusion
When viewed from a foreign investor’s perspective, now is an excellent time to buy an apartment (or two) in Kyiv and rent it out while waiting for real estate prices to increase after the war. This way, you can rent out the apartment (either for residential or office use) and then sell it a few years later, after the property appreciates in value. For a mid-size investor, it is a good option, especially considering the low prices and the expenses associated with property maintenance (property taxes, condo fees, etc.).
