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LAND MARKET: RISKS AND PROSPECTS

LAND MARKET: RISKS AND PROSPECTS

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31.03.2020 (№ LDaily #13)

LAND MARKET: RISKS AND PROSPECTS

On December 12, 2019, Kyiv City State Administration held an International Roundtable on Land Legal Relations organized by the Union of Real Estate Specialists of Ukraine SFNU and the Ukrainian Chapter of FIABCI International Real Estate Federation. Representatives of the Ukrainian real estate market and agrarian sector participated in the event.

A teleconference was held in Ukraine involving different countries of the world so that the experts from both organizations referring to the international experience could give recommendations for members of the lawmaking process and choose the best model to ensure balance between the capacity of small farmers to own land and the entry of large investors, including foreign ones.

Land

In Ukraine, land belongs to citizens only within the limits allowed not by the law but the authorities, and the problem of ownership is inherited from the totalitarian times. By the way, the moratorium on selling land operates in Venezuela, Congo, Tajikistan, North Korea, and Cuba, in addition to our country…

Law and Practice

A difficult path of the domestic land market began during the first years of Independence when about seven million Ukrainians became owners of agricultural land after the destruction of collective and state farms. However, a moratorium was imposed on its sale in 2001, allegedly to protect the owners from venturers. Although 19 years have passed, the moratorium still operates, literally burying the hopes of almost half a million landowners who have not used the right to freely dispose of this land.

Nevertheless, anyone can purchase land for agricultural purposes, and lawyers can provide legal schemes. Meanwhile, irresponsible tenants deplete the soil by sowing it with sunflower and corn by rotation. Thus, the shadow market imitates some market mechanisms for land but the lack of an owner only hurts this land. This kind of “shadow” is large but not homogeneous.

Jordi Ribo, Vice-President of FIABCI-Andorra

Just 4% of the land is private. The rest is owned by the government that prohibits selling this land, or sometimes even renting it. There are some exceptions, for example ski resorts can have concessions from the government for 50-75 years.

Mahmoud Elburai, senior advisor at Real Estate Regulatory Agency of Dubai

Before 2000, our land registry was only available for nationals, only they could buy and own land. Then we opened up our economy, and since 2000 anyone could own land in the designated area called ‘freehold’. Foreigners can own land in Dubai only in this areaThis actually boomed our economy.

Our population has grown from 600,000 to 2.5 million people within 10 years. Our GDP has increased by 10 times. This influenced not only the industry but all the economic sectors.

Lika Kardava, Co-founder of FIABCI Georgia

We have faced new regulations since 2017 according to which, non-residents are not allowed to buy or own agricultural land anymore.

Ivan Velkov, FIABCI-Bulgaria Board Member

The legislation prohibits non-EU citizens from buying land. They have to go through certain procedures and establish themselves as residents for at least 5 years before obtaining any land.

There are three types of ownership in Bulgaria:  state-owned, municipal and private land. Anyone can sell and buy private land. Other types are sold only to large-scale investors regardless of where they come from. If your business plan is prospective, the government can avoid restrictions in transferring ownership to whoever is interested to invest.

Mai-Lan Trinh, FIABCI-USA Board Director

In the USA anyone can buy or sell land properties. It is possible to sell agricultural land, but it depends on the state. Some states do not allow foreigners to buy any agricultural land. All monies must be able to be proven as obtained by legal means and such will be verified by the title company.

Gbenga Ismail, Vice President ofFIABCINigeria

All land in Nigeria is nationalized. The government owns 90% of the land. There are 36 states in Nigeria. Each state’s land is controlled by the state government. However, it doesn’t mean that a private person cannot own land. The government can give a person the authorization to deal with land. 

MARKET SHADOW

The country’s land market can be divided into black and gray parts. The first one concerns the illegal use of land that has no legal status. It commonly refers to state lands, lands of former collective property, field roads and uncalled units, which are processed without any contracts. Additionally, the land property whose owners have died is being processed; this property can’t be transferred to anybody, so farmers continue using it.

The gray zone of the land market contains transactions for land sales through judicial decisions and emphyteusis contracts. The absence of open bidding forces interested citizens to find an alternate way to formally circumvent the ban. However, in such circumstances, a seller can’t get a good price, and a buyer risks to lose land due to the inferiority of their transaction. What is the appropriate price?

Mahmoud Elburai, senior advisor at Real Estate Regulatory Agency of Dubai

Land can be transferred. The land purpose can be changed.

Lika Kardava, Co-founder of FIABCI Georgia

The procedure of transferring land ownership depends on its category. You can transfer agricultural land to state companies, Georgian citizens or legal entities. There are some exceptions for non-residents to transfer ownership. It is actually decided by the government.

Any rights connected to land ownership should be registered in the Justice Hall. It makes decisions about changing the land purpose.

Ivan Velkov, FIABCI-Bulgaria Board Member

According to several existing laws related to the topic, the procedure of realizing land property rights is very clear. The rights are transferred as any other real estate asset. There are no specific restrictions for the transaction procedure.

Gbenga Ismail, Vice President ofFIABCINigeria

In Nigeria, we have the land registry where you can get the Governor’s consent concerning your land transfer. You cannot just make a private transaction between a buyer and a seller, the Governor’s permit is obligatory. Otherwise, the transaction is considered illegal.

ISSUE PRICE

The highest rents for land are in the traditionally agrarian and metropolitan regions – Cherkasy, Poltava and Kyiv districts. The average annual cost of renting a hectare is  $84 for the Cherkasy region, and $80 and $62 for the Poltava and Kyiv regions, respectively. If the land market started its functioning, the  shareholders  in the Cherkasy region could receive $1,670 per hectare, in Poltava – $ 1,600, and in Kyiv – $ 1,240. Still, in Polissya, where a significant part of the land in the swampy area, and near the zone of armed Donbass conflict, the demand for land is low, therefore, sellers could get $564 per hectare in the Volyn region, $613 in Zhytomyr, and $665 in Luhansk.

After the increase in the overall cost, rent prices will rise. In addition, experts point out that land prices can be 2-5 times higher, as rent prices are lowered on average fivefold due to the moratorium and local monopolies!

WHAT WILL HAPPEN IF MARKET OPENS

In countries experiencing the land market opening, the value of land had grownby an average of 15-25% during the first years, and then the growth slowed. The process took place within the limits of general denationalization of property. The situation in Ukraine is different as the accumulated offer has been created during the years of the moratorium. We mean that in normal market conditions, there are up to 1.5-3% of the land in circulation each year due to the change of owners. In Ukraine, 7-11% of landowners are considering the possibility of selling it at the moment.

Due to this and the fact that land prices are substantially underestimated, the increase in value will be sharper than elsewhere before when the restriction disappears. Therefore, speculators are highly interested in the land market

The growth will continue but powered by another source – investments that should go into the agricultural sector due to the land market opening. After this, Ukraine will need at least5-7 years under favorable conditions to catch up with its neighbors .

A GAP IN THE MORATORIUM

To circumvent the discriminatory law, many citizens use the emphyteusis to freely dispose of their land. This is an agreement on the acquisition of rights to use land which belongs to another person for agricultural purposes. It can be both fixed-term and indefinite.

This refers to the right to use another’s land for agricultural purposes, and this land can be resold, pledged to the bank or inherited. For the state land and communal property, the period of emphyteusis can’t exceed 50 years. Additionally, the state and communal land under emphyteusis may not be alienated, included in the authorized capital of an enterprise or transferred to a bank.

Emphyteusis differs from rent by the fact that a contract does not specify time limits, but there is a possibility of sale and inheritance of the right to use the land. In fact, the owner can’t sell the land itself but can sell the right to manage and handle it.

According to the analyzed data on the inventory of all arable land in the land cadastre, at least 1 million hectares of agricultural land under a moratorium were transferred to the new owners under the schemes of emphyteusis.

First of all, this is beneficial to owners of gardens, vineyards and other perennial plantations because it gives a possibility to protect their right to own cultivated plants and not to lose the rent when that garden becomes a commodity. Emphyteusis is not interesting to big market players whose land bank consists of units.

However, in the case of emphyteusis, landowners who sell the right to use their land on a long-term basis do not receive fair value for their share due to the restriction of competition. At the same time, buyers still don’t become owners of these territories when paying for the land.

There are certain risks of using emphyteusis for purchasing land. Firstly, people don’t specify the real sum of the transaction in order to avoid paying taxes. So, there is a risk that the seller will receive not the real amount of money but the sum specified in the contract. Secondly, the fiscal service can recognize the agreement of emphyteusis as an “apparent transaction”, which is invalid. The main risk for the buyer is that they don’t become owners, but only formalize their right to use the land in contractual relations.

Artificial restrictions on the right to own land increasingly slow down the agriculture development. This restriction of ownership applies to those people who are not engaged in agriculture and could spend the proceeds from the sale of land for their own needs, including business projects. It also applies to those who want to work effectively in this field. Due to the lack of rights to leased land, farmers are not interested in investing time, effort and money in what they do not actually own. For the same reasons, land ownership rights limitation prevents livestock from developing.

No More than 10 Thousand Hectares per Person

On November 13, in the first reading, the Verkhovna Rada voted for a Bill 2178-10, which lifts the ban on the sale of agricultural land.

The Bill on Agricultural Land Transfer provides for a limitation of the amount of land per person − no more than 10 thousand hectares allowed.

One legal person or individual cannot own more than 10 thousand hectares. If an individual − a Ukrainian citizen has purchased, for example, 1 thousand hectares, and they are at the same time the founders of a legal entity for which 5 thousand hectares were purchased, this means they already own 6 thousand hectares in total. The legal entity can buy another 4 thousand hectares to total 10,000 or the individual can buy it directly.

Mahmoud Elburai, senior advisor at Real Estate Regulatory Agency of Dubai

There is  no limitation on the number of hectares to purchase. You can buy as much land as you want.

Lika Kardava, Co-founder of FIABCI Georgia

There is no limitation on the number of hectares to buy.

Ivan Velkov, FIABCI-Bulgaria Board Member

There is no limitation on the number of hectares for purchasing. You can buy as many as you wish if you go through the required procedures. So, there are different requirements for EU and non-EU investors. For EU ones, all the procedures are the same as for the local residents: they can do anything with land, including agricultural, urban development, etc. Non-EU residents can consult professional lawyers to help them go through the certain process of acquiring land.

Gbenga Ismail, Vice President ofFIABCI-Nigeria

There is no limitation on the number of hectares to buy. But still, it depends on the Governor because he grantsthe interests to hold and use the land.

EXPERT OPINIONS ON LAND MARKET INTRODUCTION

Jordi Ribo, Vice-President of FIABCI-Andorra

I don’t see any problems to sell land to foreign investors. For a long time in Andorra there has been no difference between foreigners and locals in the view of business. One thing you need to keep in mind about foreign investment is that our country is more well-known. So, people are more confident to invest here.

Mahmoud AlBurai, senior advisor at Real Estate Regulatory Agency of Dubai

I believe there should be foreign investment into the state. We need to attract investors from abroad. However, we should remember certain things. If the home ownership level is low, it becomes more expensive for our people to own property, land, etc. Therefore, we need to attract foreign investment in a way that we don’t overinflate our real estate market. We must always have some restrictions on speculation. Foreign investors bring more confidence. We also need to look at the social objectives, that is what we are trying to achieve. We look for the home ownership because real estate is an educational institute, entertainment, the tool to make our tourism industry more competitive. We have done our research in Dubai which shows that to build a competitive real estate market, you should be focused on three things ‒ the quality of life including social and economic stability, the government’s ability to make the industry more attractive for people, and affordable housing and living. We should be cautious about prices ‒ we cannot become unaffordable because there are many other attractive destinations for investors.

Lika Kardava, Co-founder of FIABCI Georgia

I am convinced that everything should be tailored to the country’s specific economic and social conditions and plans for the future. However, the main approach that should be implemented is a balanced strategy and approach to attract investors to our land and property. For example, in Georgia we have quite a high level of ownership ‒ almost 93% of families own real estate. There is also a trend of young people buying their own separate property by taking mortgage loans. So, owning property is something cultural and traditional. This is why I’m talking about the idea that everything should be adjusted to the particular country’s traditions, future plans and economic conditions. Of course, foreign investment is important for the country’s economy, and it stimulates the local market, developers and construction companies. In our case, real estate construction in hospitality brings almost 20% in GDP growth. So, in my opinion, there should be a balance.

Mai-Lan Trinh, FIABCI-USA Board Director

In my opinion, it’s a great opportunity to buy land in the US because the economy is going up and the security level is high. Nevertheless, you have to be aware of many things when buying land in the US.

Gbenga Ismail, Vice President, of FIABCI-Nigeria

The reason the Land Use Act came out in 1978 was to allow most Nigerians to have access to land. Before that, about 50% of land belonged to foreigners. So, the government wanted to make sure that the Nigerian citizens had access to land. I think it was the right decision because now the majority of Nigerians own land. From my point of view, we need to find a balance ‒ the citizens should have access to land and the security that they can own this land without competing with foreign investors who have more means to buy it. Therefore, there are some particular areas where foreigners can buy land. Today all Nigerians can access land, and the law protects it. A foreigner can lease land for 99 years and develop it as they want.

So, you should focus on the legislation in Ukraine that gives locals access to their homeland, and if it comes to commercial purposes, it should open up the opportunities for development.

Best Ukrainian Land Market Model to Attract Substantial Investment in the Country

Jordi Ribo, Vice-President of FIABCI-Andorra

I prefer the free market but not the regulations from the government’s side. Investors feel more comfortable if the government does not interfere in their business.

Lika Kardava, Co-founder of FIABCI Georgia

As I have mentioned before, it’s important to keep a well-balanced approach to let investors enter the country and launch business. Regardless of they are minor or major investors, their rights should be protected. You should have a long-term attitude without introducing regulations or new rules all the time so that investors feel comfortable and safe to run their business.

Ivan Velkov, FIABCI-Bulgaria Board Member

I believe that concession is the best opportunity to differentiate real investors from those whose intentions are not serious. It is a useful tool for the municipality to improve the development opportunities of big cities.

Mai-Lan Trinh, FIABCI-USA Board Director

The main reason for investors to enter the country is that they have some benefits from their investment. They need to know that their investment is secure.

Gbenga Ismail, Vice President ofFIABCI-Nigeria

Free market is the best one. You can use any system like concessive marketing, but free market is the best option.

Since October 1, 2020, the land sale ban is no longer relevant. According to the document, persons who can acquire ownership of agricultural land are citizens of Ukraine, territorial communities, the state, legal entities of Ukraine and foreign citizens, and stateless persons in the case of an acquisition under the procedure of inheritance with the obligation to alienate the land during one year.

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