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Land: too Long Real Estate

04.06.2019 Analytics

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

Neither the Verkhovna Rada nor the Constitutional Court has seen violations of Article 41 of the Constitution of Ukraine for many years. According to this Article, everyone has the right to own, use and dispose of their property. Moreover, the decision of the European Court of Human Rights (ECHR) from May 22, 2018, recognizes the prohibition of purchasing and selling agricultural land as a violation of citizens’ rights.

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 17 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, sowing them 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.

The Shadow of the Market

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?

Price Issue

The highest rents for land are in the traditionally agrarian and metropolitan regions – Cherkassy, Poltava and Kyiv districts. The average annual cost of renting a hectare is  $84 for the Cherkassy region, and $80 and $62 for the Poltava and Kyiv regions, respectively.

If the land market started its functioning, the shares owners in the Cherkasy region could receive $1,670 per hectare, in Poltava – $ 1,600, and in Kyiv – $ 1,240. Still, in Polissya, a significant part of the land in the swampy area, and the demand for land near the zone of armed Donbass conflict is low, therefore, sellers could get $564 per hectare in the Volyn region, $613 in Zhytomyr, and $665 in Lugansk.

After the increase in the overall cost, the rent prices will rise. In addition, experts point out that land prices can be 2-5 times higher, as the 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, its value grew by an average of 15-25% during the first two-three years, and then the growth became slower. 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, the land market is highly interested in speculators.

The growth will continue but powered by another source – investments that should go into the agricultural sector due to the opening of the land market. After this, Ukraine will need another 5-7 years to catch up with its neighbors under favorable conditions.

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 timely and indefinite.

This refers to the right to use another’s land for agricultural purposes, which can be resold, pledged to the bank or inherited. For lands of the state 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 cadastre within the World Bank project framework, only in 2016, new owners got 11,2 thousand pieces of agricultural land with the total area of 40 thousand hectares under emphyteusis schemes.

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 it long-term due to the restriction of competition do not receive fair value for their share. 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 he doesn’t become an owner, but only formalizes the 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 simply not interested in investing time, effort and money in what they do not actually own. For the same reasons, limiting the right of ownership to land prevents livestock from developing.

Please read: The most important recommendations on business protection in Ukraine for 2019

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