In the second half of February 2019, the National Securities and Stock Market Commission published an official warning on its website for investors buying forward contracts and thus investing in housing construction.
We decided to break down for you the scheme of buying a new building through a forward contract, as they say “brick by brick”, and explain in simple words the main risks of such a purchase and the consequences one may face.
What exactly is a forward contract?
In our Ukrainian legislation, a forward contract is defined in paragraph 14.1.45.3 of the Tax Code as a civil-law agreement whereby the seller undertakes to transfer securities, a material or intangible asset in the future within a specified period, and the buyer pays for such asset.
Indeed, it is somewhat similar to a purchase and sale agreement that will occur in the future? However, the price is determined at the moment the forward contract is concluded.
You may have heard about futures in American movies and currently do not understand the difference between a forward and a future. So, a future is a standardized and uniform contract. If the subject of such a contract is a commodity, then it is standardized, the quality and properties of such commodity are clearly defined, as well as the lot size. A future is an electronic contract. Futures are concluded on an exchange and their further circulation takes place on the exchange. The exchange controls their execution.
Unlike futures, forwards are not concluded on an exchange. This is a paper contract. A forward may be registered on a commodity exchange, but
the exchange does not control the execution of the forward contract.
Forward contract in construction
The subject of a forward contract is the property rights to
a specific apartment in a residential complex. A forward contract is usually concluded between the Developer and the Investment Fund managed by an Asset Management Company.
An important nuance is that the apartment price in a forward contract is
significantly underestimated! Often it is 2 times lower than the actual market price of the apartment, calculated at 6000 -7000 hryvnias per square meter of apartment area.
The second important point is that the subject of the contract is not the apartment, but
property rights to the apartment. That is, under a forward contract, the Developer undertakes to transfer, within a specified period, not an apartment under construction, but property rights to the apartment in the house being built. Such transfer of property rights occurs by concluding a purchase and sale agreement for property rights to the apartment.
How does the purchase of an apartment using a forward work?
- The Developer and the Investment Fund conclude a forward contract for a specific apartment in a residential complex, for example, at a price of 300,000 hryvnias. With the actual market price of the apartment being 550,000 hryvnias. Contracts are registered on the exchange.
- The buyer, wishing to purchase such an apartment, concludes a purchase and sale agreement for the forward contract with the Investment Fund. However, the Investment Fund sells the forward contract already with a premium (markup) of 250,000 hryvnias. That is, the buyer first pays the Investment Fund 250,000 hryvnias for
