You're reading: Buyer beware: What it pays to know about Kyiv property

Ukraine’s status as an emerging market means any property transaction will always carry risk. Those risks can be mitigated with due diligence, but perhaps never eliminated.

Lawyers might research whether an apartment complex developer is financially stable or if there are any disputes surrounding ownership of a property.

But even the best advocate would have been unable to predict the 2014 EuroMaidan Revolution that ousted President Viktor Yanukovych. The revolution, which triggered Russia’s war, also started a steep economic downturn from which Ukraine has only recently emerged.

Real estate was by no means insulated from the slump. Although now once again looking up, on average since 2011 property prices have dropped by 30 percent.

But macroeconomic shocks are, in some cases, the least of the worries of a potential buyer or investor.

A high-profile example of the risks associated with failing to conduct proper due diligence is the case of Oleksandr Klymenko, Ukraine’s tax and revenue minister under Yanukovych.

Klymenko is accused of stealing hundreds of millions of dollars from the state budget and laundering the bounty offshore. Companies he allegedly used to funnel the money back into Ukraine were searched by police on July 14.

According to prosecutors, some of Klymenko’s ill-gotten gains were used to buy real estate in Kyiv, much of which was later sold to others.

Today, those buyers have found themselves caught up in the investigation, with the properties they bought from companies linked to Klymenko being subject to searches and inventories by police. While the case continues, they cannot rent or sell the properties and are potentially facing long legal battles to assert their rights of ownership and clear themselves of any wrongdoing.

But had the buyers done their due diligence, it should have been possible to learn that the properties they were purchasing were coming from an untrustworthy source, says Igor Rubinstein, director of Kiev International Realty.

He told the Kyiv Post that such information would have been revealed during the title search, when records are studied to determine claims on a property.

“At the time when a purchase is made, we have our legal team do the title search,” said Rubenstein. “In case there are any question marks in regards to the ownership structures of the previous owner, of course they’ll look into that. If there is even a hint of a red flag, we won’t go through with the transaction.”

Oleksander Klymenko. Ukraine’s exiled ex-tax and revenue minister

Oleksander Klymenko. Ukraine’s exiled ex-tax and revenue minister (Podufalov Pavel)

Specialist work

In residential Kyiv real estate, “red flags” come in all shapes and sizes and are often more mundane than vast money laundering schemes perpetrated by high-ranking officials.

More common are family feuds over property or a spouse or even former spouse failing to give consent to a sale. Something as simple as unpaid utility bills — which an owner may not even be aware of — can also hold up a transaction.

Checking for the existence of such complicating factors is crucial, say brokers.

Given that in Ukraine there is no unified property register — and those that exist are often incomplete — such work is best carried out by seasoned lawyers able to make use of formal and informal resources, networks and contacts.

Tim Louzonis, co-founder of AIM Realty Kiev, said that when it comes to finding out if a property is subject to any disputes, a good lawyer is like a private investigator.

“It would be great if we could all log in to an online database of court cases but that’s not the way it works,” Louzonis told the Kyiv Post. “But it is a necessary step. Finding a lawyer who will get down in the weeds and dig around is very important. If the lawyer says it’s going to be simple, find another lawyer.”

Deadbeat developers

Other due diligence concerns evaluating the architectural and structural elements. This is especially important when it comes to older apartments in Kyiv’s historical center, built prior to the 1950s. It pays to hire a specialist to look into the condition of electrical, plumbing and heating systems before committing to a deal.

New developments, meanwhile, are not necessarily a safer bet. Among the most prevalent problems associated with them are apartment blocks constructed without the proper permits or with permits obtained through bribery.

Investors who put their money into such projects can often be in for a nasty shock when the building is nearing completion and the authorities refuse to connect it to the city’s water or electricity networks because it does not meet the required standards.

Good due diligence can reveal such issues before they arise.

“There are builders who have good reputations,” said Rubenstein. “I don’t think you can do everything by the book in Ukraine, but you can be reasonable about what you do and don’t do. And then there are some developers who just build without permits and sell to the population.”

Worse still are developers who declare bankruptcy and leave construction incomplete.

One notorious case concerns the apartment block located at 58A Bohdan Khmelnitsky Street in the heart of Kyiv, where construction began in the mid‑2000s. In 2008, the company behind the venture, Konsol Limited, said it could not afford to finish the building. Only this year did the initial investors manage to raise the needed funds.

The way to avoid getting caught up in such bad deals, say property agents, is to carefully evaluate any developer before committing.

“Approach things conservatively and take a low risk, lower return strategy, that is my advice,” Rubenstein told the Kyiv Post. “Don’t take a chance on unproven developers. If something looks too good to be true, it is.”

Hiring right people

Local property experts say that in spite of all the risks, there are still good deals to be had in Kyiv residential real estate. But in what is a cash-driven environment, closing deals quickly is the key to success.

That applies to due diligence too, the bulk of which needs to be done within a week of identifying a potential purchase.

Given the chaotic nature of the market, that may seem an unrealistic timeframe, although industry insiders say it is entirely achievable.

The key is to make good decisions even when it comes to the first step of hiring the right people to see a transaction through to completion.

“Ukrainian brokers like to disappear into the night,” said Louzonis. “They are not bound by laws or an ethics code.

There’s no licensing for brokers. You need to do your due diligence when you select a broker.”