The situation in the residential market clearly indicates that buyers planning to purchase a dwelling in the primary residential market are searching primarily for completed residential projects or the ones close to completion.
Due to the instability in the market, the clients? behavior, which results mostly from significant limitations in access to bank financing for individual clients and developers, is fully understandable in the current situation as it reflects the fear of losing the funds paid for the apartment owing to the developer?s loss of liquidity and in the worst case scenario, the developer?s bankruptcy. Consequently, any formula which increases the clients? sense of security will be met with a strong response from the buyers.
However, it must also be noticed that it was not the current crisis that forced the developers to introduce measures aiming to increase the comfort and security of purchasing a new dwelling. For several years now the developers have been financing their projects using the so called reserved accounts or a 10/90 financing model. Both mechanisms are available at the moment and are used by an increasingly large group of developers.
The idea to introduce an escrow account has come up several times now and has been debated for at least several years, but to no avail up to date.
Undoubtedly, the core concept of making provisions for the risk of losing the funds by the purchaser in the case of developer?s bankruptcy is legitimate. However, we must bear in mind that it will not take place ?free of charge?. The warranty to return 100% of funds will need to be paid for, so the client will be charged for the comfort of safety, regardless of the fact where that charge is located, whether in the cost of the credit, warranty, price of the dwelling or costs of keeping an escrow account.
Despite the fact that the escrow account has been in the works for a rather long time, it seems that neither banks nor developers are keen to implement the idea (first of all, there is no legislation). The banks can see the weakness of their provisions and the difficulties connected with recovering a granted loan, while the developers will have to bear bigger costs, at least the financial costs. Still, is this an exorbitant price for the client?s comfort of security and increasing the transparency of the market? This question should be answered by the client, i.e. the market. Being able to choose between various models of financing the purchase of his apartment, he should make the decision how much he is willing to additionally pay for a 100% warranty of security of this investment, since after all it is one of the most important decisions in his life.
Will the escrow account gain popularity if it is introduced? ? Some part of clients will definitely want to make use of this type of solution. At the moment it would be hard to estimate their number. It depends on several factors, including the developer?s credibility, the structure of project financing etc.
Grzegorz Żochowski
Partner
