What Might the New Model of Residential Development Look Like?

Dmytro Ovsiy, a member of the board of the Ukrainian Association of Developers, in a column for "Ekonomichna Pravda" shared his vision for a new model of financing residential construction in Ukraine.

During the war, the market is undergoing yet another shift in its business model. Perhaps the next market transformation will turn this model on its head. But let’s take it one step at a time.

The "sales from the excavation site" model

The Ukrainian residential real estate development market began to take shape in the 2000s. The economy was growing. People had the money to buy homes, and a segment of the population had spare capital that needed to be invested somewhere. An apartment became two products at once:

• for some, a home;
• For others, it is a “concrete deposit”—a tangible asset in which money can be stored.

At the same time, the banking market was developing. The NBU explicitly states that mortgages in Ukraine were a mass-market product precisely until the global financial crisis of 2007–2008: foreign banks with access to funding and lending technologies were actively entering the market.

At that time, banks also played a major role in the financial system supporting real estate development. Sales of apartments to buyers were an important source of funds, but they were not yet the dominant mechanism for financing construction that they later became.

Then the global financial crisis struck. And that model collapsed.

After the banks, a buyer came along

After 2008, the mortgage market effectively lost its former scale. Ukraine then experienced another systemic shock. Between 2014 and 2018, a large-scale cleanup of the banking system took place: according to the NBU, more than 100 banks—which accounted for approximately one-third of the sector’s assets—were removed from the market.

Along with the banks, traditional long-term financing has largely disappeared from the housing construction model. The NBU describes the consequence directly: after the crisis, the real estate market received almost no support from mortgages, and its recovery occurred primarily through funds from developers and buyers. At the end of 2021, the ratio of mortgages to GDP stood at just 0.3%.

The market has adapted. In fact, a new model has emerged. A developer would purchase land or join a project, begin construction, and start selling future apartments as early as possible. Prices are lower at the start and go up later.

With each subsequent stage of completion, the price went up. The buyer received a discount as compensation for the risk of an early purchase. And the developer received the funds needed to continue construction.

It was a unique form of decentralized project financing. Only instead of a single bank, the construction was financed by hundreds of future apartment owners. And this model worked for many years.

But it would be unfair to say that, in this model, the developer merely sold apartments. In fact, the developer invested its own capital in the land, the concept, the design, the permitting process, and the start of construction, and also assumed a significant portion of the financial and market risks. In effect, the developer became not only the creator of the product, but also an investor and the arranger of financing.

Reputation became the key asset. In the early stages, buyers were not purchasing a finished apartment, but rather placing their trust in the developer. That is why the brand, the track record of completed projects, and the ability to fulfill commitments over many years were the main competitive advantages in the market.

The war has changed the equation once again

The Great War has set off a transformation. Demand has become less predictable. Decisions about buying an apartment take longer. Location risk has become more important. The planning horizon has shortened. And most importantly, many people now have less money to invest, or have lost their purchasing power altogether.

Large-scale private investments have become more complicated. But the desire to invest in real estate has not gone away. For Ukrainian investors, real estate remains a historically familiar asset class.

That is precisely why another trend began to develop in parallel—collective investing through small contributions. A single investor cannot buy a house. A thousand investors can. Through an investment fund, small amounts of capital can be pooled into a single large institutional fund.

So far, this model has not become widespread in residential development. But this is precisely where the next chapter in the market may unfold. And here, the economics of development begin to look quite different.

Two products instead of one

Currently, a developer primarily generates revenue from a single large product: a building. The developer’s financial result is the difference between sales revenue and the costs of implementing the project. Under the new model, a developer can potentially create two separate products.

The first is a ready-to-invest project:

• land parcel;
• concept;
• urban planning and baseline data;
• permit documentation;
• financial model;
• prepared by the project company.

In fact, this is a product that’s ready for investment. It’s not just a plot of land or a pretty rendering—it’s a project that professional investors can get involved in and start developing.

If the institutional financing market develops, investment funds could potentially compete for the best such projects. And the developer will generate its first profit as early as the stage of creating and selling a ready-to-invest product.

The second product is “development as a service.” The developer’s work does not end after the project is sold. On the contrary, the fund hires a developer to carry out the project. The developer acts as a professional client service provider:

• design;
• bids;
• general contractor;
• budget oversight;
• deadline management;
• construction;
• commissioning;
• preparing the product for sale.

And after the project is completed, he takes over sales, marketing, and advertising. For this, he receives a development fee—a transparent compensation for his professional services. In other words, the developer only stops earning money once he has sold the last apartment a few years later.

He begins to earn money based on two areas of expertise:

• develop investment projects;
• to implement them professionally.

What's wrong with the old margin? Let's imagine that a project has a good margin—the difference between future revenue and all expenses. That sounds great. But there's one "but."

Time. If a project is completed quickly, that’s one economic scenario. If construction takes two years, that’s another. If it takes three or four years, that’s an entirely different scenario. Profit margins alone are not necessarily an indicator of profitability.

It’s possible to have a good margin in Excel and a mediocre internal rate of return (IRR). This isn’t a technical detail. It’s the point where the difference between the project’s margin and the return on capital becomes apparent.

What Does Guaranteed Funding Change?

Now let's imagine a different situation. Before construction begins, it's clear where the money for the entire project will come from. There's no need to ask a bunch of questions every month.

Financing and sales are no longer a single process. Construction is financed by the fund’s capital and, possibly, additional leverage. And the apartments are sold when the timing is right. This is a fundamentally different approach.

A developer can focus not on where to find money for the next month. Instead, they can focus on how to build better, faster, and within budget. They focus not on promotions and discounts as part of marketing efforts, but on selling completed properties for the highest possible price. And their financial incentives can be tied specifically to this goal. This may include an additional bonus for exceeding targets or performance metrics.

And where does the foundation generate its revenue?

This is probably the most interesting part. Today, a significant portion of the developer’s profit margin is effectively distributed among the various participants in the process. A buyer who purchases a unit at the foundation stage receives a discount to account for the risk. The next buyer pays more. A finished apartment costs even more.

That makes sense. The more risk that has been left behind, the more expensive the asset. In the new model, the fund can go through the entire value creation cycle:

• buy a ready-to-invest project;
• fund the construction;
• pay the developer a professional development fee;
• to assess the construction risk;
• and sell apartments once the building is ready or nearly ready.

This is precisely when the buyer’s risk is minimal and the asset’s price is potentially at its highest. In fact, the fund’s small investors collectively take the place previously occupied by an early-stage apartment buyer, a bank, or a developer who invested in the project.

But now they're not just buying a single apartment. They're reaping the financial benefits of the entire project.

The bank may return

There is another interesting effect. When a project is managed by a professional organization, has a clear budget, a well-managed project company, full funding, and a transparent timeline, there is potentially room for a bank to get involved again.

It doesn't have to be your only source of income. But it can serve as a financial safety net.

A project company can potentially secure loan financing secured by assets, corporate rights, cash flows, or future real estate—depending on the structure of the specific transaction and the bank’s willingness to assume the associated risk. This is because there is no need to sell the real estate before the project is completed.

Interestingly, the professional discussion on resuming construction financing is currently moving in this very direction. The NBU explicitly states the need to reinstate project financing, provided that the developer has a transparent structure, there is oversight of the funds’ intended use, a complete set of permits is in place, and a realistic construction plan exists.

In other words, the cycle can come full circle. The bank returns—but not to a market where its loan is supposed to save a project from a lack of sales. Instead, it returns to a professionally structured project with the fund’s own capital, clear oversight, and a contingency plan.

Fortune-telling with coffee grounds

The Ukrainian housing market won't switch to this model tomorrow. And I don't think early-stage sales will disappear. Markets rarely change in such a linear fashion. But major crises almost always change more than just the market's size; they change its structure.

The financial crisis of that time drastically reduced the role of banks and made buyer funds the main driver of residential development. Today’s crisis could give rise to a different model, in which thousands of small investors pool their resources through a fund to form a large pool of professional capital. The fund then purchases and finances the project.

The developer creates a ready-to-invest product and professionally markets it for a development fee. The bank provides financing. And the buyer purchases a completed home. In this model, the winner isn’t the one who was the first to sell the cheapest apartment on the construction site. It’s the one who best designed, financed, built, and sold the entire product.

Perhaps the future of residential development lies in a shift from a business focused on selling square meters to one focused on creating investment products. And then the developer’s core competency will no longer be the ability to constantly raise funds to continue construction.

And the ability to quickly and professionally convert capital into finished real estate.

‍