In its latest report, the National Commission on Securities and Stock Market warned buyers of property rights to housing construction about the existence of certain risks when making a purchase through forward contracts.
The underlying asset of forward contracts, in most cases, are property rights to residential premises, which will become a real estate object after completion of the construction of a residential house. Through the sale of such forward contracts to the buyers, the developer optimizes his tax liabilities, since, according to the Tax Code, the operations mentioned are not subject to taxation.
Real estate sale scheme through forwards
The peculiarities of such a scheme for the sale of real estate today are the conclusion of a number of contracts, namely:
- The forward contract, which is concluded between the developer and the asset management company (AMC), acts in the interests of the joint investment institution on the commodity exchange;
- The contract of purchase / sale of the derivative (forward contract), which is concluded between the AMC and the buyer (individual);
- The contract of purchase / sale of property rights, which is between the developer and the purchasernatural person.
Under these contracts, the payment by the individual buyer of the funds is divided into two parts, that is, he first buys a forward contract and pays AMC, and then buys property rights from the developer.
Accordingly, the income received from their sale is not considered a means of co-investment.
When acquiring forward contracts and property rights to residential premises with the participation of AMC, the following risks arise:
- The impossibility of returning fully paid funds (in the event of termination of the contract of sale of property rights), since the conditions of the forward contract are fulfilled (the contract is delivered on time). That is, the buyer will be able to return only the funds paid under the contract of purchase / sale of property rights;
- The risk of an increase in the price of residential premises, since in the case of a non-recognition of a forward contract as an asset by the tax authorities, additional tax charges are possible;
- The absence of special legislation to control the issuance and circulation of forward contracts, unlike other financial instruments, in particular, such as bonds.
Due to the lack of proper regulation of commodity exchanges, the pricing of forward contracts may also be biased.
In addition, an individual buyer who has entered into a forward contract with an AMC is only a party to the transaction, not an investor of the joint investment institution, and therefore the Commission has no leverage to protect its rights.
And finally, the conclusion of most of these contracts is carried out without the participation of professional participants of the stock market. And this, in turn, reduces the bargaining position of the buyer, and, accordingly, the degree of legal protection of his rights in contracts. “In order to make an informed decision on investing in housing through forward contracts, buyers must take into account all these risks,” warned the commission.