L&M Finance Group


Today, quite a popular way of investing in real estate is the purchase of targeted bonds. In this article, we have tried to briefly describe what these targeted bonds are and what the risks of investing in them exist.
First of all it is necessary to note, that according to the Ukrainian securities legislation , target bonds mean bonds, performance of obligations on which is carried out by means of transfer of goods and / or providing services according to the requirements established by the prospectus or the decision on issuing such bonds, as well as by paying funds to an owner of such bonds in the cases and manner provided for by the prospectus or the decision on the issue. The legislation establishes, that issue of targeted bonds of the enterprises, fulfilling obligations on which is carried out by means of transfer of object (a part of object) of housing construction, can carry out by a legal entity who according to the legislation is entitled to perform the functions of the employer on the construction of such object, or a legal entity that has entered into an agreement to participate in the construction of housing with the executive authorities, local authorities, who have the right of ownership, lease or permanent use of land, on which will be located housing construction by means of which fulfilment of obligations by target bonds will be provided.
Targeted bonds may be public or private. Public placement of bonds is carried out by offering them to a predetermined number of persons on the basis of publication of the bond issue prospectus in the official print publication of the National Securities and Stock Market Commission. Private placement of bonds is carried out by a directly written offer of such bonds to a predetermined category of persons, the number of which must not exceed 100. Bonds offered for a public offering are in free circulation. The first and subsequent owners of such bonds may be any legal or natural persons. In turn, the first owners of bonds offered for private placement may be legal entities or individuals - participants of the private placement, the range of which is predetermined in the decision on placement of such bonds.
If we are speaking from a practical point of view, purchasing such bonds, the investor reserves the right to himself to receive in the future a certain number of square meters in the new building. That is why, along with the agreement of purchase and sale of securities, the so-called agreement of reservation of a particular property - an apartment or a parking lot, for example, is often made with an investor. It also should be noticed that, although such a agreement does not contradict the legislation of Ukraine, it is worthless in the absence of a agreement for the sale and purchase of target bonds.
Before making a purchase of target bonds, an investor should first of all search for information about the relevant bond issuer on the Internet. Among the publicly available information about the legal entity that can be found in the network space, the most interesting is information about the enforcement proceedings opened against the person concerned, its bankruptcy or liquidation, court cases involving it, as well as the usual news in which the relevant issuer, his participants (shareholders) or ultimate beneficial owners are mentioned. If negative information is found during such a simple research, we do not recommend investing in target bonds of such an issuer.
After checking the Internet, the prospectus of the relevant bonds should be reviewed - this document contains the key terms of the placement of the relevant bonds, including the term, conditions and procedure for redemption, information about the landowner or land user, employer on the project, developer and contractor, construction project, by means of which obligations on bonds will be fulfilled, and about contracts, licenses, state acts, certificates, etc. 
After a detailed study of the above, the investor can invest money in bonds.
Among the main risks of investing in real estate through the purchase of targeted bonds, the following should be stressed:
  • It should be said that targeted bonds give the right to abstract square meters in the object because the legal status of the reservation agreement for a real estate object is not specifically defined by the law, therefore in the future disputes may arise regarding the individualization of square meters by which target bonds are redeemed;
  • Whereas it is bought, speaking a simple language, the right to square meters, and not square meters specifically, there is a risk for the investor of not getting the square meters in the future (for example, the issuer's creditors impose enforcement procedures on the object, or the issuer could not have not enough resources for the completion of the object);
  • Additional time and cost when an investor opens a securities account;
  • The issue may be recognized as invalid, which means the investor will receive not the real estate, but the nominal value of the bonds;
  • The investor’s obligation to make a call upon the bonds at a specific time; and
  • Although the National Securities and Stock Market Commission checks the issuer when registering the issue prospectus, the construction procedure itself is beyond its control, which means that its representatives cannot soberly assess the risks.
As conclusions, it should be emphasized, that investment in the real estate through the purchase of targeted bonds is a rather interesting opportunity for investors (as a matter of practice, bonds are much cheaper to buy than square meters) and for developers (attraction of financing). However, it is important to note the great risks of such an investment. Therefore, we advise you to carefully study all the information about the issuer and the building before making an investment, so that you do not lose the treasured real estate.