Russia Overview – Real Estate

25.04.2014

Chambers and Partners

Contributed by Goltsblat BLP

Recent Russian macro-economic indicators are far from inspiring compared to growth figures in the past. Even so, Russia’s Doing Business rating has gone up 20 points over last year and the World Bank puts Russia among the ten countries that have advanced most in creating favourable conditions for doing business and in first place among the BRICS countries in terms of introducing effective reforms.

The Russian commercial real estate market remains positive, with Russian companies continuing to dominate the domestic commercial property market with over 80% share of the market. Foreign investors are also virtually absent from the residential real estate segment. However foreign professional investors do in fact achieve excellent results on the Russian market, in spite of its local specifics and complexities. It is rare that a transaction is completed without foreign participation. On the other hand, whereas foreign banks are cutting finance for Russian projects and transactions for a variety of reasons, the major Russian banks are more than willing to lend, and foreign investors have found that Russian banks will finance for both development and transactions involving commercial real estate.

Market growth has been driven by retail property. Since there are few opportunities in Moscow for new construction, developers are looking to the regions. A large number of small players typically participate in regional development, thereby acquiring invaluable experience of commercial real estate construction. Given the availability of project finance and stable demand from retail chains and global and national brands, as well as the fact that Russia as a whole is still well behind even Eastern Europe in terms of retail space saturation, this market segment’s prospects look good in the medium-term.

A new trend in the retail property sector consists of construction projects of major agricultural trading centres, like Rungis, near big cities. There are at least three such facilities at the design stage in the Moscow area and two outside St Petersburg. Another trend, this time a global one, is growing competition from online trade.

There is a shortage of storage premises, making Russia an attractive market for investors in this sphere. The vacancy rate of logistics property is regularly less than 1%. It is typical for over half the space in new warehouses to have already been leased out by the time the foundations have been laid.

High class office space is a more complex market segment that is developing only sluggishly outside Moscow and St Petersburg. It is experiencing quality segmentation, with Class A spaces still in short supply and regularly commanding high rentals. Cloud technology is also affecting the market situation with developers seeking to find an optimum balance of office, hospitality, retail and entertainment space and apartments in new projects.

In other segments, investors are particularly interested in entertainment theme parks, airports, the medicine and health industry and the automotive part and medicine production sectors.

Moscow has consistently concentrated on several key priorities, with the primary focus on roads, public transport, engineering and social infrastructure, hotels and the development of new areas. New building permits issued in the historical centre of the city are exceptionally rare. The cadastral revaluation of land plots in Moscow has raised the cost of land, rentals and land tax. City Hall has nothing, in principle, against selling land in the city to private buyers, at least outside the Garden Ring, but the rise in land prices has markedly reduced the interest of buyers.

The development of New Moscow (territory attached to the capital three years ago) is mainly focused on the construction of transport infrastructure, such as roads, railways and Metro. For this purpose, City Hall has managed to push through legislative amendments simplifying the withdrawal of land for public purposes and the relevant mandatory procedures are now expected to take significantly less time. In any case, the withdrawal of land is, of course, possible only on the condition of appropriate monetary compensation for the owner.

In legal terms, one of the latest Russian trends is the so-called de-offshorisation of the local economy, which is an incentive to Russian businesses to repatriate funds so that they can be drawn more actively into the Russian economy. The Russian Ministry of Finances has initiated a series of negotiations with authorities of offshore jurisdictions traditionally preferred by Russian citizens to exchange information. It has specifically opened talks with the Netherlands for the revision of the very attractive Double Tax Treaty. This trend is no different from similar processes taking place in more developed economies.

Another recent reform concerns the merger of the two court systems in Russia that have existed so far: the Supreme Commercial Court, which deals with commercial disputes, and the Supreme Court of General Jurisdiction, which handles administrative, criminal and family matters, amongst others, as well as disputes with participation by individuals. Considering that the Supreme Commercial Court has recently been demonstrating an unprecedentedly business-friendly and proactive approach (for example, the reimbursement of judicial costs by the losing party, transactions with future real estate property, etc.), professional participants on the local market and the legal community are justifiably pessimistic about any short-term increased efficiency or improvement of the work of the judicial system.

Finally, the reforms have also embraced the system for taxing commercial real estate. Previously, corporate property tax was based on the book value of the property but it is now calculated according to the cadastral value of such property established (and updated from time to time) by the municipal authorities. The idea is that the cadastral value will be brought closer to market value, but not all owners of commercial property agree with the cadastral valuations and the result is mass challenges to these in court.

As for the long-anticipated massive reform of the Civil Code, so far it has resulted in rather moderate modifications that are promulgated and enacted in a rather comfortable regime. For instance, the changes in the real estate sphere include the abolition of “double” registration of some real estate agreements in the Realty Register.

The Supreme Commercial Court has made much more active efforts than the legislature to interpret laws in a manner that modernises them and makes them more business-friendly. The most notable recent rulings have concerned deformalisation of property leases: the possibility of leasing a future property (to be built or acquired in the future) is now recognised, as is that of leasing part of a premises. The court also confirmed that a real estate lease not recorded in the Realty Register is still valid and binding on the landlord and the tenant, while not existing for any third party unless and until it has been properly registered.

Large-scale reforms in the sphere of land transactions, spatial planning and zoning, provision of public land for construction, etc. are expected to continue. Finally, another major aspect attracting the attention of professional market players is the development of the federal law on PPP, which is anticipated to at last allow private investors more flexibility, predictability and protection in their relations with the public authorities when implementing large-scale projects, such as the construction of roads, bridges, airports, the utility and social infrastructure, which still retain a high commercial appeal in the eyes of professional investors.

http://www.chambersandpartners.com/180/11/Editorial/7/1

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