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Property Investment for Expats in Russia

Submitted: December 2013

In Russia, house price variations should always be adjusted for inflation, failing which you cannot have a clear picture. Property rights are reportedly poorly protected, and housing market statistics are hard to find.

The buy/sell costs (e.g. estate agent fees, legal fees and taxes) are very high (25%). In other words, Russian property investment should be considered only if there is a long-term purpose. Otherwise, the buy/sell costs would likely undermine any return on investment.

Regarding income and capital gains taxation, Russia makes a clear cut-off between residents (taxed at 13%) and non-residents (taxed at 30%). This means that you had better anticipate your country of residence over the coming years, as it can make a huge difference.

You should pay attention to how old/deteriorated a building is at all times Many premises have been poorly built, which means that they either need huge maintenance or rebuild from scratch. Don’t underestimate the geological side of it either, and check the possible risks in your local area.

Acquisition of real estate by foreign nationals

At the moment, there is no general restriction on foreign ownership of Russian land. There are some specific restrictions though, such as agricultural land or defence-related landownership restrictions.

The Government has proposed, however, barring foreign nationals from buying property in Russia unless they are authorised to do so. This restriction is expected to be effective from 2015.

If you are in any doubt, seek professional advice. Be wary of illegal or fraudulent schemes to circumvent foreign investment restrictions (e.g. bribes, holding property through a company, etc.).

Russian housing market generally

The Russian housing market is not really uniform, which is hardly surprising given Russia’s geographical size. Central Moscow is the most expensive property market in Russia. You could expect prices to be around US$7,000 per sqm, rising to up to US$20,000 per sqm for prime property. Real estate can be much less expensive in many other cities (e.g. US$3,500 per sqm in central Saint Petersburg, etc.).

As in most countries, the capital shows one of the poorest gross rental yields, which can be around 8.3% for a 1-bedroom property and close to 7% on a 3-bedroom one. In a cheaper town, such as Saint Petersburg, you could expect 9.2% and 8% respectively.

Given that Russia is still a high inflation country, these high rates should not be overestimated. However, there is strong potential for capital gains on top of that, as rents are generally rising. Furthermore, property prices would probably rise a lot if the interest rates demanded by the market on RUB-denominated investments are going down.

An assessment of the Russian housing market must include many additional macroeconomic factors, including:

  • Mortgage availability
  • Evolution of foreign ownership restrictions
  • Interest rate variations
  • Housing supply developments, both in terms of quantity and quality
  • Social and cultural trends
  • Political factors, including corruption issues
  • Demographic trends
  • Tax policy, and
  • Psychological factors

Mortgaging

Get your documentation right before applying for a mortgage, and do it early to avoid disappointment.

From a financial point of view, remember that:

  • your net borrowing costs include not only interest but also additional mortgage-related fees and taxes
  • interest rates may go up in the future, but they have some room to shrink further as well
  • homeownership costs are not solely about financing costs (you may to plan for other costs, such as maintenance).

For more information on mortgages in Russia, see ACCOMMODATION – Mortgages for Expats in Russia.

Property taxes

Property taxes are levied by municipalities or regional governments. The tax regime is different depending on whether you own property directly or through a corporate vehicle. Generally, more taxes must be paid if a property is owned by a company, but this is on a case-by-case basis.

Higher land taxes mechanically shrink property values and rental yields. Prior to purchasing property, it is essential that you check how much property taxes you can expect to pay.

Letting your property

Do check the applicable landlord and tenant law in the first place. Rental agreements generally need to be registered unless their duration does not exceed one year. The presence of both parties is required.

On paper, the eviction process should take four months, but this can sometimes be much harder to achieve.

 

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