The Russia route

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Spending spree

Add to this investment mix low levels of government and corporate debt, hugely profitable companies whose earnings are growing at around 30% a year, a financial sector that has no exposure to subprime lending and stock valuations that are among the cheapest in the emerging markets universe, and the investment case for Russia would appear to be complete. While many investors view recent market volatility as a warning sign, even more see it as a buying opportunity.

Russia has always enjoyed the geographic advantage of being the bridge between Western Europe and the Asia/Pacific.

The reality is that most international businesses today cannot afford not to be in booming Russia. Economic growth averaged 6.7% for 1999-2007, and accelerated in the first eight months of this year to 7.7%. Inflation is in single figures, and Russia has amassed the world's third biggest gold and foreign exchange reserves.

Growth is no longer driven just by high energy prices, but by investment and consumer spending. Russian business remains cut-throat, and investors cite endemic corruption and bureaucracy as leading obstacles. Yet outside the politically sensitive energy and resources sectors - where operating without a local partner, probably state-controlled, now seems near impossible - risks of serious pitfalls for most investors are no higher than in other emerging markets.

The taxation of companies in Russia underwent comprehensive reform in 2001. The basic rate of Corporate Tax applicable to a Russian enterprise, or a foreign corporation with a permanent establishment in Russia, is between 20% and 24%.

The new Russian economy is overall a healthy, consumer-driven one. State spending is high, but there is more competition than within much of Western Europe.

Russia is ranked among the world's top 10 tourist destinations and across its vast landscape, Russia has plenty to offer the Russia property investor. The historic cities of Moscow and St Petersburg are firm favourites and Sochi - host to the 2014 Winter Olympics. Major investment in infrastructure and amenities is underway, particularly in Sochi and Krasnodar, but also in other parts of Russia.

Property returns over the last few years have been nothing short of overwhelming - some investors who bought property in Moscow ten years ago have made up to US$2 million.

Speaking to Matthew Lewis, Managing Director at PIK Capital Partners, on what Middle East and western developers are looking for in the Russian market, he replied "A good mix of track record, transparency, right location, effective financing, and most importantly capital appreciation."

He describes the present property market in Russia to have a liquidity problem due to the lack of credit financing from 60% plus of the major banks and that this will probably last another 6-12months before things start to get better.

Matthews stresses that the Russian market now has the greatest opportunity to acquire "distressed assets" at rock bottom prices due to the liquidity problem that is forcing owners to sell up. Medium-sized developers have begun to put developing of new projects on hold, again due to the lack of financing from banks with some even restructuring and downsizing.

PIK Group is one of the largest and few vertically integrated developers in Russia, whose principal activity is the development, construction and sale of residential properties targeted primarily at the middle-income housing market in Russia with revenues of US$2.7 billion.

"Over the last 10 years the GDP has grown five times. There was no political stability, no class A office buildings, no shopping malls." Today Moscow city now commands the 2nd highest office rent in Europe.

Property prices are now among the highest in Europe and that demand for commercial and residential property is still strong. However, rental rates have not kept pace with rising Russian property prices - and this is making Moscow a less attractive investment proposition. The simple reason for this is that there is no freehold land available, similar to London.

St Petersburg, on the other hand, has seen both rising apartment prices and an increase in gross rental returns over the past year - the city was named in the Knight Frank Annual Wealth Report as having one of the highest price growths achieved by prime residential areas (38%). The ‘oil towns' of Tyumen and Novabrsk also offer good investment potential, while Russian property on the Black Sea coast is tipped for major price rises.

The Russian way

The panel of speakers at the session included Mr David Geovanis, Managing Director of London & Regional Properties. "Buying Russia property is not necessarily the same as other countries and the purchase process for Russian real estate is unique.

There are also Russia tax implications and a Russia mortgage to take into account. Obtaining independent legal advice on Russia law is highly advisable" stated Geovanis. "You will also require information on Russia tax - although there is no stamp duty on Russian property, there are fees and expenses associated with buying in Russia.

Foreigners investing in Russia property enjoy the same rights as Russians buying property and there are no restrictions. Bear in mind that owners of Russia properties are liable for state and local taxes, and if your investment in Russia property generates rental income you must pay income tax".

A Russia mortgage is currently not common for those buying Russia property and Russia mortgages finance has made a relatively new appearance on the Russian real estate scene. Russia has recently introduced legislation giving Russians access to a Russian mortgage for the first time, which adds tremendous potential to demand for Russia properties. Given the newness of the Russia mortgage market, you should obtain up-to-date Russia mortgage information from a legal advisor.

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