Uptick in Russian outbound CRE deals – Exclusive

An increasing number of high-net-worth investors from Russia and the Commonwealth of Independent States (CIS) are shifting their preference from residential to commercial property purchases in overseas markets, in the aftermath of the Russian economic crisis, a report has found.

According to Moscow-headquartered real estate brokerage firm Tranio’s sixth annual survey that analysed the outbound property investment appetite of Russian and CIS buyers in 2016, real estate is increasingly being viewed as a capital maintenance vehicle. This trend contrasts with the buying habits seen in 2014 to 2015 – a period when Russia’s economic woes were at its peak amid tumbling value of the ruble, falling oil prices and the Ukraine crisis. During that period, investors were either selling or leasing their holiday homes abroad, or postponing any residential purchases.

Out of the 269 people surveyed, which comprised real estate professionals in 32 countries globally who work with Russian and CIS clients, 27 percent named the group as an essential buyer category in 2016, up from 10 percent in 2015. Meanwhile, the number of respondents who felt Russian investors were a rarity in the global commercial property market fell by nearly half, from 29 percent in 2015 to 16 percent in 2016.

One of the top drivers prompting this overseas push was relative political and economic stability in the investing markets. Over 60 percent of the respondents said this was a key reason why their Russian-speaking clients were seeking investments in Austria, the Czech Republic, the US and France.

Typically, Russian overseas investors, mostly consisting of entrepreneurs, prefer to acquire rental properties directly. As many as 81 percent of the respondents said these investors are not attracted to real estate funds.

“This is likely due to the fact that there isn’t a lot of information available yet in Russian regarding real estate funds,” explained George Kachmazov, managing partner at Tranio. “We have found that some of our clients haven’t even heard of this investment vehicle.”

However, he expects crowdfunding and real estate fund investments to pick up pace this year.

According to the report, 2017 will also see Russian investors restructure their foreign capital and assets due to changing regulatory norms.

“Starting 2018, the Russian government will be aware of the foreign bank accounts held by Russian tax residents,” Kachmazov said. “At the same time, Russian tax residents are required to pay a 35 percent tax on cheap loans. However, as the low interest rates in Europe are beneficial, these clients are unlikely to reject mortgages. In order not to violate the requirements of Russian regulators, more investors will be structuring their purchases through legal entities and therefore avoiding the requirements imposed on individuals.”

With falling yields on rental properties, Russian investors are also expected to move into development projects and value-add investments in the hunt for better returns. Many investors looking for redevelopment investment opportunities, the report noted, would flock to Spain particularly where real estate prices have dropped by 40 percent since 2007 and are now expected to increase.