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More Russian investors look for Spanish commercial property
Amid economic sanctions and a volatile ruble, Russian international property investors are switching from residential to commercial sectors, with Spain a top target, says a new report.
The typical investor is an entrepreneur, business owner, who aims for a simple rental business and wants to achieve 4-8% per annum for at least five years, along with economic and political stability in their chosen investment destination, according to the sixth annual survey from Tranio.com. Spain is likely to be a major target, it predicts.
Russian investors bounced back in 2016, says Tranio, with 27% of respondents named investors as essential buyers 10% up year-on-year. Meanwhile, the number of respondents who said Russian/CIS investors were a rarity fell by nearly half, from 29% in 2015 to 16% in 2016.
Tranio Managing Partner, George Kachmazov, says, “Prior to 2013, Russian/CIS buyers who were looking for property overseas primarily wanted to obtain residential property in foreign resort towns for their own use.
“Back then, these buyers were snapping up properties without considering real estate to be an investment. In 2014-2015, the value of the ruble tumbled amid falling oil prices and economic woes exacerbated by the Ukraine crisis.
“During this period, some Russian/CIS foreign property owners began trying to sell or lease their holiday homes abroad, while others who had been planning to purchase homes abroad decided to postpone their purchases. In the aftermath of the economic crisis, many Russian/CIS buyers have shifted their preference from residential to commercial properties. This indicates that many of these investors now view real estate as a capital maintenance vehicle. This trend became increasingly pronounced in 2016.”
Respondents included 269 realtors who work with Russian-speaking clients from both Russia and the Commonwealth of Independent States (CIS) in 32 countries across Europe and Asia, as well as in the United States.
Clients are primarily motivated by political and economic stability in the target country, the potential for price growth and the possibility of obtaining residency.
The percentage of respondents who consider political and economic stability to be a key motivator for Russian/CIS overseas commercial property purchases has increased by 25% since 2014. This dramatic rise is due to the fact that Russian/CIS buyers have sought relatively stable economies to invest in amid economic uncertainties at home, says Tranio.
Political and economic stability is a particularly key factor for Russian/CIS buyers eyeing property in Austria, the Czech Republic, the United States and France; 60-90% of respondents in each of these countries indicated as much.
“In most cases, investors opt for these markets because they want to receive permanent, long-term rental income,” says Mr Kachmazov. “If not for the uncertainty that has arisen following the Brexit referendum, the United Kingdom probably would have made the list as well.”
In the United Kingdom, Portugal and Thailand, some 50-70% of respondents cited the potential for price growth as a key motivator for Russian/CIS buyers. Thailand and the UK are also popular among those who wish to invest in redevelopment projects.
In Bulgaria, Greece and Latvia, all respondents cited the possibility of obtaining residency as a key motivator for Russian/CIS buyers. Upwards of 50% said the same in Portugal, Hungary, Cyprus, Turkey and Spain. In all of these countries, residence permits are available to real estate investors. Most Russian/CIS buyers want for simple rental for a long-term investment in reliable markets.
Among the foreign markets included in the survey, Thailand and the United Kingdom proved the most fertile for development and redevelopment projects. In Thailand, 50% of respondents said development and redevelopment projects accounted for upwards of 30% of their Russian/CIS clients’ interests. In the United Kingdom, 40% of respondents said the same.
“Russian/CIS investors have long had a prominent presence on the UK market. Many run rental businesses, and most are professionals with a wealth of experience. Like investors in other sectors, Russian/CIS real estate investors in the UK are typically drawn to increasingly complex investments, such as development and redevelopment projects,” Mr Kachmazov says.
Across foreign markets, some 63% of respondents said that their Russian/CIS clients typically plan to sell their real estate investments in the near future – a 15% increase compared to 2015.
The remaining 37% of respondents said their Russian/CIS clients typically plan to hold on to their properties for the long haul, ultimately passing them on by inheritance.
Of the respondents who indicated that their Russian/CIS clients typically plan to sell their investments, 59% said most plan to do so within 5-10 years of the purchase.
Russian/CIS investors have come to expect lower yield rates, our study revealed. Across all of the markets we reviewed, the percentage of respondents whose clients expected their rental property to yield over 8% per annum fell from 35% in 2013 to 20% in 2016 for residential properties and from 55% to 36% during the same period for commercial properties.
Mr Kachmazov says, “Rental yields are low in the liquid European markets, and the number of Russian/CIS investors realizing this is growing. On average, high-quality liquid properties located in the centers of big cities yield 3-5% per annum. Yields of over 7% typically entail peripheral locations, low liquidity and heightened risks.”
Just over half (52%) of respondents said that Russian/CIS investors typically opt for properties located in districts adjacent to city centers and characterized by moderate risks and yields. The popularity of such locations was particularly notable in Croatia (100% of respondents), Turkey (86%), Greece, Bulgaria (75% each), Spain (71%) and the Czech Republic (69%).
Central districts of capitals and big cities (chosen by 46% of respondents) are in high demand in Latvia and Portugal (100% of respondents each), France (86%) and Hungary (83%).
“With respect to investing, Latvia, Portugal and Hungary are relatively high-risk countries. Russian/CIS buyers there appear to be reluctant to purchase properties in peripheral areas,” Mr Kachmazov says. “In France, Russian/CIS buyers are almost exclusively drawn to top locations in Paris and the Côte d’Azur.”
Overall, only 2% of respondents said that Russian/CIS buyers typically opt for city outskirts and small towns, though this figure was slightly higher in Bulgaria, Greece and Thailand, where a 13% of respondents (in each country) selected these options as favorites among Russian/CIS buyers. These three countries are distinguished by a heightened sense of risk in comparison to the other markets we analyzed. By comparison, only 4% of respondents in Germany said that city outskirts were of interest to their Russian/CIS.
Half of our respondents typically work with Russian/CIS clients who want to spend less than ˆ300,000 on residential properties. Only 2% said it was typical to work with Russian/CIS clients looking to purchase properties worth upwards of ˆ3million.
With respect to commercial property, we asked our respondents the same question, but with the following budget categories: less than ˆ1million, ˆ1million-ˆ3million, ˆ3million-ˆ10million, or more than ˆ10million.
Russian/CIS buyers were slightly more eager to shell out money for commercial properties. Some 43% said that most of their clients from the region look for commercial properties of between ˆ1-3million; 32% said such clients typically seek such properties for less than ˆ1million.
Respondents in Bulgaria, Turkey and Montenegro were more likely to work with clients with lower budgets, while those in the United Kingdom, France and the United States worked with more high-budget clients.
Nearly half (41%) of respondents said that the biggest struggle their Russian/CIS buyers encounter is that of selecting the best property to fit their needs.
“Investment properties will become even harder to find in the future,” says Mr Kachmazov. “Due to the large amount of capital currently flooding commercial markets around the globe, quality properties are becoming scarce and there is a bitter struggle for available properties.”
Russian/CIS clients also struggle with obtaining loans (according to 24% of respondents) and paying for their purchases via transfers (22%). By comparison, in 2015 only 4% of respondents mentioned each of these difficulties. These problems have likely become more pronounced in recent years due to a widespread tightening of Know Your Customer procedures, as well as the fact that the Central Bank of Russia has cracked down on many banks in recent years, revoking numerous banks’ licenses.
The long-term planning horizons, expecting moderate yields established in 2016 are set to be even more pronounced in 2017, as clients become more professional, says Tranio.
The main trends are:
Commercial property. The 2016 trend will likely continue: Russian/CIS buyers will more frequently invest to maintain and multiply the capital, spending less money on holiday homes for their own use.
Added Value projects. “As the number of experienced Russian/CIS investors is on the rise, and the yields of simple rental businesses are relatively low (5% on average), we anticipate a greater number of our clients will invest in development projects in 2017 in order to obtain higher yields (15%), and that they will do so both directly and via collective vehicles,” Mr Kachmazov says.
“We at Tranio.com believe that redevelopment investors will flock to Spain, where real estate prices have fallen by 40% since 2007 and are expected to increase substantially in the next few years.”
Student housing. In 2017, demand for student property is expected to increase: Microapartments are being actively constructed in Germany and the United Kingdom, and more and more international students are coming to these countries. Investors will also continue buying conventional rental flats, hotels and supermarkets.
Alternative property investment vehicles. “We expect Russian investors to learn more about collective investment (crowdfunding) and real estate funds and to begin moving in this direction gradually in 2017-2018. This format is often more convenient for individual investors than buying and subsequently managing properties on their own,” George Kachmazov says.
In addition, investors are likely to continue to restructure their foreign capital and assets in 2017 following the entry into force in 2015 of a set of restrictive new controlled foreign companies (CFC) rules requiring Russian taxpayers to provide the tax authorities with details regarding various foreign business interests.
“Starting 2018, the Russian government will be aware of the foreign bank accounts held by Russian tax residents,” Mr Kachmazov concludes. “At the same time, Russian tax residents are required to pay a 35% tax on cheap loans (by the “9% minus the loan interest rate” formula). 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.
Tranio is a leading international real estate broker. It is headquartered in Moscow backed up by an office in Bryansk and has offices in Europe: Spain (Barcelona, Alicante, Torrevieja) and Germany (Freiburg).
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