OFFICE AND RETAIL REAL ESTATE,
PRODUCTION BUSINESS, FOOD AND AGRICULTURE, AGRITOURISM
Dr. iur. Ilya Alexandrow, LL.M., MBA (Finance)
Managing Partner, Alexandrow and Partners, Moscow
Our consulting company is currently working on several projects in the real estate sector in Moscow and in other regions of the Russian Federation. We render our services to one of the largest German architect bureau from Dusseldorf, which paticipates in several successful projects in Moscow City, in the City of Winter Olympic Games 2014 – Sochi, and in other regions of the Russian Federation. Furthermore we also participate extensively in the structuring and organizing of financing of certain types of investment projects in Russian Federation and other neighboring countries: Belarus and Abkhazia. We are involved in several mergers and acquisitions transactions between Russia and Germany. Lots of our investment projects are connected with different types of development and construction issues.
This article is addressed to all interested investors who would like to invest sure in Russian real estate and to get higher rent income. This aspect, connected with necessity of risk reduction through detailed legal analyses of offered transactions in Russia will be considered in this article also.
After the presidential elections of 2012 in Russia, after the governors elections in September 2013 in the city of Moscow and in the Moscow region our country is being considered as territory with high-level stability, rapid economic growth, high-level protection for foreign investors and as country with well developed civil society.
ECONOMIC GROWTH IN THE RUSSIAN FEDERATION 2012-2030
In April 2012 the Economic Development Ministry of Russian Federation published its estimation of growth in the domestic economy from 2012 till 2030.
So the medium rates of growth under two scenarios are between 3 and 5 % p.a.
By 2013 the medium population income increased by 46 % of the Euro-zone level, and it shall increase to 90-95% of this level in 2030.
The middle class will also increase essentially – from 22 % (in 2010) to 48 % (in 2030). According to the program of investment development, the medium rate of the Russian GDP's growth in 2012-2030 will increase by 4,4%. In 2014-2018 the Russian economy will move into the 5th place in the world rating instead the actual 6th position. In 2021 the Russian GDP will be higher than in Germany, and the Russian Federation will move into the 4th place in the world rating. It is necessary to mention this fact with regard to thousands of interesting projects with high level of profitableness and enormous potential in different economical sectors in Russia. To our opinion, the primary goal for foreign investors is to choose among certain investment projects in various economy sectors. Such decisions should be based on recommendations of qualified local Russian consultants shall consider options for minimization of risks and alternatives for the implementation of each investment project.
WHAT IS THE REASON FOR REAL ESTATE INVESTMENTS IN RUSSIA?
The real estate investments is one of the most stable type of investments. Recently the mid- and long-term regional investment projects have been appearing in different economical sectors of Russia. Such investments are fully acquitted and in some cases expressed as purchasing of existing real estate items or construction of new buildings.
Guarantees for Investors, Due Diligence and Deal Structuring
The most important instrument to protect investors' interests at the stage of concept design is the Due Diligence process. Such analysis of legal, technical and financial background of each project and its separate assets (including existing real estate items like land plots etc.) should identify risks for potential buyers. Effective minimization of operational risks is also the most important aspect at the stage of project concept development.
If the results of Due Diligence process are adequate, investor may set about the next stage of project's implementation, that is the deal structuring — whether the classical real estate sale and purchase agreement or agreement on establishing of joint company with a Russian partner for the further implementation of the project.
The majority of transactions with real estate in the Russian Federation are being executed on the base of sale and purchase agreements. The terms of such contracts should be formulate in details and can include certain guarantees for the seller and the buyer as well as references to several instruments of ensuring of performance of obligations like bank guarantees, personal guarantees, letters of credit, advance payments etc.
Importaint Details for Real Estate Transactions
The necessary term of investor's rights protection in the property acquisition process is the aspect of state registration (logging of information about transfer of real property title in the Russian Uniform State Register). In testimony of successful registration of transfer of real property title the party who files an application, receives 30 days after the application the abstract of title and extract from the Russian Uniform State Register issued in a paper format.
For new buildings of real estate items, it's necessary to draw special attention to actual documentation, in reference to the building process, which includes architectonical project documentation, building permission documents, geological research data, permit of the relevant regional authorities regarding participation of region in the infrastructure development (such as roads, electricity, water service and gas connection).
Minimizing of Risks Regarding the Long-Term Management of Real Estate
There are several types of risks to be considered here:
(1) Currency risks: Income from renting office and selling spaces in the Russian cities and towns generally nominated in rubles. Despite stable position of Russian currency in the past ten years (at the expense of currency reserves of the Central bank of the Russian Federation (a total of $ 525 bln.), and high prices of raw material), it's necessary to take into account the actual abstractive risk of currency devaluation. So it's necessary to conclude the long long-term agreement with the Russian bank to convert the funds received for the prescribed exchange rate during the investment period in terms of Euros or US dollars and in terms of another foreign currency (so called currency rate limits, “currency corridors”);
(2) Professionalism and responsibility in the management of real estate: It's necessary to know experienced and qualified local specialists who are able to exercise effective control and administration. For the purpose of liability insurance through the international insurance companies consulting companies are ideal. Their consultants speak the client's language. This allows to conclude long-term agreements with the projects in the sphere of investments and management of projects;
(3) Cooperation with the Russian partners. It's necessary to provide an overview about contactor and project companies, which are proposed for the joint project. The results of such overview should be reflected in the agreement in written form and should be discharged. We suppose that there shouldn't be any disputes between long-term partners, but any investor should let formulate arbitration clauses in the contracts appropriately for effective protection of rights;
(4) Tax planning: Actually there are several tax regimes which can be applied by an investor more effectively. The tax burden for investor will be reduced essentially if necessary activities are taken timely and adequately. For instance, simplified taxation system, system of one-time 6 (six) % rate tax for LLC or JSC incomes, tax remission for property tax, value added tax, income tax and other types of taxes on condition that the annual revenue doesn't exceed € 2,5 mln. Of course there are other variants to reduce the tax rates.
It’s necessary to refer to some examples of real estate investments in the regional projects inside of Russia:
In several European countries such as Germany, Austria and Switzerland the agritourism branch is the key economical factor in the agricultural regions and is traditionally integrated into agricultural sphere.
Recently, firms and agricultural villas have been appearing in Russia and Belarus in the past few years. Such type of relaxationt is being offered in village areas and attracts big number of tourists.
The actual situation in the countries of instable Near East (in such traditional tourist countries as Egypt, Tunisia and Turkey) and in the regions which were harmed by the economical crisis (such south countries of the EU as Greece, Spain and Italy), creates a new market situation where the development of agri- and ecotourism in Russia and Belarus is becoming an interesting alternative.
Using the contextual advertising on websites and other modern means, we can estimate how profitable are the investments in agritourism of Russia and Belarus.
Office and Retail Real Estate
Office and retail real estate investments in such cities as Moscow, Yekaterinburg, Rostov on Don, Samara, Chelyabinsk and St. Petersburg and in other Russian cities with high potential of increase of prices for the real estate are interesting and recommended. The second income source is the renting of land property rights. Earnings from such activities can achieve 10% to 15% per annum.
Also many economically strong Russian middle-size cities with population from 100.000 to 500.000 people (like Kaluga, Nizhniy Tagil, Ulyanovsk and Tula), are attractive in the sectors of office and retail real estate investments.
Projects in the Agricultural Sector
Russia occupies the largest part of onshore land in the world. The modern agriculture can develop the big number of regions, especially Southern-West of Russia, where there are enormous spaces of the fertile black-earth grounds, but also Povolzhye (regions near the Volga river), Ural and Southern Siberia.
All our actual projects in the agricultural sector are capable to assure earnings 20 to 100 % per annum — so-called “clever investments”.
Among these are the grain and seed production projects, meat and milk production projects, production and processing of vegetables, fruits and fish. Projects, connected with modern technologies for long-term storage of such products like fruits, vegetables, fish and meat, are more profitable. Earnings from regional projects in the food production sector can fluctuate between 25 % and 70 %. In our opinion, such projects are more interesting because food products are always the type of liquid and fast consuming goods. In the period of the Russian economical crisis 2008 to 2010 this rule was one more time confirmed.
Residential Real Estate. Production of Building Materials
The actual average quantity of floor area is about 22 m2 per one Russian citizen. This index is three times lower than in Germany or in Netherlands. Now several main technologies are being used for new construction projects including construction of multistory buildings and construction of wooden houses with application of modern materials reducing construction period by 3 months. All this can increase profitability of the development company.
Now we have projects for development of realty in the suburbs of such thickly populated cities as Moscow, Yekaterinburg, Kazan, Samara, and other cities with a million-plus population as well as in the special economic zones with reduced tax regimes where the new production unites are currently being built. The income rates from such investments can fluctuate between 15% and 40% p.a.
Furthermore there are projects in the constructional materials industry. The actual growth phase of incomes of the Russian population and long-term profitable operation of certain enterprises in this sector are conncted closely.
Such investments in Russia also make sense, there are enough projects for investors which can be successfully implemented.
The Russian real estate market is one of the most interesting real estate markets in the world with excellent growth perspectives.
There were demonstrated only several advantages of real estate investments in Russia.
The detailed information can be received upon requesting the author.