Russian Investors Buy Into Premier International Locations But Wait For Resort Markets To Bottom Out

MorgueFile / Hot Black

Real estate purchases by Russians fell in the first quarter of 2013 — for the first time in four years. The decline, to $413 billion, from $428 billion in the same period the previous year, according to the Central Bank of Russia, may have been influenced by the bank on public officials owning overseas property. But experts say there are several other reasons.

Konstantin Kovalev, Managing Partner at Blackwood Real Estate and VP of the Russian Engineering Union thinks Russians are becoming†more mature and cautious buyers. †

"And that means that nowadays it takes longer for the transaction to happen," he told Real Estate Quarterly. "They now see property abroad more as an investment rather than just a second house by the sea. Yet, in comparison, purchases of holiday accommodation still prevail over purchases of property in large cites."

Kovalev says the central bank's findings also reflected fluctuating levels of interest in both foreign property abroad and commercial real estate in Russia.

"The financial crisis caused prices to drop in weak European economies, yet investors believe that prices will eventually recover. It is now lucrative to splash out $50,000 to $70,000 for an apartment in Spain and wait for prices to go up. Many Russians are taking advantage of the situation."

According to Blackwood Real Estate, the top four countries where Russians like to buy property are England (the majority transactions are made in prime locations of London), along with France, Italy and Spain.

"London is an interesting case," continues Kovalev. "One in four homes bought in London is bought by a buyer from Russia or CIS. Russians are hungry for prime areas in London and can spend 2-6 million pounds and more on their properties in central boroughs. The lack of balance between supply and demand generates a rise in prices in central London. Purchases are made in record time and at prices close to the offered. London still remains a "safe haven" for the investors."

Alexander Shatalov, Managing Partner at International agency of elite real estate Intermark Savills Moscow adds that London remains one of the most attractive cities in the world to live and invest in real estate by foreign buyers. Today, in the most prestigious areas of London, the share of real estate purchases made by foreigners is more than 60 percent. Among Russians new housing projects are very popular, where the prices go ahead of the market in the whole.

"Property in London is a "reserve currency" in the global real estate market," says Shatalov. "The secret of that popularity is in its global financial center status, and that it's a good way to preserve money. London is also attractive to the buyers as a city to live in, to educate children, and run a business. In other words, real estate purchase motives are often intertwined with personal reasons."

Some families buy property abroad for children who are studying in university. According to Knight Frank Russia & CIS, the most popular countries for education-related purchases are the UK, U.S., Germany and Switzerland.

"In addition to all of the above there is another significant reason for those purchases," says Elena Yurgeneva, the head of the department of the elite real estate of Knight Frank Russia & CIS. " The transactions are made in order to obtain a residence permit. For the same reason that buyers used to purchase a house in Latvia, for example, changing laws mean we can expect an increase in such transactions in Spain as well."

Yurgeneva says that a lot of would-be and current pensioners prefer to buy houses by the sea, paying attention to the good environment and "stress free" locations: Jurmala, the coasts of France and Italy, Monaco, Spain and Montenegro are in great demand.

"Baltic countries in particular are popular," says Yurgeneva. "Mild summers without sweltering heat typical of other countries is an attractive choice the older generation. Another factor in favor is the lack of the language barrier, mental, social and cultural proximity with the local population as much as attractive lending rates compared to Russian ones."

Along with foreign property, there is an increasing demand for domestic real estate. From an investment point of view, one of the most attractive options now is commercial property in Moscow and Moscow region. At a cost of Class A office rent in Moscow ranks second in Europe after London, and the rate of return is even higher than in some Western countries.

According to Savills, in the next 5 years, the prices for the premium property in the heart of London will rise another 24.3 %.

Julia Ovchinnikova, the foreign real estate director of Intermark Savills says there are some risks that the Russians and other foreigners face when buying property abroad. They tend to be common risks but they should not be underestimated.

"If we are talking about a newly-built facility in the project, the developer might not get funding for the construction, there might be violation in the commissioning of the facility. Of course, in times of crisis, these risks increase. Therefore, it is important for the investor to understand where the funding comes from, and what guarantees banks, developers and insurance companies give. As for the commercial real estate purchases such as hotels or office spaces, in a crisis, of course, there is a risk that the number of visitors, tenants will drop down, i.e. the profit will drop down as well."