A Selection of News and Topical Views

Maxim Stulov / Vedomosti

Q1 Properties bought White Square in Spring 2013.

O1 Properties Gains Investor ş— Report

By Mark Gay

O1 Properties is in negotiations with billionaire Alexander Nesis but would not confirm as REQ went to press that Nesis is buying a stake of more than 40 percent in the real estate investment company.

Nesis told Bloomberg news agency that he has agreed to buy a stake of more than 40 per cent in O1 Properties. The company cancelled a $425 million IPO planned for London last year. However it successfully raised 6 billion rubles (about $185 million) on the Russian bond market in August, at a coupon of about 12.0 percent.

O1 Properties' chairman Dmitry Mintz told REQ at the time that the proceeds were used to reduce the amount of bank debt and to further develop the company.

"The pricing of prime offices is really balanced right now," Mintz said. "Rents did recover from 2009 but are still far away from pre-crisis levels. As an asset class prime offices are not better then proper retail, though risk return ratio here is a bit different. It tends to be more stable then retail due to longer average lease maturities and higher credit quality of the tenants. So it is a more sustainable investmentáin the down turn though it does not allow you to pick up higher returns when the markets are rapidly growing."

Mintz said the Moscow office market was dramatically undersupplied compared to all major European cities, however he said it could take a "couple of cycles" to catch up.

Despite talk of companies moving out of central Moscow because of high rents, Mintz said, "For our portfolio we definitely prefer central locations, though we think there is a lot of value in selected locations outside city center like Kutuzovskiy or so called Gazprom triangle. In general most of the destinations outside the third ring are a bit tricky."

At the beginning of 2013 O1 bought one of Moscow's most prestigious business centers, White Square, at Belorusskaya. Its most recent acquisition was the Nakhimovsky business center, named iCube, in the south west of Moscow. The building's attractions, Mintz said, were, "convenient location, effective design, a lot of natural light, a possibility to place signs by anchor tenants, bright look of the façade and ample parking — all these factors make iCube one of the most attractive office complex on the South-West side of Moscow." The company plans to invest in improving the common areas around the iCube complex.

Disney plays down store report

The Moscow Times

The Walt Disney Co. played down reports that it plans to open retail stores in Russia. The newspaper Kommersant said the entertainment company planned to open Disney Store, Disney Plan and Disney Style outlets in the country, without naming a source. However a Disney Consumer Products spokesman told The Hollywood Reporter that there was nothing new to announce, though of course the company was evaluating opportunities for global growth.

According to Kommersant's report on 23rd October, Disney is considering shopping center space in Moscow and St. Petersburg and looking for local operator-licensees. Disney called the report, "inaccurate". Disney has had an office in Moscow since 2006 to manage film and television distribution.

City Hall Buries Plans to Build Mall Under Pushkin Square

The Moscow Times

Pushkin can rest easy. City Hall has abandoned plans toábuild anáunderground shopping center beneath his most famous square inácentral Moscow.

Former mayor Yury Luzhkov proposed the idea in 2004, but Sergei Sobyanin, theácurrent mayor, drew aáred line through theáplans, Interfax reported, according to information from an unnamed city hall official.

Theánow-scrapped project also envisaged theáconstruction ofáan underground car park ináaddition toáthe shopping center, which would have been built inside aálarge tunnel.

Shopping Mall Traffic Rules Drafted to Reduce Jams

The Moscow Times

TheáTransportation Ministry has drafted tougher rules foráMoscow's shopping malls toáreduce theátraffic jams they cause, but critics fear that theávaguely-worded bill might only make theáproblem worse.

Theáproposed amendments toáRussia's transportation laws would require that highway "entrances, exits andáramps must not impair visibility onáthe road or create conditions that diminish theároad's capacity," Kommersant reported.

Shopping centers would be given until 2015 toásign road access agreements that specify theáfees they would have toápay forátheir use ofáhighway ramps andáthe maximum number ofácars that may travel toáthe shopping center each day. Exceeding that number would lead toáan increase ináfees.

Head ofáthe economics ofátransportation institute atáthe Higher School ofáEconomics, Mikhail Blinkin, said theárules were "reasonable, but they should have been adopted 20 years ago." Some ofáthe older malls, surrounded byáheavily developed urban areas, have no land toábuild convenient ramps, he said.

Aátransportation official said theávague wording ofáthe bill would allow foránew malls toábe built too close toáexit ramps coming fromáfederal highways, threatening toáreplicate theásituation onáthe heavily congested Moscow Ring Road andáincreasing traffic jams.

No Clarity On Residential Property Tax

By Alexander Panin

Residential property taxes will be based on cadastral values but lawmakers still disagree on tax deductions for privileged categories. The resulting delay means the tax will not be implemented until 2015.

The bill was presented to the government in August, but needs to be revised and was expected to be resubmitted by 15th November.

President Vladimir Putin said earlier this year that the new tax could be levied as early as 2014, but this now looks unlikely. The allowance of tax deductions for privileged categories became a stumbling block and the bill has attracted broad criticism.

Rather than being tied to the artificially low inventory price of property, the new real estate tax that the Finance Ministry has initiated is to be calculated according to the cadaster value, which is closer to a property's market value.

The Finance Ministry's proposal would allow the regions to set their own tax rates within given parameters. Taxes on residential buildings could be set at no more than 0.1 percent of their cadastral value, taxes on nonresidential buildings at up to 0.5 percent, and taxes on properties worth more than 300 million rubles ($9.3 million) at up to 1 percent. The current rate is 2 percent of the inventory property value.

Introducing the new system will increase property tax revenues by 5.6 times, to 137 billion rubles, the Federal Tax Service said.

The initial bill proposed by the Finance Ministry entitled everyone a 20-square-meter deduction from every apartment or house they owned, thus reducing the value and tax bill. Special categories of citizens, such as pensioners, the disabled, World War II veterans and others, were to receive a bigger deduction: 30 square meters from residential property and 1,000 square meters from land. That deduction would only be allowed for one piece of property and land. Currently, those set to receive this benefit do not pay real estate tax, no matter how much property theyáown.

The President's administration said that there should be more tax deductions and that privileged residents should not pay the tax at all. The Finance Ministry, on the contrary, thinks that the existing deductions are "radical," an unidentified ministry official said.

Another reason for the possible delay in rolling out the new tax is that the process of establishing the cadastral prices for property across the country is not complete. The agency responsible for setting up and maintaining the cadastral database was hit by corruption scandals earlier this month.

State Has Incomplete Record of Title Deeds

The Moscow Times

The Russian state has no ownership records for almost 40 percent of the country's real estate, Vedomosti said, referring to a memo from the Federal Tax Service.

In 18 of 83 provinces, the ownership of more than half of all property is in doubt. Records are least transparent in western Smolensk Region, where the municipal authorities cannot ascertain the ownership of 77 percent of real estate.

The state agency responsible for recording real estate ownership was established in 1998, and inherited a poorly compiled database of title deeds, the newspaper said.

The lapse could cost regional authorities delay. Budgets may lose as much as 45 billion rubles ($1.4 billion) a year if they cannot verify owners, Vedomosti said.

However an official in the Economic Development Ministry had a more dramatic proposal: The government may confiscate property that it classifies as abandoned if it cannot identify the owner. Real estate owners will still be able register on the state cadaster up until 2020.

Deputy Mayor Rejects Affordable Housing

By Lena Smirnova

High housing prices are a key tool to restrict migration, the Deputy Mayor of Moscow Marat Khusnullin told the annual Moscow Real Estate Forum in October.

Khusnullin said that building affordable housing ináMoscow would be strategically unjustified. He estimated that another five million people would arrive ináMoscow if theáprices per square meter inácity apartments went down toá$2,000 or $3,000, less than half of the current average.

Theáadditional migrants would further increase theáheavy burden onáthe city's transportation infrastructure. "Today theácost ofáhousing, as paradoxical as it is, is aáserious limitation onáthe growth ofáMoscow's population," Khusnullin said. "We do not need any more people. Theáaffordable housing model does not work foráMoscow."

Theáaverage price per square meter inánewly built Moscow apartments was 217,900 rubles ($6,754) ináearly September, according toáMiel real estate agency. Aásquare meter onáthe secondary housing market cost anáaverage 238,500 rubles ináAugust. New housing tends to cost less due to the possible construction delays as most apartments are bought while the building is still incomplete and need significant investment to fit out the core and shell.