Real Estate


Q2 2006

Editors' view

  • January 01, 1970
Welcome to this year’s second issue of Real Estate Quarterly, which this time is focused on industrial development. Before we go any further, we’d do well to bring a bit of precision to a term that means many things to many people and gets bandied around too carelessly at times. Yevgeny Alyoshin gets to the bottom of one aspect of industrial development by sorting through the various types of ‘park’ — techno, industrial and the like — which are starting to generate a lot of interest on the Russian market.

Going Up In Russia

  • January 01, 1970

News in Brief

  • January 01, 1970

Market-Wide Overview

  • January 01, 1970
If one were to choose just one sector to serve as an illustration of the rapid growth that Moscow’s economy is undergoing at the moment, it would have to be the city’s commercial real estate market. Growth is evident across the board and, judging by the volume of projects either actually under construction or in the pipeline, as well as by the existing undersupply of quality offices, retail and warehouse space, no slowdown in development activity is likely for years to come.

Defining 'Parks'

  • January 01, 1970
Clarifying loose terms and where to invest for high returns

Green Versus Brownfield

  • January 01, 1970
A universal woe of developers looking to build in Moscow is the acute shortage of free land plots within the city limits. Those that are available are usually small in size and many of the most significant new developments are going up on greenfield sites located near or beyond the city ring road, or MKAD. But there is huge supply potentially up for grabs presently occupied by the capital’s rustbelt. The city government has been pursuing a policy since 1999 of moving industrial plants out beyond the city limits with the aim of improving environmental standards. The potential for developers is colossal, with 20,000 hectares of land at present under industrial use and 2,500 sites covering more than 1 hectare, with 70 of them in the sought-after Central Prefecture.

Project Management

  • January 01, 1970
Project management is the application of knowledge, skills, tools, and techniques to a broad range of activities in order to meet the requirements of a particular project. In terms of construction and development of commercial property it encompasses management of time, cost, risk, contract, and quality. Since the early 1990s the basic principles of project management have been applied to the Russian construction industry for the first time. In 1991, the construction industry was fraught with time over runs, budget blowouts, low quality of finished product, and a lack of co-ordination between the various participants in the construction process. The introduction of the market economy created a commercial property market which has been driven by both international and local investors, with the main focus of activity being concentrated in Moscow, and to a lesser degree St. Petersburg and the regions.

Warehouse Update

  • January 01, 1970
Moscow long ago secured a reputation as one of Europe’s most expensive warehousing markets, second only to London in terms of its sky-high rents. Renting a quality warehouse in the Russian capital is on average 70 percent more expensive than in Warsaw and 60 percent more expensive than in Budapest. Industrial rental rates are twice as cheap on such major European markets as Berlin or Paris.

High-Rise Safety Issues

  • January 01, 1970
Until recently, Moscow had been resting on its laurels when it came to high-rise construction and no major tall buildings had appeared since Stalin’s ‘Seven Sisters.’ But no longer — the boom in the property and construction industries, a desire to compete with other world capitals and the rising cost of land has quickly started to drive buildings upwards.

Successful Investments

  • January 01, 1970
When in May 2003 Fleming Family and Partners announced their new real estate fund with the capability to invest $60 million, it seemed like a substantial boost for the developing Russian market. But although it was a huge step forward in bringing international funds to the local market, strict limitations were set: it could only be used for Moscow downtown and Class A commercial property — no nonsense like retail, warehouse and, heaven forbid, residential property! At that time, the average yield was between 14 to 18 percent per annum. And please be aware that most property owners were not and are still not aware of the meaning of the term ‘yield.’

Minimizing Tax

  • January 01, 1970
Tax structuring the sale or purchase of a real estate investment project typically focuses on a project company, which implements the investment project, and on this company’s assets, including a land plot (either owned or rented) and a building (either completed or under construction). The project company may be a Russian legal entity or a foreign company with a branch office in Russia; its shareholders may be Russian or foreign companies or individuals. Depending on the stage of the project, the project company may have already entered into lease agreements and have started to generate rental income. Usually, the project company will be significantly leveraged and will have significant input VAT accumulated from construction costs.

Construction Contracts and VAT Refunds

  • January 01, 1970
The New Year brought real estate investors a generous present in the form of new rules governing VAT refunds in construction, and not to make the most of those rules would be both foolish and a waste of financial resources. But it is not enough just to want to make the most of them; much depends on the terms of the contract between the investor and the contractor dealing with the handover of completed construction work. Before we look at specific recommendations, from a tax risk management point of view it makes sense to take a look at the applicable provisions of current Russian legislation.

8 Years at the Helm of IKEA

  • January 01, 1970

Regional Realty Centers

  • January 01, 1970
Thanks to almost seven years of sustained economic growth since 1999, development of the commercial real estate market in Russia outside the two principal markets of Moscow and St. Petersburg has gathered momentum over the past few years. Unsurprisingly, from 2003 to 2005 the highest concentrations of activity could be found in the so-called goroda millionshchiki — Russian cities with populations of one million or more inhabitants.

Classical Offices

  • January 01, 1970
Classical architecture, it transpires, is still alive and well in Moscow not just in the residential, but also in the office sector: possibly unexpectedly so, since although the attraction of living in a latter-day Renaissance palazzo is clear enough for house buyers and thus also realtors and developers, Hi-Tech is largely the flavor of the month in office design. Living in a palazzo appeals to an aesthete and evokes the whole cult of the house beautiful, whereas an office building has to look slick and convey the impression that the companies inside it are efficient, fast-moving and up-to-the-minute.

Montenegrin Realty

  • January 01, 1970
Montenegro cannot fail to make a big impact on any visitor. Some tourists have compared it to the French Riviera and Sardinia, while others, on the contrary are certain that there is not and could not be any other country on earth like it. Whatever the case may be, there is not a shade of a doubt that it is one of the most attractive areas of Europe in terms of the quantity and quality of sites of natural and historic importance.

Realty in the Baltic States

  • January 01, 1970
Estonia, Latvia and Lithuania are both the most undervalued and the fastest growing property markets in all the emerging economies of the new European Union member states. Although they start as the poorest, they also have the highest growth rates. Latvia, for example, has GDP per capita of 8,249 euros, only 39 percent of the European Union average, making Latvia the poorest country in the EU. Yet at the same time, Latvia is the fastest growing economy in the EU, with an annual GDP growth reaching 11.4 percent as of the third quarter of 2005. The rapid growth of GDP has led to the income generated filtering downwards, leading to a strong growth in personal wages and purchasing power. In Estonia, for example, wage growth topped 10.9 percent in 2005. Estonia has an unemployment level of only 6.9 percent, and Lithuania’s stands at 7.1 percent — far below the EU average of 8.7 percent.

Appointments

  • January 01, 1970

Neighbors From Hell

  • January 01, 1970
At the moment any buyer of a Moscow-region suburban house is unlikely to find himself suddenly the new neighbor of a confectionary factory, warehouse or pig farm. But the chances of this happening in the future are increasingly high. Companies who purchase land on a speculative basis are as likely to sell them on to a firm intending to build an industrial plant as they are to a developer building cottage settlements. There is no general plan for building in the Moscow region due to appear until 2020, zoning has been carried out in by no means all areas of the region and a local administration’s plans are not always in the public domain. Nor do residential developers always find out what the future plans might be for wasteland next door to a site destined for a spanking new cottage settlement before setting to work. Yet while the proximity of a cottage settlement might not make any difference to the developer of, say, a warehouse, it could wipe thousands of dollars off the value of neighboring houses.

Record Price Rise

  • January 01, 1970
Moscow does not believe in tears,” says the Russian proverb, implying that the capital can be indifferent to suffering. But the nightmare scenarios unfolding on the residential market in the first quarter of 2006 cannot fail to make an impression on even the most steely-hearted. The rush is here, with sellers holding back while why they wait for prices to stabilize, and desperate young couples and middle-class families asking for higher mortgage loans to compensate for the growing gap between their desired and actual spending power.