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. Last Updated: 07/27/2016

Investors Size Up Moscow Farmland

Foreign investors are taking a close look at the farms around Moscow ahead of the Jan. 27 introduction of the law regulating ownership and use of agricultural land.

Real estate experts say investors' interest is not in agriculture -- the new law bars foreigners from owning farmland -- but in converting plots into retail, residential and industrial properties.

"Most of the land that can be used for commercial development is designated agricultural," said Andrei Sukhomlinov, real estate lawyer with Baker & McKenzie.

Parts of the region that lies just outside the Moscow Ring Road are under intense development and have already attracted retailers such as IKEA and Auchan. Farther out in the Moscow region, companies such as Campina, Ehrmann and Danone have built factories.

"Many foreign investors view the policies of the regional government as aimed at attracting investment," Sukhomlinov said last week.

"The city of Moscow is very stubborn regarding land ownership, but the Moscow regional government allows ownership."

City Hall has allowed only long-term leases of land, despite having the option of selling land. It has said it would sell less than 10 percent of the city's territory under a law now being considered by the Moscow City Duma to bring local legislation into compliance with the Land Code.

Stephen Wilson, managing director of DTZ Zadelhoff Tie Leung, said the new agricultural land law should enhance development of the region and could pose a threat to the Moscow city government's dominance of the commercial property market. "Could it be that they [City Hall] will eventually be forced to relax their stubborn attitude in order to stem the inevitable long-term drift of commercial enterprise to the Moscow region?" Wilson said.

Sukhomlinov said the Moscow region is also attractive for green-field development compared with the capital, which has few suitable plots for large developments.

However, the mechanism for converting agricultural land into commercial real estate is still being refined. "The Land Code says it is possible to convert one classification of land to another, but does not establish the exact procedures," he said.

Boris Gromov, governor of the Moscow region, has had the power to approve conversions of land in the region, but many people think that a federal law governing such conversion is needed, Sukhomlinov said.

As a result, a law is being drafted to address the question of how to convert farmland to new uses.

The federal government has generally encouraged the establishment of a real estate market in Russia, and it is likely that the law governing conversion of agricultural land will be given high priority, Sukhomlinov said.

Wilson agreed, saying the Land Code is bound to be only the first step in an evolving process whereby all land eventually becomes commercially available for development, be it agriculture, retail or industrial.

The law governing the possession, use and disposal of agricultural land was signed into law by President Vladimir Putin on July 24 and will come into force six months after it was published on July 27. It covers 427.8 million hectares of land registered as agricultural by the Federal Land Register Service. Almost all of it is state-owned.

As a concession to politicians opposed to land sales, the new law forbids agricultural land to be owned by foreign firms, individuals, stateless persons or by majority-foreign-owned companies.

These categories of land users must get rid of their agricultural land holdings by Jan. 26, 2003, but will be permitted to lease such land.

Some foreign companies that have acquired land in the Moscow region with the intention of converting its use in the future may face problems in either changing the ownership structure or completing the conversion before the deadline, Sukhomlinov said.

But Michael Lange, managing director at Jones Lang LaSalle, said that if foreign companies had acquired land either by buying it outright or through a lease, they would not risk losing their territory -- provided they had followed legal procedures.

"There's always going to be one case that sticks out, but the majority, with some small exceptions, have found the right partners and done their research from day one to avoid problems of this kind," he said. "We have done it numerous times in a way that there will not be anyone coming back to them at a later stage."

Sukhomlinov said the ban on foreign ownership restricts access to mortgages. If a foreign bank takes a mortgage on agricultural land, in case of a default, the bank would not have the right to buy the land during foreclosure proceedings, he said.

Another potential problem is that the new law does not apply to plots of agricultural land provided to individuals for the construction of residences or garages.

"There is a very clear provision saying that this law does not apply to agricultural lands that are occupied by buildings or structures," Sukhomlinov said. "This means that an agricultural enterprise may have land and buildings; the new law will govern its land, but its buildings and structures will be governed by the Land Code. This may lead to some problems."

Nevertheless, Lange said he expects the value of land in the region to increase substantially in the next few years with increasing demand.

"There are only a limited number of plots in high catchment areas, and it is advisable to buy today if possible, even if one does not plan to develop for several years," Lange said.

Jones Lang LaSalle created and marketed the Governor's Ring project, which identified 20 to 25 land plots ranging from 50 to 150 hectares, which have been offered to potential users.

Several of these have been developed into hypermarkets, and Lange said he expects further development to be of decentralized office parks, industrial complexes and warehouses.