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Moscow Real Estate Investments

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Moscow Real Estate Investments Powered By Docstoc
					   Moscow Real Estate
         Investments


Challenges and Opportunities
Should I invest in real estate?

      Rhetorical questions to ponder about:

      •   Do I want to invest in Russia?
      •   Do I want to manage my investment?
      •   How long do I plan to be in Russia?
      •   What should I fear?
      •   Political risks
      •   Sudden drop in oil prices

                                                2
We will discuss:


         •   General market background and
             current state
         •   Investment types, risk and returns
         •   Moscow real estate transaction
             peculiarities




                                                  3
What drives real estate prices up:
true and false
       •   More or less protected property right
       •   High return from rents (not any more)
       •   Inadequate housing conditions of most
           Muscovites (very much so)
       •   Growing availability of mortgage
           (somewhat)
       •   Lack of other trustworthy investment
           instruments (yes)


                                                   4
1990- 2005: very short history
     •   State owned real estate in the Soviet times
     •   Free privatization since early 1990s
     •   Steady development of the real estate
         market

     •   1998 Economic crisis and prices drop in half
     •   By 2001 prices reach pre-crisis level

     •   Dramatic price growth between 2001-2004
     •   Second half 2004 – early 2005 – stagnation
     •   Now the market has picked up a slow growth

                                                       5
Purchase price per meter – all Moscow
average since 2000




                                        6
Prestigious locations appreciated faster
($/m)
       Average price p/meter   Stalin Buildings   Modern Development

      $10 000
       $9 000
       $8 000
       $7 000
       $6 000
       $5 000
       $4 000
       $3 000
       $2 000
       $1 000
           $0
                 Arbat   Patryarch Chystye Frunzen Tretyakov Leninsky7
Properties grew in value differently
   Pre-Revolutionary Buildings
    •   $3000-7000 per/m in top locations now
    •   This is triple or quadruple from $1500 on average in 2001
   Stalin type buildings
    •   $3000-5000 per/m in top locations now
    •   This is double from $2000 on average in 2001
   Post-Stalin and Ministerial buildings
    •   $3000-4000 per/m in top locations now
    •   This is more than double from $1500 in 2001
   Modern Development
    •   $4000 (pre-construction) to $10000 (up to 25000)
    •   This is double to 2001 price
    •   Price range remained the same, but various buildings
        have different dynamic
                                                                    8
Return for different types of investment

       •   Buy to rent - 8-12% per year (plus
           appreciation)
       •   Buy to capture appreciation – up to 30%
           per year (last year)
       •   Buy preconstruction - up to 100% over 2-
           3 years
       •   Buy, change, resell - up to 30% per
           project
       •   Change of use, attics, complex deals


                                                      9
Pre-revolutionary buildings offer higher
return from rent

        •   Lower purchase price – comparable rent
            income
        •   Western tenants – Western taste for pre-
            revolutionary charm
        •   Location more important than building
            type
        •   Some additional effort and investment can
            upgrade the building
        •   Risks – demolition, neighbors, building
            infrastructure
                                                    10
Small rental premium of Modern over Pre-revolutionary
buildings cannot justify difference in price
                                  USD per month
   Pre-revolutionary buildings:




                                                  Total area, sq. meters
   Modern development:            USD per month




                                                                  11
                                                    Total area, sq. meters
Larger apartments allow higher return
                                      apartment
     Rooms    total area, sq.                           rental      return,
                                    purchase price,
        #         m.                                        price   per year
                                 at $4,000 per/sq. m.
     2 low                  50              200,000         1200           7%
     2 high                 70              280,000         2000           9%
     3 low                  80              320,000         2500           9%
     3 high                120              480,000         4000         10%
     4 low                 100              400,000         3000           9%
     4 high                150              600,000         5000         10%
     5 low                 150              600,000         6000         12%
     5 high                200              800,000       10000          15%
     6 low                 160              640,000         8000         15%
     6 high                300           1,200,000        15000          15%
                                                                               12
Capturing appreciation – plan or gamble?

       •   Try to choose undervalued areas (Chystye
           Prudy, Tretyakov gallery area)
       •   Russian tastes follow Westerners – you
           have an upper hand
       •   Research city development plans
       •   Be opportunistic - hunt the market for
           undervalued options
       •   Luck matters


                                                  13
Buying preconstruction can be risky
       •   Return on investment up to 100% per
           project
       •   No property right at purchase
       •   Low control – full dependence on
           developer
       •   Unavoidable delays of construction
       •   Delayed use – renovations continue for
           2-3 years after the construction
           completion
       •   Sharing legal liability with developer

                                                    14
Accepting other people’s risks and
hassles pays off
     although require a lot of time, involve legal risks
     and efforts…

     •   Communal apartments still exist
     •   Tasteful renovations are still rare
     •   Very few ready to move-in options on the market in
         any price range
     •   All of these can present an opportunity:

         •   Buying communal apartment from multiple
             owners and reselling as a resident free
             apartment
         •   Buying, renovating (furnishing) and reselling
                                                              15
Think outside of Moscow
     •   Saint-Petersburg (still 50% of Moscow
         prices, lack of hotels, lower long term
         rental demand)
     •   Ukraine (Kiev) 50% of Moscow prices,
         150% expectation! Bank on Orange!
     •   Minsk - extremely cheap, wait for
         Lukashenka to retire!
     •   Other Russian cities (research supply-
         demand dynamics)
     •   Land outside Moscow (not just Rublevka)

                                                   16
Interested? Lets start!
      •   Can foreigners buy?
      •   Corporate or individual
          ownership?
      •   Taxes on purchase?
      •   Taxes on sale
          proceeds?




                                    17
Legal Challenges, overview
       •   Apartment History
       •   Implication of Marital Code
       •   Arrest and property claims
       •   Illegal layout changes
       •   Building risks
       •   Communal apartments, Chains
           ( “alternatives”)
       •   Timely property transfer
       •   Permanent registration issues
       •   Realtors

                                           18
Taxes on Sale Proceeds
 Residents                       Non-Residents
 (183 and more days in Russia)   (183 or less days in Russia)


 •   Profits, not the proceeds   •   Profits, not the proceeds

 •   13% above 1 million         •   30%
     rubles if owned for less
     than 3 years

 •   0% if owned for more
     than 3 years
                                                                19
Transaction Main Steps

       •   Property Search
       •   Paperwork check
       •   Preliminary Agreement
       •   Advanced paperwork check
       •   Closure
       •   Registration
       •   Property Transfer



                                      20
Preliminary Agreement
      •   Who is the other party: owner or agency?
      •   Notary or Written form?
      •   “AVANS” or “ZADATOK”?
      •   Form of payment, choice of a bank
      •   Watch out!
           • Length of contract
           • Penalty terms
           • Amount of contract (declared price)
           • “physical transfer” and “legal transfer”
           • Condition of the apartment and
             equipment
      •   Can I protect myself in court?
                                                        21
Deposit: Avans                         versus Zadatok

•   Agency or Owner                •   Only the Owner
•   Is returned in full, or with   •   Retuned in DOUBLE
    penalties as agreed by             amount (article 381 of the
    both parties                       Civil Code)


•   Is applied towards the         •   Does not have to be
                                       applied towards the future
    future payment for the             payment for the property
    property



                                                                    22
Paperwork for closure, & fees
   •   Notary or PPF (simple written form)?
                    Depends on the amount equal or below 1%
   •   State registration per contract
                    6000 rubles for 2 weeks registration
                    3000 for a month registration
   •   Payment: cash or wire transfer?
                    cash – safe deposit box rental $50
                    getting cash in Moscow can be risky (1% )
   •   Letter of credit (instead of escrow account)
                    varies, but can get pricey
   •   Title insurance
                    1-3% of property value per year
                    only applicable to apartments with full market
                    value indicated in the sale-purchase agreement
                                                              23
Buyers risks and how to avoid them
    What if the price will go up while I
     prepare the paperwork?

      •   Accurate preliminary agreement
      •   Who controls the apartment – landlord or
          agency?
      •   If landlord - use the notary
      •   Larger penalties
      •   Longer terms of the penalties
      •   Befriend the owner and his/her realtor


                                                     24
Buyers risks and how to avoid them

    What if the owner sells the apartment of
     my choice to someone else?
      •   Accurate preliminary agreement
      •   Who controls the apartment – landlord or agency?
      •   If landlord - use the notary
      •   Larger penalties
      •   Longer terms of the penalties
      •   Befriend the owner and his/her realtor




                                                        25
Buyers risks and how to avoid them

    How do I make sure that I don’t end
     up in a communal apartment?

    •   Never buy an apartment part by part, only
        simultaneous purchase of all the parts




                                                    26
Buyers risks and how to avoid them

   What if the building is demolished?

     •   Spravka from Uprava on the city 5 year plan
     •   Declare a full purchase price
     •   Initiate forming a condominium in the building
     •   Choose a “nice-looking” building
     •   Order a TZK (technical state of the building)
     •   A small risk will always remain


                                                          27
Buyers risks and how to avoid them

      What if someone claims the
      apartment in court ?

      • Do proper apartment history check
      • Declare a full purchase price in the Sale-
          Purchase Agreement
      •   According to the Constitutional Court
          Order, a diligent buyer is not responsible
          for the previous transactions
                                                       28
Buyers risks and how to avoid them


      What if I pay… and never become
       the owner?

        • Be careful if the seller uses a power of
            attorney
        •   Bank safe deposit
        •   Letter of credit
        •   Avoid wire transfers!

                                                 29
Buyers risks and how to avoid them

What if the sellers remain registered in my flat?

   •   Agree with the sellers to terminate their registration before the
       closure
   •   Keep a small portion of the payment in a separate safe
       deposit box with a condition of a registration at a new address
   •   Just agree on paying a small portion of the purchase price
       later after the owner’s registration at a new address
   •   New Residential Code doesn’t separate the right of use and
       the ownership right – as an owner, you can terminate
       anyone’s registration (unclear how it works yet)



                                                                    30
Buyers risks and how to avoid them

    What if the owner never moves out?

      •   Agree with the owners to move out before the
          closure
      •   Keep a small portion of the payment in a
          separate safe deposit box with a condition of
          moving out
      •   Just agree on paying a small portion of the
          purchase price later after the owner moves
          out
                                                     31
Buyers risks and how to avoid them


  What if I lose a local telephone line?

     •   It’s not so important. You can get a new one within
         2 months in most cases
     •   With your ownership certificate, you can register
         the line in your name for 6000 rub.
     •   Exception – the apartment is registered in a name
         of a foreign company


                                                         32
Buyers risks and how to avoid them

   What if the owner removes all the
   valuables from the apartment that he/she
   promised to leave?

    •   Make a list of the remaining equipment and
        furniture in the preliminary agreement. Sign a
        separate equipment and furniture purchase
        contract in addition to the apartment sale-
        purchase agreement.
    •   Never believe any oral promises, keep everything
        in writing!
                                                           33
Sellers Risks and how to avoid them
   •   To insure the receipt   Use safe deposit box in a
       of money                bank, avoid wire transfers
   •   Not to loose the time   Set sooner transaction
                               dates
   •   Unwanted residents,     Never allow anyone move
       non-performing          into the apartment before
       buyers                  or during the property right
                               transfer

                               Declare nominal purchase
   •   Manage tax liability
                               price in the sale-purchase
                               agreement
                                                         34
Mortgage in Russia 101
      •   Available for Russians and Expats!
      •   10-20 years
      •   Down payment 10-30%
      •   9-15% per year
      •   Proof of income and credit history
      •   High hidden cost
      •   Limitations on a property:

          Declaration of full purchase price
          Type of building requirements by some banks
          Complexity of the deal limitations (chains or communal
            flats)
          Owner’s registration at a new address before the deal
                                                              35
Do I need a broker?
      •   Broker in Russia has wider legal
          obligation and responsibilities in the
          West
      •   Buyer’s broker has access to the entire
          market, not just his/hers own listings
      •   You can shop on your own, but be very
          careful with structuring the deal and
          doing due diligence
      •   Brokers cost 3-5% of purchase price; the
          hiring party pays the broker


                                                     36
Real Estate Glossary
    •   PPF (ППФ) – simple written form
    •   Avans - deposit
    •   Zadatok - deposit
    •   Alternative (chain) – alternative accommodation
        for sellers purchase simultaneously with the sale
    •   Physically free apartment – nobody lives in the
        apartment
    •   Legally free apartment – nobody is permanently
        registered (propisan)
    •   ГУФРС (GUFRS) for Moscow – state title
        registration body
    •   TZK (ТЗК) – technical survey of the condition of
        the property
    •   TSKH (ТСЖ) – a form of a condominium
                                                       37
EVANS PROPERTY SERVICES
             Managing Partners
                  Anya Levitov
               anya@evans.ru
                Karina Kheifetz
              karina@evans.ru



           www.evans.ru
              Tel. 232-6703
                                  38

				
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posted:5/25/2012
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