The areas of real estate, construction, and development are currently some of the most attractive and profitable for investors who have an eye on Russia. Hence it is always crucial for investors to keep themselves up-to-date in regards to the trends predominating in those sectors. Some trends are common throughout Russia, but not all; there are also various trends that apply specifically to the Northwest region of Russia alone.
As a common trend, we would highlight the ongoing reform of the registration system for real estate. The aim here is to simplify the real estate registration procedure in Russia. From January 1, 2017, the cadastral recording of immovable property and state registration of rights to immovable property have been merged in order to create a unified registration system, which includes a register of immovable property items, register of rights, restrictions on rights, encumbrances, as well as the cadastral register of the boundaries of immovable property, including land plots throughout the whole of the Russian Federation.
The second common trend is that the cadastral value of immovable property is now applied as the tax base for calculating property tax and land tax; previously, the balance sheet value or inventory value was used for these purposes. The use of the cadastral value by the Russian tax authorities has led to an increase in the tax burden, in some cases to an unreasonable degree. As a result, real estate owners have started to litigate to decrease the cadastral value as the base for property tax and land tax. This reform reflects the general approach of the Russian government in recent years: its overriding objective has been to gather in as much tax revenue as can be charged.
However, the Russian courts are, with increasing frequency, upholding challenges brought by real estate owners who are indignant about unfair cadastral valuations placed on their immovable property.
The following trends are inherent in the Northwest region, especially in the Saint Petersburg real estate market:
- As a result of the reduced investment flow in commercial construction, volumes of newly constructed commercial premises (i.e., offices, retail premises, and warehouses) have decreased dramatically in 2017. This is due to market players (potential users of the commercial premises) making extensive cuts in their budgets. The effect of decreased demand from retail players has been that no shopping and entertainment centers have been built and put into operation during the current year.
- The lack of land considered as being suitable for development in the center of Saint Petersburg has forced developers and investors to find new ways to develop residential housing and mixed-use commercial construction projects.
These circumstances have driven the adoption of new amendments to the Russian Town Planning Code concerning the redevelopment of unused industrial areas of Saint Petersburg (generally known as the city’s “gray belt”). The amendments in question are aimed at simplifying and accelerating the implementation of construction projects in areas of the relevant type, as well as the seizure of industrial lands for subsequent redevelopment. The owners of such industrial sites have given a less than enthusiastic welcome to these new developments, which may result in dozens of claims being submitted to courts when the power to seize land is exercised. - The Northwest region, including Saint Petersburg and the surrounding Leningrad Oblast, is a region where a lot of international companies prefer to locate their manufacturing capabilities in Russia. The Russian government is making efforts to stimulate foreign businesses to allocate their production capabilities to Russia by proposing certain incentives for investors, such as a mechanism for subsidies and reductions in taxes and customs payments.
- Last but not least is a trend related to residential construction in the Saint Petersburg area, which is not positive news for developers and investors.
Supply on the housing market has exceeded demand for a long time, but developers are continuing to pursue residential construction projects. Thus, none of the necessary economic conditions exist for the purchasing power of private individuals to increase.
In addition, the Russian government has set itself on a course toward the increased protection of individuals and has participated in joint residential construction projects. This policy has resulted in a set of amendments to Russian law including, in particular, either requirements for developers to have a minimum charter (i.e., issued) capital, which must be paid up in full, or restrictions on the maximum development area (set in square meters) on which construction is allowed depending on the amount of the charter capital. Certain other financial restrictions and additional legal requirements have also been imposed.
At the same time, the Russian government’s program of subsidies for the purchase of apartments by individuals (subsidizing the interest rate on mortgages) will end in 2017. This means that sales of residential premises can be expected to decrease in 2018.
All the changes mentioned above will lead to increased competition for customers between developers. As a result, only the largest and wealthiest players on this market will survive the inevitable collapse of the housing bubble.
