INVESTMENTS IN RUSSIAN REAL ESTATE
RESIDENTIAL, OFFICE AND RETAIL PROPERTIES,
INDUSTRIAL PROPERTIES, AGRICULTURE LANDS AND TOURIST RESORT AREAS
LEGAL SUPPORT WHILE STRUCTURING AND IMPLEMENTING
REAL ESTATE INVESTMENT PROJECTS IN RUSSIA
Dr. iur. Ilja Alexandrow, LL .M., MBA (Finance)
Managing Partner, Alexandrow and Partners, Moscow
Currently our law firm is working on several real estate projects in Moscow, Moscow region and other regions of the Russian Federation. We also provide our services largest international architect bureaus, construction companies and investors. In addition, our team is also actively involved in structuring and organizing the financing for certain types of investment projects in the Russian Federation and other neighboring countries: Belarus and Abkhazia.
This article is addressed to all interested investors who would like to reliably invest in Russian real estate and receive higher rental income. This aspect, related to the need to reduce risks through a detailed legal analysis of the proposed transactions in Russia, will be discussed within the framework of this article.
Reason to invest into Russian real estate
Investments in real estate are considered in Russia as one of the most stable types of investments. Recently, medium- and long-term regional investment projects appeared in the last 25 years in various sectors of the Russian economy. Such investments are fully justified and in some cases are combined with the direct or indirect acquisition or new construction of real estate items.
To be mentioned as one of the main factors on the market: The Central Bank’s key rate. This is one of the strongest instruments of monetary policy, which significantly affects the investment environment, including the real estate market. This rate determines the cost of borrowing for Russian commercial banks and therefore affects the rates on loans for individuals and legal entities. This is especially to notice considering the periods when the Russian state introduces support programs, such as preferential mortgages for young families, for new production enterprises etc.
In Russia, for example, the period of preferential mortgages was especially relevant between 2021 and 2024, when many people took advantage of the opportunity to purchase residential real estate at reduced rates. Low mortgage rates allowed many citizens to gain access to housing, as well as to consider real estate as a profitable investment. This created a certain excitement in the market, which contributed to the growth of prices for apartments and houses. Investors, in turn, sought to take advantage of favorable lending conditions to purchase real estate for long-term rent or resale. But since 4th quarter 2024 when a big number of support programs was canceled due to the overheated residential real estate market, many of investors who are able to wait, will definitely enjoy the significant price correction by the end of 2025 combined with the current lower USD/RUR exchange rate.
However, since the key rate has been raised and credit policy has been tightened, many investors have faced new challenges. The government’s strategy to stabilize the economy includes raising the key rate to combat inflation and cool the overheated market. This means that real estate investments have become riskier for many people, as the cost of borrowing has increased and monthly mortgage payments have increased significantly.
However, there is a phenomenon in the real estate market where cash buyers receive favorable offers in the form of discounts and special conditions. With the number of buyers on credit declining, property owners are interested in a quick sale, which leads to a more flexible price for those who can pay cash. Thus, those who have the means get a real opportunity to profitably invest in real estate, even in conditions of market instability.
Guarantees for investors, due diligence and transaction structuring
The most important tool for protecting investors’ interests at the concept development stage is the comprehensive due diligence procedure. Such an analysis of the legal and accounting aspects of the project, as well as individual assets (including real estate) should identify the risks of the potential customer. Effective minimization of operational risks is also an important aspect at the concept development stage.
If the results of the due diligence are satisfactory, the investor can proceed to the next stage of project implementation – structuring the agreement – be it a classic real estate purchase and sale agreement or a founding agreement for a project or a joint venture with a Russian partner for further implementation of the project.
To purchase real estate in the Russian Federation, it is necessary to conclude a purchase and sale agreement. The terms of such an agreement must be formulated in detail and may include certain guarantees on the part of the buyer and methods of ensuring the fulfillment of obligations, which are bank guarantees, personal sureties, letters of credit, advance payments, etc.
Real Estate Title Transfer Registration
A necessary condition for protecting the investor’s rights when acquiring real estate is the moment of state registration (entering information about the transfer of ownership of real estate into the Unified State Register). In confirmation of the successful registration of the transfer of ownership of real estate, the person who submitted the application is issued an extract from the Unified State Register within 3 days from the date of filing the application.
For new real estate construction, special attention must be paid to the actual documentation related to the construction process, which includes architectural design documentation, urban development plan of the land plot, building permit documents, geological survey data, permits from the relevant regional authorities for the region’s participation in the development of infrastructure (roads, electricity, water supply and gas supply).
Minimizing Risks in Long-Term Property Management
There are several types of risks to consider here:
(1) Currency risks: Income from renting office and retail space in Russian cities and towns is usually denominated in rubles. The position of the Russian currency in the last ten years has been characterized by four serious devaluations of the ruble: in 2014, 2016, March 2022 and summer 2023 (65-75 RUR for 1 USD). The current exchange rate makes appr. 1 USD = 97 RUR as on 11th February 2025. At the same time, in August 2013, 1 USD cost 33.1 RUR, in June 2022 the exchange rate of 1 USD was 50.1 RUR, since then the rate has increased threefold.
Despite the absence of restrictions on transactions with non-residents, there are certain conditions and currency risks that must be taken into account. All currency settlements of a Russian organization participating in such transactions must be carried out through accounts in authorized Russian banks, or through foreign banks and financial organizations, which may entail additional risks associated with exchange rate fluctuations and possible restrictions on international transfers. Transfers of electronic funds and, in certain cases, cash settlements in foreign or Russian currency are also permitted, subject to strict compliance with certain law requirements. It’s necessary to pay attention to the right choice of payment instrument considering the actual cryptocurrency market options and economic sanctions introduced by the Russian Federation against the so called ‘unfriendly nations’ like USA, EU members and some other countries who provided military support to Ukraine since February 2022.
(2) Professionalism and responsible property management: Cooperation with experienced and qualified local specialists who are able to carry out effective independent project control and administration, is required. Any liability and property risks can be insured through reliable local insurance companies. Also consulting companies are important for a qualitative distance work and advanced knowledge. This allows for long-term agreements with projects in the field of investment and project management;
(3) Cooperation with Russian partners: Getting an overview of the contractors and architect design companies that are proposed for a joint project. We strong believe that there should be no disputes between ongoing long-term partners, but any investor should allow arbitration clauses and all contract details in general be formulated by a professional legal team appropriately for effective protection of rights;
(4) Tax planning: In fact, there are several tax regimes in the Russian Federation that an investor can use more effectively. The tax burden on an investor will be significantly reduced if the necessary measures are taken in a timely and adequate manner. For example, a simplified tax system, a one-time tax system in the amount of 1 to 6 (one to six) % on the income of an LLC or JSC depending on the region of its state registration, tax benefits for property tax, value added tax, profit tax and other types of taxes, provided that the annual income does not exceed EUR 2,5 M. Of course, there are other options for reducing tax rates.
It is necessary to give several examples of real estate investments in regional projects in Russia:
Tourist Resorts
In many countries hotel branch and active tourism are key economic factors. Recently, hotel management companies and tourist resorts of high level are currently appearing in different regions of Russia. This type of real estate development is offered for country recreation and is of great interest to tourists.
The general instable situation in the world creates a situation when the development and operation of tourists resorts and qualitative hotel management inside Russia becomes very popular and profitable investment sector.
Office and Retail Property
Following the COVID-19 pandemic, which changed the approach to work and business processes, the office real estate market has undergone significant changes. In recent years, there has been a growing interest in flexible office spaces and coworking concepts . The increase in the key rate set by the Central Bank of Russia has also affected the cost of borrowing, which in turn leads to stricter conditions for new investments. In the context of uncertainty and volatility of the economic situation, companies are beginning to reconsider their needs for office space, which creates both challenges and new opportunities for investors.
Retail real estate is also undergoing a transformation. With the rise of online retail, physical retailers are forced to adapt by creating unique consumer experiences. This opens up opportunities to invest in formats such as multifunctional shopping centers that include entertainment elements, as well as centers that offer experiential shopping with a focus on local products and unique brands.
Investments in office and retail real estate in cities such as Moscow, Yekaterinburg, Rostov-on-Don, Samara, Chelyabinsk and St. Petersburg are interesting and recommended, that is, in cities with the greatest potential for growth in real estate prices in some sectors of the economy. And the second source of income is the lease of purchased land property. Income from such lease can reach 10 % per annum.
Also attractive in the area of investments in space, in particular in warehouses, are such cities as Kaluga, Nizhny Tagil, Ulyanovsk and Tula, which are the closest to the capital and have economic strength with a population of 100 thousand to 500 thousand people and are currently of interest to investors.
Residential Real Estate
According to Article 7 of the Federal Law of 30.12.2012 No. 283-FZ, the standard for living space should be about 33 m2 per Russian. Currently, several basic technologies are used for new construction, including multi-story construction and construction of wooden houses from modern building materials, which reduces construction time, and therefore can increase the profitability of the developer.
We currently have projects for the development of real estate in the suburbs of such densely populated cities as Moscow, Yekaterinburg, Kazan, Samara, a special economic zone with a preferential tax regime and other million-plus cities.
Construction Materials Production
In addition, the stagnation of the real estate market has not yet affected manufacturers of building materials, the demand for products is supported by long-term contracts and current projects. But in 2025, companies expect a temporary lull, which can be used to modernize enterprises. It is also possible to note the real phase of growth in the income of the insured population and the long-term profitable work of individual organizations in this sector. Therefore, such investments in Russia make sense.
Food production
The income of a regional project in food production ranges from 25% to 70%. Such projects are more interesting, since food products are always a type of liquid and quickly consumed goods. In the 2020s, despite a large number of events, the demand for food products remains high, but producers have to adapt to changing conditions, take into account rising prices, logistical difficulties and changes in consumer behavior.
There are enough projects for investors who can receive stable profits from such projects by investing in the construction and reconstruction of production facilities and the acquisition of necessary facilities together with the project initiators.
CONCLUSION
The Russian real estate market is one of the most interesting real estate markets in the world with excellent growth prospects over several years.
Only a few of the benefits of investing in real estate in Russia have been demonstrated.
Detailed information is available upon request.
Contacts:
Phone: +7 906 035 74 78 (Telegram / WhatsApp) Email: alexandrow@alexandrow.biz