Russian Investment in Overseas Property: Analytical Report by Tranio.com (2014)
The spotlight of this fourth analytical study by Tranio.com falls on investments in residential and commercial overseas property by the citizens of Russia and other countries of the former Soviet Union. We analyzed the results of our online survey, which involved 432 respondents made up of independent realtors and experts from international property agencies across 39 countries.
With increasing frequency,
According to Tranio.com’s study, the last few years have shown an increase in the number
As a rule,
Residential property is often bought to be rented out, and in fewer cases to be resold for a profit. The most popular types of commercial property are hotels and apartment buildings.
1. Number of Investors
The survey participants shared information on the number
Among Russian investors, commercial property is less popular than residential. More than half of respondents (56.5%) reported that “few or no” Russian clients are interested in acquiring commercial property.
The market activity
“In Germany, buying a residential property is profitable if
“The number of investors is increasing,” adds Elena Mischicheva, sales manager
Ilya Gordon, head of Gordon Commercial, emphasizes that “in the most prosperous regions of the country, the residential market is growing even in times of global financial crises, and prices for commercial property are currently at a peak.”
Investors from Russia and former Soviet Union countries are particularly active in Germany, Latvia and the Czech Republic
According to George Kachmazov, these countries are characterized by “a large number of Russian immigrants who are moving to live permanently in the countries and wish to buy a small rental business there.”
Julija Kuharjonoka, leasing and sales expert at Mercury Group Estate, commented: “In general, the property market in Latvia is developing, and many
As for the Czech Republic, most experts highlighted its
Pavel Malyshev, director of Preco Group, also cited the Czech Republic’s close economic ties with Russia, a stable economy, and a simplified loan arrangement for Russian citizens. “One can take out a mortgage on favorable terms – 3.59% per annum,” said Firaz Muinov, CEO of the Lekvi Group. “In addition, property tax in the Czech Republic is relatively low compared to other Western countries. For example, the annual tax for a 90m² apartment is about 2,700 roubles. The transfer tax is 4% and is paid by the seller out of income tax.”
France has the lowest number of investors from Russia
France has the lowest number of investors from Russia: 42.9% of respondents said that there were few or no customers from Russia interested in buying residential property in the country, and none sought commercial property. George Kachmazov attributed this to the fact that “it has been hard to get solid revenues in France for the past three years, prices failed to go up and in fact decreased slightly. Property resale is associated with high taxes, while tax exemption periods can reach tens of years.”
1.1. Residential and Commercial Properties
Some countries reveal a high proportion
In contrast, the largest number of Italian respondents (43.6%) stated that there were “few or no”
The lack of commercial property buyers in other countries is also pronounced. This was noted by 100.0% of respondents from Portugal, and 87.5% from Cyprus. Michael Chulkov, general director of Michael & Jeneva Portugal Property, emphasized that “having an interest in commercial property is typical for customers who have decided to relocate to Portugal and are looking for a way to make money in a new country.”
George Dokuchaev, sales director of Prime Property Group, remarked on the investment environment in Cyprus: “Most buyers are interested in property for living and recreational purposes. The number of investors buying property
1.2. Activity of Russian Investors in Global Property Markets
Most realtors agree that the citizens of Russia and other former Soviet Union countries play a minor role in international commercial property markets, although in some countries, Russian investments are quite evident in the residential segment. According to Ilya Gordon, “in the German commercial property market,
Russian-speaking investors play a minor role in foreign commercial property markets
“In Italy, the number of Russian investors is low,” said Elena Lapina, realtor at Casa Nostra. “In our region, we are more used to seeing Chinese customers. Germans are also traditionally active. The number of investors from Eastern and Southern Europe (Poland, Czech Republic, Hungary, Croatia) is increasing.”
“If we talk about Greek hotels,” added Julia Smagina, “there are almost
Julia Smagina’s observations were based on the Greek market. However, market leaders from various countries expressed something similar about
Realtors note that
2. Cost of Properties
39.8% of respondents noted that
(The sum total of the survey results exceeds 100% because respondents could select one or two price categories).
The survey results helped us classify the countries according to prevailing commercial property prices. Here is the comparison of these results with similar data on residential property from the previous Tranio.com study, which reveals some interesting facts:
|Residential property||Commercial property|
|Average price, €||Countries||Average price, €||Countries|
Czech Republic, Greece, Italy
|Germany, USA, Cyprus|
|UK, Italy, USA, France||Over 3,000,000||France, Great Britain|
Most countries fell into the same or similar categories in both rankings. Since prices for residential properties were the focus of our previous study, we will now look at prices for commercial properties.
2.1. Low Category (up to €500,000): Portugal, Turkey, Bulgaria, Spain
The price segment up to €500,000 prevails in four countries: Bulgaria (78.4%), Portugal (71.4%), Turkey (58.3%) and Spain (43.5%).
According to Michael Chulkov, “in Portugal,
In Bulgaria and Spain – countries where the cheapest category prevails – a considerable number of respondents selected the €500,000 to €1,500,000 price segment as well. According to Vera Kolarova, consultant at RK Real, “Bulgaria remains the least expensive country in the EU to buy property in. More and more people from Russia think that they can afford to invest in Bulgarian property.”
In Spain, it is remarkable that all price categories are relatively comparable, with the only exception being the most expensive properties. Elena Zhabreva, expert in luxury property at One House Group, explains it this way: “There are customers who are interested in commercial property of different price categories. Clients with a budget of up to €500,000 usually buy
2.2. Low – Medium Category (€500,000 – €1,500,000): Montenegro, Latvia, Czech Republic, Greece, Italy
In Montenegro and Latvia, both these categories were selected by a comparable number of respondents (40 50%). In the Czech Republic, the €500,000 to €1,000,000 segment dominates the field, being selected by 41.7% of survey participants. Pavel Malyshev explained: “Investing in Czech property is particularly attractive, since it is suitable for a broad market. The price of investing in property usually ranges from €1,000,000 to €3,000,000. However, there are also some deals priced over €30,000,000.”
In Greece, this category also leads (50.0%), and is followed by the “expensive” segment – from €3,000,000 to €10,000,000 (33.3%). According to Julia Smagina, “if customers are serious about buying a hotel, they are looking for one priced from €3,000,000 to €10,000,000. Sometimes they buy small hotels priced from €500,000 to €1,000,000 for lease, but that’s another story.”
Finally, the results for Italy: while the survey showed that the largest share of respondents (41.0%) selected the category priced from €500,000 to €1,000,000, the trend for closing more expensive deals is still strong: 33.3% of respondents closed deals priced from €1,500,000 – 3,000,000.
Interestingly, the results of our previous study indicated that residential property in Italy was
However, realtors suggested that affordable housing is becoming more popular in Italy. Elena Lapina noted, “recently, customers have started looking for more reasonably priced residential properties, mainly apartments in the €200,000 – €250,000 price bracket.”
2.3. Medium – High Category (€1,500,000 – €3,000,000): Germany, USA, Cyprus
In some countries, most respondents selected the €1,500,000 – €3,000,000 price range: in Germany 44.4%, and in the USA and Cyprus 57.1%. However, in Germany and the United States there is a trend towards increased activity in the cheaper €500,000 – €1,500,000 segment: in both countries this segment was selected by about 40% of respondents. George Kachmazov explained this by saying: “Many investors into the United States market are interested in property with a minimum price of $500,000 – this is the investment amount required for obtaining a green card. However, the country shows a wide range of prices; for example, property is cheaper in Miami than in New York.”
Meanwhile, the €1,500,000 – €3,000,000 category significantly prevails in Cyprus and the island can be called the most “expensive” country in this category. According to George Kachmazov, “there are many Russian businesses headquartered in Cyprus, and some banks there are Russian owned. Many
2.4. High Category (over €3,000,000): UK, France
The most expensive commercial property is in the UK and France. In both countries, no realtor said that they had sold a property for below €500,000. In France, two price ranges scored the maximum number of responses (36.4% for both): €1,500,000 – €3,000,000, and €3,000,000 – €10,000,000. The UK is the only country where the most expensive segment (over €10,000,000) is the absolute front runner: it was selected by 42.9% of survey participants. “The UK is popular among the richest
According to the experience of Aleksey Kovalevsky, “foreigners like central London
3. Returns from Residential and Commercial Properties
Almost half of respondents (44.8%) said that investors expect a moderate profit from residential property,
Maksym Vykhoryev, director of Smart Tax & Realty, explains: “Areas providing more yield also demonstrate higher pricing, volatility and risks. The Czech Republic is chosen by investors who value stability and investment security.” Pavel Malyshev added: “In Prague, the average investment return
An opposite pattern is observed in Greece, where the maximum expected return (over 10% per annum) was selected by 33.3% of realtors. “It is obvious that the Greek market is underrated,” says Aleksey Sorokin, sales expert at Grekodom Development. “Due to lowering prices,
Russian investors expect an average return
On average, expected returns from commercial property are higher than those from residential property: 43.3% of respondents stated that buyers usually expect a return of up to 10% per annum (it should be noted that the other two options were also popular).
The lowest expected returns from commercial facilities were cited for the Czech Republic and the UK. In both countries, the option
In Greece, according to Julia Smagina, “villas for rent can
3.1. Expected Returns
The survey results allowed us to categorize countries by expected returns from residential and commercial properties:
% per annum
|Residential property||Commercial property|
|UK, Czech Republic,
|UK, Czech Republic, France|
(up to 10%)
|USA, Latvia, Cyprus,
|Germany, USA, Cyprus,
In many countries, expected returns from residential property fall into the same category as expected returns from commercial property. In the US and Cyprus, residential properties are expected to bring
In contrast, in Latvia, Turkey, and Bulgaria, commercial property
3.2. Inflated Expectations of Russian Investors
Realtors around the world underline one typical feature that is shared by most
According to Vera Kolarova, “many
Russian buyers typically have inflated expectations from returns on investment property
“Every customer wants no less than 10% per annum,” said Anna Glinskaya, director of One House Barcelona. “Even though in reality one can only get
“In Germany, one can secure a maximum return
“Speaking of return expectations,” said George Kachmazov, “I would keep in mind the balance of different factors influencing the final profit: risks, revenues and the investor’s involvement in the property’s management. Taxes make this list as well. Many discrepancies in return estimates occur due to differences in the level of investor participation. The more time and effort investors are ready to devote to managing their properties, the greater the returns that they will obtain. There are no magic solutions in this regard: if you buy a simple rental business and all management issues are dealt with
However, some experts are observing a gradual improvement in investment expertise among
Julia Smagina believes that Russian investors’ high expectations are linked to the high rates previously offered by banks: “Before, customers said that they would be better off depositing their money in a bank
“If we talk about private investors in Montenegro, their interest has shifted from price growth to rental income,” said Anton Shamarin, managing partner at Value.One.
Investor focus has recently shifted, from securing a profit to the preservation of capital and minimizing risks
According to George Kachmazov, “since the establishment of Tranio.com, most of our clients have been
4. Investing in Residential Property
Nearly all respondents (93.1%) noted that the most popular property buying target is leasing. This option was selected by all respondents from Germany, the Czech Republic, Latvia, the United States and Cyprus. As for Germany, Elena Mischicheva said “a high proportion of investors are buying residential property which is already leased.” In Latvia, according to Yulia Kozhevnikova, “many Russian-speakers buy residential property primarily to get a residence permit, and they lease it while they are away.”
39.9% of respondents claimed that investors usually plan to not only lease their properties, but to resell them at a profit a few years later. This option proved to be particularly popular in Cyprus (71.4%), and accounted for a considerable number of the responses in the United States (54.5%) and Germany (53.3%). In the US, according to Oleg Kadyaev, “for the past two years, a lot of properties have been sold through bankruptcy proceedings, so investors took a chance.”
The most popular reason for buying residential property is to lease it out
However, not all experts agreed with the survey statistics. “In Cyprus, buying for resale was trending until 2008,” said George Dokuchaev. “Since then, prices for property have fallen, and now sellers are ready to offer concessions to win in the competition.” Ilya Gordon was even more forthright: “All our clients now, without exception, intend to buy and to never sell a property. This applies to both those who buy German property for private use, and those who invest in it.”
Reselling property was selected by as few as 12.5% of respondents from the Czech Republic. As Firaz Muinov explained, “97% of customers buy one- or two-bedroom apartments for leasing, and only 3% buy property at the design stage in order to resell it. This happens because of a very low resale profit, with a maximum of 1 1.5%.” “In the Czech Republic, prices have almost never grown, but tourism is popular,” added George Kachmazov “Many investors receive an income from short-term tourist leasing.” Boris Litsev stressed that “very few people are interested in reselling property located in central Europe; almost everyone values owning it and being able to live there.”
Unlike leasing, resale (not accompanied by leasing) was almost non-existent in the survey results related to investment goals, and was selected by only 6.9% of respondents. However, it turned out to be quite a significant trend in Turkey (22.2%). “On the southern coast of Turkey, development has been very active, and prices are rising. Many investors buy properties at the construction stage, and expect to resell them at a healthy profit when construction is complete,” said George Kachmazov.
Buying a property for resale is also significant (though not prevailing) in Italy and Greece, where it was selected by 11.8% and 11.1% of survey participants, respectively. This relates primarily to properties under construction. “Here in Greece, we have this type of investor,” said Julia Smagina. “They buy a good site, and develop an interesting project so sales can happen at the 3D-model stage. One of the projects that we are currently working on is villas by the sea, designed for the so-called business class. The price for such villas on the beach, with a very big plot of land and a large pool and a modern design, is about €1,000,000.”
On the other hand, buying a secondary property for resale is not always an option. “In Italy, prices have always been high, so almost no options exist for buying a property for a cheap price and reselling it at a profit,” said Anna Tikhonova.
4.1. Resale Terms for Residential Property
Responding to the question, “after which period do investors expect to resell a bought property”, almost two-thirds of realtors (61.9%) chose the option “in 3-10 years.” This was the most popular option in 25 of the 32 countries who participated in the survey:
Short-term resale (2-3 years) was especially pronounced in Turkey (61.9%) and France (57.1%). “I think Dubai could have appeared in this list as well,” added Yulia Kozhevnikova. “Here investors buy apartments under construction and sell them in a few months, even before ownership certificates are issued.”
In Bulgaria, Montenegro, and Germany, up to 50% opted for resale in “3-10 years”. However, in Bulgaria and Montenegro, the third option (“over 10 years”) was almost not selected at all, while in Germany a quite significant 13.3% chose it. According to Elena Mischicheva, “despite the fact that prices for property in Germany grow every year, investors usually have no intention to resell in the near future due to local taxes.” A similar situation exists in Austria, about which Elena Milishenkova commented: “Reselling residential property is not profitable because of the financial transaction tax. Russian-speaking investors rely not so much on high profit (taking into consideration that the maximum actual return is 4% per annum), as on preserving their money in a stable country.”
The long-term view is especially pronounced in Greece, where this option was selected by 25% of respondents, while “resale in 2-3 years” was not selected at all. “We have no customers who intend to resell their property in the foreseeable future,” said Julia Smagina. “There are cases where property is put up for sale, but marked up by an extra 40%. Say the purchase price was €400,000, then the resale price rises to €550,000. If a customer really wanted to sell, they would add about 15%. Many hotel owners have discontinued selling their property after they began to receive a good profit. There was a hotel in the south of Crete, where the owner was ready to sell for €5,000,000, but she changed her mind because it became completely booked up – tourism was in full swing. She signed a contract with Austrian and Czech travel agencies and is very happy. She even updated the contracts after the very first year of 2013, which was very profitable.”
The option “3-10 years” made up the largest proportion of responses in Latvia (88.9%) and Italy (78.9%), where other options met with a very limited response.
4.2. Lease of Property during Landlord’s Absence
Most agents noted that the majority of buyers didn’t lease their properties during their absence. In the UK, 100% of respondents stated that they had “few or no” such buyers; in France and Croatia (66.7% each), the situation is similar.
“I have heard many times from both buyers and sellers that Russians do not tend to lease property which they only occasionally use,” said Yulia Kozhevnikova. “Unlike foreigners, they are reluctant to lease their property and to let unfamiliar people in it, and they tend not to fully trust potential tenants. This is especially pronounced in the UK, where property buyers are very wealthy people whose income won’t benefit significantly from rental payments. More often they prefer to maintain their properties in good condition and to let the price increase gradually over time”.
An opposite situation is seen in Thailand: 50% of respondents noted that more than half their customers leased their property out while they were away. According to George Kachmazov, “property in Thailand is cheaper than, say, in the UK, so owners treat it with more flexibility.” Anna Sologub, deputy director at Hot Real Estate, said, “the majority of Russian-speaking owners stay in winter, and lease their property, usually through property agencies, during the rest of the year so that it is not vacant. The US system is used in Thailand, unlike in Russia: the agent’s commission is paid by the landlord, not the tenant. The agency’s commission, which is payable upon deal completion, amounts to 10% of the rental cost. Agencies provide services related to meeting clients, helping them with transfers, cleaning, arranging utility payments, etc. This relieves the owner from having to take care of the property in person.”
As a rule,
The option “over half of all customers” had a significant share in Turkey (32%), although it is not dominant in this country. According to Irina Mikhaylik, realtor at Look-O-More, “originally, every customer wants to lease property when they are away, but later they change their mind.”
In Latvia, according to Beata Pontaka, an independent realtor in Jurmala and Riga, “many buyers lease property to earn an income. They expect around 10% per annum, but in reality it is 4-5% – it all depends on the location of the property. Leasing matters are usually entrusted to agencies, under a contract or a letter of attorney. However, some owners are selective when it comes to leasing their property, because they have invested in expensive furniture and high-quality designs – they lease it only to people they know or to well-off individuals, for example, during music festivals.”
5. Investing in Commercial Property
The survey results revealed that the most popular types of commercial property among Russian investors were hotels and apartment buildings. These categories were selected as priorities by 61.5% and 34.2% of respondents, respectively.
Hotels lead the way in 21 of the 34 countries. A healthy majority of respondents selected this option in Greece (82.4%), Italy (76.9%), France (76.9%), the Czech Republic (76.9 %) and Portugal (75%). “There really is great demand for hotels in Greece,” confirmed Alexey Sorokin. “Our company is part of a holding group which includes the biggest Greek tour operator, so after we sell a hotel, we offer investors a wide range of services related to room repurchase, management, attracting guests, and including the hotel in our club program.”
“In Italy, hotels are in demand because it’s a tourist country,” said Anna Tikhonova. “For example, a hotel in Verona works all year round at an average occupancy rate of 80%.”
“In the Czech Republic, tourism (in Prague) and therapeutic recreation (in Karlovy Vary, Marianske Lazne) are well developed,” said Yulia Kozhevnikova, “consequently it is profitable to buy hotels there.”
In Portugal, as reported by Michael Chulkov, “the highest demand relates to hotels and restaurants. These businesses look very promising because the flow of tourists is growing every year. In addition, compared to other commercial properties, offices in central Lisbon offer higher returns.”
Hotels and apartment buildings represent the most popular types of commercial property among
Why are hotels particularly interesting for Russian-speaking investors? “Many Russians spend their vacations in hotels and, inspired by their stay, they want to buy a similar business,” said George Kachmazov. According to Wenanty Bronk-Marwicz, the owner and director of the Domazur Agency in France, “many people believe that hotels and restaurants are businesses which require relatively simple management.” However, investors’ expectations may not always tally with reality. “We are often contacted by customers who would like to purchase a hotel in Austria,” said Elena Milishenkova. “Unfortunately, they do not realize all the responsibility and risks that come with purchasing a hotel in a foreign country.”
According to Julia Smagina, “if you come from nowhere and set up a hotel business, you can easily go bankrupt straightaway. That is to say, a hotel business should be managed by professionals; it involves creating a positive image, recruiting, procurement, infrastructure maintenance, supporting a website and the software used… Hotel guests are very different, sometimes a problem may pop up, and one has to know how to address it.” Olga Skovron noted: “All requests for buying hotels are received from customers who already have a hotel business in their country of residence. Knowledge of business basics is key here.”
According to Ilya Gordon, “apartment houses and hotels are the two types of commercial property most avoided by experienced Western investors; they prefer to buy retail, logistics, office and industrial property. This happens because apartment buildings and hotels are considered to be much more “energy-intensive” types of business: as a rule, they are managed by specialized management companies with years of related experience.”
In some countries, hotels were noticeably inferior to other properties: in the United States this option was selected by only 35.7% of realtors, and in the UK and Cyprus by 42.9%. In the United States, according to Oleg Kadyaev, “there is a reason behind this: the cost of hotels is still too overstated.” Dmitry Kardonsky, senior property consultant at One World Property Advisors, explained that, “in New York, the cost of a hotel starts at $10,000,000. However, they usually have a 97% average occupancy rate, bring in a steady income, and are resold at a huge profit. Thus, the famous Four Seasons Hotel on 57th Street in Manhattan was recently sold for $550,000,000, and is now on offer for over $1,200,000,000. Refitting office buildings and turning them into hotels is also very profitable. The procedure usually takes about two years, and brings a return of up to 80%.”
George Dokuchaev said that “in Cyprus, investors are particularly attracted by large, expensive hotels on the coastline; perhaps this is why actual interest is rather low. However, in recent years, Russians have purchased a number of hotels. At the same time, small mini-hotels are not a palatable option, since major tour operators don’t work with them – it is more profitable to refurbish such facilities as apartment buildings for resale or leasing.”
Apartment buildings predominate in Germany, where this option was selected by 72.2% of respondents, and in the United States by 50%. Anton Shamarin explained that “apartment buildings are usually in demand in markets with less pronounced seasonality.” In Germany, according to Elena Mischicheva, “apartment buildings are the most profitable and safe investment, and are associated with minimum risks. In addition, loan policies for apartment buildings are much more favorable than for other commercial facilities.” In the United States, according to George Kachmazov, “the cause of high demand for rental housing is explained by active migration within the country: Americans often move from place to place.”
Apartment buildings are not in the lead, but do take a significant share of respondents’ answers from Latvia, Greece and the Czech Republic. “As for the market for hotels and apartment buildings in the Czech Republic, we have witnessed an almost 17% decline through 2013 and 2014,” said Firaz Muinov.
On the other hand, the proportion for apartment buildings was relatively low in Turkey (16.7%), Spain (17.2%) and France (23.1%). “Because of tourism, all these countries demonstrate more demand for properties appropriate for short-term leasing,” said George Kachmazov. “Apartment buildings bring low returns – it is cheaper to buy other types of property such as hotels.” In France apartment buildings are less popular, as local legislation largely serves the interests of the tenant.
According to Elena Zhabreva, “apartment buildings in Spain are not particularly prevalent, although this could change in the near future. The reason for this is that the market is already saturated with hotels and tourist apartments. It has become more difficult to obtain a license for these activities. For example, under a new law, one can get a license for a tourist apartment located in the center of Barcelona only for the whole building; and it will definitely be impossible to get licenses in the Old Town. Therefore, more and more customers are interested in buying a whole building, which they subsequently renovate and resell or lease. If leased long-term, these properties can be turned into apartment buildings.”
Street retail is in third place overall. However, it leads in Bulgaria and the Czech Republic, where the corresponding options were selected by 56.8% and 53.8% of respondents, respectively. “As a rule, in Bulgaria, shops are first rented and then bought,” said Vera Kolarova. “Lately, demand for wine houses has emerged as well.”
In the Czech Republic, “there is heavy competition in the hotel segment, and a permanent lack of retail shops at the same time, so it’s a win-win investment,” said Boris Litsev. “Street retail was chosen by 78% of our clients,” said Firaz Muinov. “This happens because the cost of such facilities in Prague varies from 3 to 20 million roubles, so each investor can choose a suitable option. Few good deals are to be found in the market, and properties are mostly sold directly, not through agencies.” According to Pavel Malyshev, “in the tourist city center, the popularity of street retail has never declined, despite high prices for such offers. In non-tourist residential neighborhoods, the lead is traditionally taken by commercial properties leased to grocery chains or institutions on a long-term basis.”
Interestingly, in Portugal and Estonia none of the respondents selected street retail, and in France and Germany, this type of property registered little interest: 7.7% and 6.6%, respectively.
Other types of commercial property had much smaller proportions in the overall market pattern, although they were significant in some countries. Offices took first place in the UK (57.1%) and Cyprus (42.9%). “Cyprus is not only a resort country, but also a convenient location for international business, especially after the discovery of gas deposits in the shelf area,” said George Dokuchaev. “A lot of large companies are starting to buy office properties for their employees, so we expect growth in this segment.”
In addition, offices are popular in Montenegro, France and the USA. In contrast, in Germany, Greece and Portugal none of the respondents selected this type of property. However, Michael Chulkov noted that “investors who are focused on getting a residence permit in Portugal tend to look for offices and tenant properties in Lisbon.”
Shopping malls did not prevail in any of the survey countries. However, they made up a significant proportion in Germany (33.3%), as well as in the USA and Turkey. According to Ilya Bitkov, realtor at Coldwell Banker, “in the US, malls and offices attract foreign buyers, and yet apartment buildings are on the list as well. Many customers from the former Soviet Union are greatly interested in the immigrant investor program (EB-5) to obtain residency in the US: the required amount to be invested through regional centers is from $500,000 to $1,000,000.”
The least popular option was “industrial facilities”, which was selected by no respondents in almost all countries. George Kachmazov noted that, “this kind of property is interesting to only a few investors who specialize in production.” However, the proportion of industrial properties is tangible in Latvia (22.7%) and Italy (12.8%). Yulia Kozhevnikova shared her belief that “because of the proximity of Russia and Latvia, many investors have businesses in both countries, so they need to have warehouses and other premises in Latvia.” In Italy, according to Anna Tikhonova, “some investors are interested in wineries (for example, in Asti, Franciacorta, Valpolicella), as well as metallurgical plants.”
5.1. A Ready-Made or Free-Standing Business?
More than half of respondents (52.3%) noted that customers buying commercial property often prefer to buy a ready-made business than to establish a company themselves. This option took the lead in most countries (26 of 31), and was particularly prominent in the Czech Republic (100%), Latvia (93.3%), Spain (92.3%), and Greece (91.7%). “In Latvia, one can obtain a residence permit for investing just €35,000 in local business development,” said Elena Milishenkova. “So many people buy a ready-made business solely for the purpose of a getting a permit, and have no desire to manage the business.”
In contrast, investors in Montenegro prefer to establish their own business – this option was selected by 55.6% of the survey participants. In Cyprus, both options made up 50% of responses.
Purchasing a property and developing an independent business was not an especially popular option, but it made up a significant proportion of responses in Portugal (40%), Turkey (35.3%) and Bulgaria (34.8%). In Portugal, as noted by Michael Chulkov, “commercial property is primarily purchased by people who plan to live and work in this country. For this kind of investor, it’s both easier and cheaper to develop an independent business project.” According to Irina Mikhaylik, the situation was similar in Turkey: “As a rule, investors come here to relocate, so they start looking for business options.” With regard to Bulgaria, Vera Kolarova said that, “developing a business project from scratch is the preferred option for investors only if they have developed a business idea and have sufficient funds; other investors look for ready-made businesses.”
In almost all countries, realtors confirmed that Russian-speaking investors wanted to purchase ready-made businesses. According to Maksym Vykhoryev, “they prefer to maximize their passive income, and rarely participate in direct management.” “Investors come to buy a property and immediately start to receive a return on it. If a property is being used, investors believe it is an indicator of liquidity,” said Elena Zhabreva. “It is definitely the case that ready-made businesses are purchased more often. The reasons are obvious: there is less financial risk and time expenditure. Moreover, the return that is received on the property is already known,” added Julija Kuharjonoka.
“In the Czech Republic, 95% of our clients prefer to buy ready-made businesses,” said Firaz Muinov. “Investors are particularly interested in businesses that have been seeing a constant profit for about three-to-four years. Almost all such investors live in Russia, and they simply make two-to-three-week visits to the Czech Republic three-or-four times a year to monitor their projects.”
“Any field experiences severe competition,” emphasized Boris Litsev. “A new firm can find a market niche only if it has indisputable know-how; if this is not the case, it is much cheaper to buy an existing company. Even if such a company is not currently profitable, it is easier to invest in its development than to establish a business from scratch. Many firms are sold as a complete package, with a base of customers and suppliers.” Pavel Malyshev agreed that, “establishing and promoting a brand-new business in another country can at first be extremely challenging, so it is easy to understand investors who prefer to buy already existing companies. However, such transactions require that a thorough and professional due diligence procedure be undertaken, so that the owner-to-be properly understands all the company’s issues and its future prospects.”
Some experts believe that there are some obvious disadvantages in purchasing a ready-made business. According to Julia Smagina, “theoretically, everyone wants to have a ready-made business, however a high-quality business is rarely sold and costs a lot. At the same time, a third-rate outfit can be very well disguised, so that investors would need to conduct a very detailed audit in order to ascertain its actual condition. Even if a company was successful under its previous owner, there is no guarantee that it will work for you. As an example, a hotel seller can provide you with a customer base made up of, for instance, Germans or Norwegians who are used to staying in this hotel and to things being done in a certain way. But you’re a Russian, and you run the hotel in a different way, recruit different staff etc., and if the guests dislike it, they might leave. Therefore, it may to some extent be easier to acquire a property and to establish a business from scratch.”
“When a ready-made company is on sale,” added Michael Chulkov, “it often is the case that either the price is too high, or it needs to achieve an insanely high performance to recoup expenses.”
“In general, businesses for sale tend to be inefficient, since their owners do not pay sufficient attention to management matters,” said Anton Shamarin, speaking from his experience in the Montenegro market. “And yet, having said that, in my opinion it is more promising to buy a ready-made business with all its existing contracts, customer base, loyal suppliers and licenses. In this case, the new owner can concentrate on increasing its business profitability and performance.”
5.2. Loans for Commercial Property Purchases
According to the survey, very few Russian-speaking investors took out loans to purchase commercial property. This option was selected by over half of realtors – 56.5%, and it proved to be particularly prevalent in Montenegro (90%), Portugal (87.5%), and Greece (80.0%).
“Banks in Montenegro do not issue loans to non-residents,” said Elena Trubitsyna, director of the Moscow branch of CMM Montenegro. “Typically, Russian-speaking investors buy both ready-made and new businesses for cash.” Anton Shamarin stressed the following reasons for the unpopularity of loans: “The high cost of borrowed money compared to other European countries, combined with the highly seasonal nature of local businesses.”
“Due to the financial crisis, in recent years Portuguese banks have tightened requirements for issuing loans to foreign investors,” said Michael Chulkov. “However, throughout 2013 and 2014, the situation has improved. As a result, the banking system has seen a revival, and the number of loans has grown.”
“In Greece, it is incredibly difficult to obtain a loan – not only for foreigners, but for Greek citizens as well,” said Julia Smagina. “Moreover, when it comes to villas for rent, we are now seeing that most investors are preferring to take their funds out of Russia. They are not interested in getting loans, but in investing the money that they have, so that it doesn’t get “trapped” in their home country.”
The opposite option – “over half of all customers” – did not lead in any of the survey countries. However, in some it accounted for a significant proportion of responses: primarily, in the UK (33.3%), Italy (18.4%), Spain (18%), and Germany (17.6%). According to George Kachmazov, “a knowledgeable investor understands that a properly arranged loan helps to increase income and to optimize taxes. All the above countries have stringent tax compliance rules and high taxes, so banks are ready to issue loans to foreigners (except, perhaps, in Italy).”
“In Germany in recent years there has been an increase in the number of customers who take out loans to purchase commercial property,” said Elena Mischicheva. “Historically, interest rates in Germany have been the lowest in Europe.” Ilya Gordon added: “With few exceptions, all customers try to obtain a loan when purchasing both commercial and residential properties. The reason is simple: the refinancing rate of the European Central Bank has reached its historical minimum value, so money in German banks is very cheap. Here’s a recent example: in the second quarter of 2014, during negotiations over financing a transaction involving a commercial property priced at €3,500,000, we managed to cut the rate from 3.5% to 3.1% per annum for the entire duration of the credit agreement (8 years 9 months). And back in the fourth quarter of 2013, rates were as high as 4% per annum. In the residential property segment, rates fell to 1.6% per annum (for credit agreements with a duration term of 10 years and more).”
“In Spain, taking out a mortgage is typical for purchasing both residential and commercial properties,” said Elena Zhabreva. “The country offers favorable credit terms: the rate is usually around 3-5% per annum, which and that attracts investors.”
More than two-thirds of respondents (66.9%) noted that, if arranged, loans do not usually exceed 30-50% of the cost of the property. This was clearly the most popular option in all the survey countries.
The other options were not popular in the majority of countries, but did account for a significant number of responses in some; for example, a loan of up to 30% was especially popular in Turkey and Bulgaria: 36.4% and 30% of the survey participants, respectively, selected this option. “Investors prefer to take out a loan just to add it to available funds,” explained Vera Kolarova. “It is not that easy for a foreigner to borrow a large sum in Bulgaria.”
Conversely, loans of over 50% proved popular in Germany (20% of respondents), Spain (17.6%), and Latvia (67%).
According to Ilya Gordon, “in the German residential property market, loans issued to non-residents generally cover 50% of the contract cost of the property, and from 60% to 75% of the cost in the commercial property segment”, Elena Zhabreva emphasized that the situation in Spain is more or less the same: “For non-residents, the minimum mortgage amount is 50%. There are some banks that can issue a mortgage loan of up to 70-80% – the amount depends on the set of documents submitted by the investor and the liquidity of the property itself.” Diana Dzalbe added that “in Latvia, non-residents can get a loan of up to 60% of the property cost. Currently, it is profitable for banks to refinance properties: rates have increased (especially for foreigners), amounts payable have decreased, and guarantees have become more reliable.”
This report was compiled by the Tranio.com team:
- Rostislav Chebykin, Editor in Chief
- George Kachmazov, Tranio managing partner
- Yulia Kozhevnikova, Expert
- Marina Filichkina, Head of Sales Department