The evolution of the Russian investor: how the demands of foreign property buyers have changed
Over the past eight years, the portrait of a private, Russian-speaking, foreign real estate investor has changed profoundly: buyers have become more knowledgeable, a demand for new effective ways to invest has emerged. The evolution can be observed among both the clients of our company and across the whole market.
Summer homes in Spain
What did Russian-speaking foreign property buyers look like in 2010? They were chiefly interested in buying detached houses and apartments for their own use. Most requests we received featured sea resort holiday villas suitable for family use.
Back then, clients had an illusion (and some still have) that purchasing resort property is an investment in terms of the value growth potential and high liquidity. At that time, our surveys showed that an absolute minority of buyers considered purchasing resort property for rental purposes. Those were the people who would rather prefer an apartment in Alicante to a townhouse near Moscow.
However, in 2010, resort property selection applications amounted to 95% of the total, while now it is just 50%.
Today, resort residential property is chiefly bought by successful and affluent individuals who can afford to spend spare money on a home or an apartment of their dreams, and its subsequent maintenance. Tourist and social infrastructure — well-equipped beaches, parks, mountains, beautiful views, transport accessibility, shops, restaurants and clinics — are especially important for such clients.
Today, about one-fifth of those buying resort residential property want to make money on it, buying to lease during their absence or sell on in a few years’ time. It is interesting that despite being quite realistic, the scenario of a later resale at a profit most often remains just an intention.
The most popular foreign residential resort property market for Russians is Spain. The reason for the high demand is an optimal balance of price, quality, tourist flow and transaction investment attractiveness for the client and the company. For instance, a two-bedroom apartment within walking distance of the sea on the outskirts of Barcelona sells for about €350,000, while in Costa Blanca such a summer home near the coast is available for €150,000.
Today, about 15% of our clients are interested in Golden Visa programmes providing residence or citizenship by investment in real estate or other assets. Greece, for example, issues residence to the buyers of one or more properties totalling at least €250,000, while Cyprus awards citizenship for investing at least €2mn.
Today, the cancellation of bank secrecy and the pressure tax authorities exert on capital owners have led to many of them buying residency of certain countries to properly structure their businesses, open bank accounts and optimise taxes. Therefore, for most clients, purchasing property under a Golden Visa programme is a way to ensure safety and have a ‘safe haven’ if the need to emigrate arises.
Investment-based residency is typically obtained by the entrepreneurs who have significant business interests abroad. And even if obtaining residency is the main property buying motivation, investors try to make a profit by leasing or using the property as a second home.
Against the backdrop of the 2014 crisis, the demand for foreign income-generating property in Russia increased. In 2010, it was extremely low, and the yield expectations were ultra-exaggerated, starting from 10% per annum. In 2017, the number of clients wishing to earn increased by about five times. We started working in this field as early as 2013, and today about 60% of Tranio's Russian-speaking clients are buying income-generating property. This kind of transactions mostly involves rental residential real estate. For instance, an apartment in Berlin can yield 3-5% per annum, while a short-term rental apartment in Athens can fetch up to 7% per annum.
The buyers of rental businesses are now interested in purchasing not only residential but also commercial properties: from supermarkets and street shops to hotels and retirement homes. A simple rental business does almost not imply any capital risks, for which reason it became widely popular with Russian nationals as a capital maintenance vehicle, which also allows for an income in a foreign currency.
With an optimal investment strategy, the yield rate of such a scenario is about 5% per annum, despite the low rental business risk.
Value Added projects
Over the past eight years, Value Added projects, a brand-new product for private investors, has grown in popularity among them. This is chiefly about property development and redevelopment. Such projects target more experienced investors with high investment expectations. We started working with such products about three years ago. Their point is that we use the investors' money to construct new commercial residential property or reconstruct the existing buildings and sell them for rental purposes. Sometimes, the investor continues to own the commissioned property, leases it independently and receives an income.
Before our eyes, the next generation of investors, who have already gained experience in the rental business or other types of foreign investment and are ready to take calculated risks for the sake of obtaining 8-15% per annum, is being shaped. We are now engaged in about 10 projects in Germany, Spain, Greece and the UK.
At the moment, no more than 5% of our clients are ready to invest in Value Added projects, but their number is growing gradually.
New investment vehicles
Development projects are not always available to small private investors due to their expensiveness: usually, at least €2mn is necessary to participate. But they understand the idea of such projects and want to invest in them. This leads to new forms of investments, allowing to invest relatively small amounts and enjoy the opportunities available to major investors appearing in the market.
Among such forms are club deals, when several investors put funds into the same project. The entry threshold usually starts from €100,000, but the yield rate usually reaches the same 10-15% as in the case of an individual investment.
Other advanced vehicles are development project shares or loan disbursement. The main advantage of such investments is the possibility of investing small amounts and doing it remotely without spending time and effort on the property purchase. Therefore, first-time investors can invest a small amount in a major development project and obtain a yield significantly exceeding the alternatives of deposits or securities under the management by a team of professionals.
We see a lot of potential in such projects for the clients whose budgets average €100,000. Small private investors are forming clubs, as well as providing professional investment management services, will be the fastest-growing segment of our market for several years to come.
We have been observing a significant improvement in the Russian investors' expertise in the last few years. There is now a separate group of highly-qualified and experienced teams working together with competent local advisors that are capable of carrying out major (of €10-50mn in value) projects of great complexity. In our opinion, Russian-speaking buyers are currently one step ahead of the investors from other countries, such as Turkey, China and India.