Amid economic sanctions and a volatile ruble, Russian spending habits have changed markedly in recent years. But how have these issues influenced spending among foreign property investors from Russia and the CIS? To get to the bottom of this, Tranio.com has conducted its sixth annual survey. Our respondents included 268 realtors who work with Russian-speaking clients from both Russia and the Commonwealth of Independent States (CIS) in 32 countries across Europe and Asia, as well as in the United States.
Our survey results enabled us to paint a portrait of the typical overseas property investor from Russia/CIS:
||Entrepreneur, business owner
|Key reason for investing
||Economic and political stability in the country where the property is acquired
||Simple rental business
||At least 5 years |
|Estimated yield rates
|| 4–8% per annum
||Districts adjacent to the city center
||Flats, hotels, commercial apartment buildings
||Up to €2M
||40–60% LTV loans
||Finding the right property, obtaining financing,
1. Types and motivations of Russian/CIS overseas property investors
We asked our respondents how many of their Russian/CIS clients buy foreign property for purposes of investing.
Russian/CIS commercial property buyers have emerged as an increasingly visible force in many foreign markets. In 2016, 27% of our respondents named investors as among their essential buyer categories — a 10-percentage point increase compared to our 2015 survey results. Meanwhile, the number of respondents who said Russian/CIS investors were a rarity fell by nearly half, from 29% in 2015 to 16% in 2016.
"Prior to 2013, Russian/CIS buyers who were looking for property overseas primarily wanted to obtain residential property in foreign resort towns for their own use," says George Kachmazov, managing partner at Tranio.com. "Back then, these buyers were snapping up properties without considering real estate to be an investment. In 2014–2015, the value of the ruble tumbled amid falling oil prices and economic woes exacerbated by the Ukraine crisis. During this period, some Russian/CIS foreign property owners began trying to sell or lease their holiday homes abroad, while others who had been planning to purchase homes abroad decided to postpone their purchases. In the aftermath of the economic crisis, many Russian/CIS buyers have shifted their preference from residential to commercial properties. This indicates that many of these investors now view real estate as a capital maintenance vehicle. This trend became increasingly pronounced in 2016.»
A growing number of realtors consider the percentage of Russian/CIS investors to be significant.
We asked our respondents which of four professions the typical Russian/CIS buyer tends to belong to. The vast majority — 81% — of respondents said entrepreneurs comprised the largest category.
2. Primary motivation for purchasing investment property
We asked respondents what chiefly motivates their Russian/CIS clients to purchase property in a certain country.
According to our respondents, such clients are primarily motivated by political and economic stability in the target country, the potential for price growth and the possibility of obtaining residency.
Political and economic stability is a particularly key factor for Russian/CIS buyers eyeing property in Austria, the Czech Republic, the United States and France; 64–91% of respondents in each of these countries indicated as much.
"In most cases, investors opt for these markets because they want to receive permanent, long-term rental income," said Kachmazov. "If not for the uncertainty that has arisen following the Brexit referendum, the United Kingdom probably would have made the list as well.»
In the United Kingdom, Portugal and Thailand, some 56–70% of respondents cited the potential for price growth as a key motivator for Russian/CIS buyers. Thailand and the UK are also popular among those who wish to invest in redevelopment projects (see Investment Strategies below).
In Bulgaria, Greece and Latvia, an astonishing 100% of our respondents cited the possibility of obtaining residency as a key motivator for Russian/CIS buyers. Upwards of 50% said the same in Portugal, Hungary, Cyprus, Turkey and Spain. In all of these countries, residence permits are available to real estate investors.
The percentage of respondents who consider political and economic stability to be a key motivator for Russian/CIS overseas commercial property purchases has increased by 25% since 2014. We attribute this dramatic upsurge to the fact that Russian/CIS buyers have sought relatively stable economies to invest in amid economic uncertainties at home.
3. Investment strategies
We asked respondents how many of their clients have displayed an interest in investing in development and redevelopment projects. In accordance with our findings, we have concluded that the prevalence of the political and economic stability motive correlates with another observation: most Russian/CIS buyers opt for simple rental businesses when choosing an investment strategy. This strategy typically entails long-term investments in reliable markets.
On the other hand, development and redevelopment projects have not proven to be darlings among Russian/CIS investors. Nearly two-thirds (64%) of our respondents stated that fewer than 10% of their Russian/CIS investors have expressed any interest in development and redevelopment projects.
According to 100% of our respondents in Bulgaria, Hungary and Croatia, Russian/CIS buyers have shown virtually no interest in development and redevelopment projects in those countries. Likewise, the majority of our respondents in France (85%), Spain (81%) and the United States (80%) stated that fewer than 10% of Russian/CIS buyers have shown interest in development and redevelopment projects.
Among the foreign markets included in our survey, Thailand and the United Kingdom proved the most fertile for development and redevelopment projects. In Thailand, 50% of respondents said development and redevelopment projects accounted for upwards of 30% of their Russian/CIS clients’ interests. In the United Kingdom, 40% of respondents said the same.
"Russian/CIS investors have long had a prominent presence on the UK market. Many run rental businesses, and most are professionals with a wealth of experience. Like investors in other sectors, Russian/CIS real estate investors in the UK are typically drawn to increasingly complex investments, such as development and redevelopment projects," Kachmazov said.
Most (81%) of our respondents from across the globe said that Russian/CIS investors are not typically attracted to real estate funds. "This is likely due to the fact that there isn’t a lot of information available yet in Russian regarding real estate funds. We have found that some of our clients haven’t even heard of this investment vehicle," Kachmazov said.
Most CIS investors put their capital into simple rental businesses. Only a few opt for development and redevelopment projects or real estate funds.
4. Investment timeframes
With respect to Russian/CIS foreign property investors, we asked our respondents how many years buyers typically plan to own their investment properties for.
In the cases of development and redevelopment projects, buyers typically plan to invest for periods of five years or less. In the case of rental investments, buyers typically set their sights on significantly longer investment terms.
Across foreign markets, some 63% of respondents said that their Russian/CIS clients typically plan to sell their real estate investments in the foreseeable future. This represents a 15-percentage point increase compared to 2015.
The remaining 37% of respondents said that their Russian/CIS clients typically plan to hold on to their properties for the long haul, ultimately passing them on by inheritance.
Of the respondents who indicated that their Russian/CIS clients typically plan to sell their investments, 59% said most plan to do so within 5–10 years of the purchase.
Respondents who said their Russian/CIS clients typically plan to sell their property investments within the shortest timeframe — 3–5 years — were most abundant in Hungary (50% of respondents), the United States (43%) and Cyprus (40%). In the latter case, this hefty figure is likely to be attributable to the fact that many Russian/CIS investors are drawn to the Cypriot property market because of its citizenship-by-investment program. To maintain citizenship gained through the program, an investor must possess his or her qualifying property for at least three years.
On the contrary, none of the respondents in Italy, Latvia or France, and fewer than 10% of respondents in Austria or Germany chose the 3–5 year option.
In Germany, 52% of respondents stated that their Russian/CIS clients typically don’t plan to sell their investment properties in the foreseeable future. Of those that said their clients typically do plan to sell their investment properties, 24% said they planned to do so some 10–30 years after purchasing.
According to our respondents around the globe, most Russian/CIS investors plan to hold onto their investment properties for at least five years after purchasing.
5. Estimated yield rates
We asked respondents what annual yield rates their Russian/CIS clients typically expect from their foreign real estate investments.
Russian/CIS investors have come to expect lower yield rates, our study revealed. Across all of the markets we reviewed, the percentage of respondents whose clients expected their rental property to yield over 8% per annum fell from 35% in 2013 to 20% in 2016 for residential properties and from 55% to 36% during the same period for commercial properties.
"Rental yields are low in the liquid European markets, and the number of Russian/CIS investors realizing this is on the rise. On average, high-quality liquid properties located in the centers of big cities yield 3–5% per annum. Yields of over 7% typically entail peripheral locations, low liquidity and heightened risks," Kachmazov said.
In most markets we analyzed, respondents typically choose yields of 8% or less. For instance, in Germany, 70% of respondents said that Russian/CIS investors typically opt for yields of between 4–8% for commercial real estate; 56% of respondents in Germany said the same with respect to residential properties.
Of the markets included in our study, Thailand appears to be most attractive to investors seeking relatively high yields; 80% of our respondents in the country said that Russian/CIS investors typically seek yields of upwards of 8% when purchasing commercial properties, while 62% said the same regarding residential properties. This is attributable to the fact that property yield rates in Thailand are typically high relative to other foreign markets, and investors on the market expect to benefit from the risk premium. According to global cost of living database Numbeo, residential properties on the Thai resort island of Phuket yield an average of 5–6% per annum, while those in popular EU markets typically yield 3–4%.
We asked our respondents which areas of a given city or region their clients typically purchase foreign investment property in.
Just over half (52%) of our respondents said that Russian/CIS investors typically opt for properties located in districts adjacent to city centers and characterized by moderate risks and yields. The popularity of such locations was particularly notable in Croatia (100% of respondents), Turkey (86%), Greece, Bulgaria (75% each), Spain (71%) and the Czech Republic (69%).
Central districts of capitals and big cities (chosen by 46% of respondents) are in high demand in Latvia and Portugal (100% of respondents each), France (86%) and Hungary (83%). "With respect to investing, Latvia, Portugal and Hungary are relatively high-risk countries. Russian/CIS buyers there appear to be reluctant to purchase properties in peripheral areas," Kachmazov said. "In France, Russian/CIS buyers are almost exclusively drawn to top locations in Paris and the Côte d’Azur."
Overall, only 2% of respondents said that Russian/CIS buyers typically opt for city outskirts and small towns, though this figure was slightly higher in Bulgaria, Greece and Thailand, where 13% of respondents (in each country) selected these options as favorites among Russian/CIS buyers. These three countries are distinguished by a heightened sense of risk in comparison to the other markets we analyzed. By comparison, only 4% of respondents in Germany said that city outskirts were of interest to their Russian/CIS.
Many realtors who said most Russian/CIS investors opt for moderate yields (4–8%) also noted the popularity of locations adjacent to city centers, reflecting the current market reality.
7. Property types
We asked respondents which of the following property types have proven most popular among their Russian/CIS clients: flats/houses, hotels, commercial apartment buildings, student housing facilities, cafes/restaurants, street retail shops, supermarkets, malls, offices and retirement housing facilities. Notably, respondents were able to select up to two options each, so the total number exceeds 100%.
Among Russian/CIS investors, flats/houses are the most popular property types: across all of the markets we analyzed, 78% of respondents identified this category as the top picks among Russian/CIS buyers. In Bulgaria, Hungary, Greece, Portugal and Croatia, 100% of respondents selected this option.
Hotels proved to be the second most popular option, selected by 26% of realtors overall. Hotel property is especially popular in Austria (82%) and Greece (60%).
The above reflects a significant change in buying patterns; in 2015, 41% of respondents selected hotels as the most popular property type among Russian/CIS buyers. "In the past, a fair number of amateur investors were interested in acquiring mini-hotels," Kachmazov said. "But over the past year, these clients increasingly began to purchase commercial apartments. At the same time, we’ve seen more and more professional investors with a desire to purchase relatively large and costly hotels.»
Commercial apartment buildings also proved popular among Russian/CIS investors in 2016, with 22% of respondents selecting this category. This enthusiasm is strongest in Latvia (57% of respondents), the United States (55%), Thailand and the Czech Republic (44% each), and Germany (37%).
Other investment property types were less popular overall but benefited from high demand in specific countries.
"Many commercial real estate investors are drawn to supermarkets in Germany, which boast high yields (6% on average) and long-term (15-year, on average) rental agreements," said Kachmazov. He added that Russian/CIS investors have lost interest in restaurants and street retail shops due to relatively low yields.
Most respondents noted the popularity of buy-to-let residential properties. In our opinion, this is attributable to the fact that this investment strategy is relatively easy to manage, low-cost and easy for investors to understand, particularly when compared with retail and office space or hotels.
8. Investors' budgets
With respect to residential property, we asked our respondents which of the following budget categories most of their Russian/CIS clients typically fell into in 2016: less than 300,000 EUR, 300,000-1 million, 1 million-3 million EUR, or more than 3 million EUR.
We found that 50% of our respondents typically work with Russian/CIS clients who want to spend less than 300,000 EUR on residential properties. Only 2% said it was typical to work with Russian/CIS clients looking to purchase properties worth upwards of 3 million EUR.
As for commercial property, we asked our respondents the same question, but with the following budget categories: less than 1 million EUR, 1 million-3 million EUR, 3 million-10 million EUR, or more than 10 million EUR.
Russian/CIS buyers were slightly more eager to shell out money for commercial properties. Some 43% said that most of their clients from the region look for commercial properties of between 1–3 million EUR; 32% said such clients typically seek such properties for less than 1 million EUR.
We found that respondents in Bulgaria, Turkey and Montenegro were more likely to work with clients with lower budgets, while those in the United Kingdom, France and the United States worked with more high-budget clients.
The relatively low budget of the typical Russian/CIS buyer corresponds with the popularity of buy-to-let residential properties, which are more affordable than many other investment strategies.
9. Commercial property financing
We asked respondents how many of their Russian/CIS clients typically obtain mortgage loans to purchase foreign properties, giving them the following answer options: few to no clients; many clients, but not the majority; or most clients.
Statistics varied considerably by country. For example, in Austria, Germany and Spain, more than 70% of realtors said that many of their Russian/CIS clients typically obtain mortgages. However, that figure hovered around zero in Hungary, Greece, Cyprus, Croatia, Montenegro and Thailand, where Russian/CIS clients are at best hard pressed to obtain a mortgage, or at worst, not authorized to do so.
"Most clients seek out mortgages in countries where loan conditions are good. This indicates that Russian investors are becoming more professional," Kachmazov said. "A growing number of investors are realizing that advantageous financing has an impact on eventual investment returns. For instance, Germany has become one of the leaders in the inflow of investors from Russia/CIS, due largely to mortgage loans being available to non-residents at 1.5% per annum in the country.»
We also asked respondents what loan-to-value (LTV) ratio their Russian/CIS clients typically obtain when taking on mortgage loans. About half (52%) said that 40–60% was the most typically sought after LTV. This answer was most common in the Czech Republic (88% of respondents), the United Kingdom (78%), Spain (68%), Austria (64%), the United States (60%) and Germany (58%).
In Hungary, 100% of respondents said that the typical LTV their Russian/CIS clients seek is less than 40%. Most banks in Hungary do not provide financing to non-EU nationals. Those that do typically limit loan sums to 64,000 EUR.
According to most respondents, Russian-speaking investors use leveraged finance actively wherever it is available and take out loans with up to 60% LTV.
10. The difficulties encountered by Russian-speaking buyers
We asked our respondents which of the following difficulties their Russian/CIS clients typically struggle with when purchasing property abroad: finding a suitable property, structuring purchases/tax optimization, obtaining loans, transferring money for the purchase, verifying the reliability and integrity of the seller, or completing all required documentation.
Over half (55%) of our respondents said that the biggest struggle their Russian/CIS buyers encounter is that of selecting the best property to fit their needs.
"Investment properties will become even harder to find in the future," said Kachmazov. "Due to the large amount of capital currently flooding commercial markets around the globe, quality properties are becoming scarce and there is a bitter struggle for available properties.»
Russian/CIS clients also struggle with obtaining loans (according to 24% of respondents) and paying for their purchases via transfers (22%). By comparison, in 2015 only 4% of respondents mentioned each of these difficulties. These problems have likely become more pronounced in recent years due to a widespread tightening of Know Your Customer procedures, as well as the fact that the Central Bank of Russia has cracked down on many banks in recent years, revoking numerous banks’ licenses.
As many as 44% of respondents in Thailand said that their Russian/CIS clients struggle to verify the reliability and integrity of sellers. This is likely due to the fact that the Thai market is broadly considered to be less transparent than its counterparts in the United States and Europe.
Russian/CIS buyers also struggle to obtain loans in Thailand (according to 56% of respondents), Cyprus (55%) and the United Kingdom (40%). Non-residents typically have a tough time obtaining mortgages in Thailand. Cypriot banks have been cagey about granting loans in the aftermath of the country’s 2012–2013 financial crisis. Meanwhile, the United Kingdom imposes stringent requirements that deter would-be borrowers.
The main problems Russian/CIS investors faced in 2016 were related to finding suitable properties, obtaining loans and transferring money.
We have drawn up several predictions regarding Russian/CIS buying patterns going forward.
"In 2016, clients were opting for long-term planning horizons, expecting moderate yields, establishing lofty requirements with respect to location and tenant quality, demonstrating considerable knowledge of the nuances of transaction structuring and were taking out bank loans," Kachmazov concluded. "I think that these trends will also continue to be pronounced in 2017; clients are becoming more professional.»
In 2017, Russian/CIS foreign property buyers are expected to become increasingly interested in the following types of real estate and investment vehicles:
Commercial property. The 2016 trend will likely continue: Russian/CIS buyers will more frequently invest in order to maintain and multiply the capital, spending less money on holiday homes for their own use.
Added Value projects. "As the number of experienced Russian/CIS investors is on the rise, and the yields of simple rental businesses are relatively low (5% on average), we anticipate a greater number of our clients will invest in development projects in 2017 in order to obtain higher yields (15%), and that they will do so both directly and via collective vehicles," Kachmazov said.
We at Tranio.com believe that redevelopment investors will flock to Spain, where real estate prices have fallen by 40% since 2007 and are expected to increase substantially in the next few years.
Student housing. In 2017, demand for student property is expected to increase: micro apartments are being actively constructed in Germany and the United Kingdom, and more and more international students are coming to these countries. Investors will also continue buying conventional rental flats, hotels and supermarkets.
Alternative property investment vehicles. "We expect Russian investors to learn more about collective investment (crowdfunding) and real estate funds and to begin moving in this direction gradually in 2017–2018. This format is often more convenient for individual investors than buying and subsequently managing properties on their own," George Kachmazov says.
In addition, investors are likely to continue to restructure their foreign capital and assets in 2017 following the entry into force in 2015 of a set of restrictive new controlled foreign companies (CFC) rules requiring Russian taxpayers to provide the tax authorities with details regarding various foreign business interests.
"Starting 2018, the Russian government will be aware of the foreign bank accounts held by Russian tax residents," Kachmazov said. "At the same time, Russian tax residents are required to pay a 35% tax on cheap loans (by the "9% minus the loan interest rate" formula). However, as the low interest rates in Europe are beneficial, these clients are unlikely to reject mortgages. In order not to violate the requirements of Russian regulators, more investors will be structuring their purchases through legal entities and therefore avoiding the requirements imposed on individuals.