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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, Russian-speaking clients are viewing overseas property not only in terms of being a possible residence, but also as a profitable investment. Tranio.com Study ‘12 revealed that investment was the third most important reason cited for buying property; while Study ‘14 indicated that investment was the second most important reason. George Kachmazov, head of Tranio.com, says that in 2012 the market had not yet fully recovered from the economic crisis. Now, however, prices are rising, and investment in overseas property is gaining in popularity. At the same time, many investors are placing more emphasis on the preservation of capital than on securing a profit.

According to Tranio.com’s study, the last few years have shown an increase in the number of Russian-speaking clients investing in overseas property. In many countries, Russian-speaking investors take leading positions in the residential property market, though this trend is not reflected in the commercial property market.

As a rule, Russian-speaking clients prefer to invest in properties priced up to €500,000, although average transaction costs vary considerably from country to country. Most Russian investors expect an average return of 6% per annum from residential properties, and 10% from commercial ones. However, many experts have commented that Russian investors often have inflated profit expectations.

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. Russian-speaking investors prefer to buy an already established business and to derive a passive income from it than to set up and run an enterprise.

Very few Russian-speaking clients take out loans when buying investment property, although this can vary depending on the country.

1. Number of Investors
1.1. Residential and Commercial Properties
1.2. Activity of Russian Investors in Global Property Markets
2. Cost of Properties
2.1. Low Category (up to €500,000): Portugal, Turkey, Bulgaria, Spain
2.2. Low – Medium Category (€500,000 – €1,500,000): Montenegro, Latvia, Czech Republic, Greece, Italy
2.3. Medium – High Category (€1,500,000 – €3,000,000): Germany, USA, Cyprus
2.4. High Category (over €3,000,000): UK, France
3. Returns from Residential and Commercial Properties
3.1. Expected Returns
3.2. Inflated Expectations of Russian Investors
4. Investing in Residential Property
4.1. Resale Terms for Residential Property
4.2. Lease of Property during Landlord’s Absence
5. Investing in Commercial Property
5.1. A Ready-Made or Free-Standing Business?
5.2. Loans for Commercial Property Purchases

1. Number of Investors

The survey participants shared information on the number of Russian-speaking clients buying residential property for investment purposes rather than for own stay. The responses received fell almost evenly into the three options shown in the pie chart below, although “10-20%” (selected by 39.4% of respondents) prevailed slightly.

Are there many Russian-speaking clients buying commercial property?

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.

Многие ли русскоязычные покупатели приобретают коммерческую недвижимость?

The market activity of Russian-speaking clients is especially noticeable in Germany: 77.8% of respondents claimed that the number of Russian-speaking customers investing in residential property for sale in Germany was “not less than 20% of all customers,” while 36.8% of respondents stated that Russian-speaking clients were active purchasers of commercial properties.

“In Germany, buying a residential property is profitable if the owner-to-be intends to lease it,” explains Yulia Kozhevnikova, expert at Tranio.com. “Almost 54% of the country’s population lives in rented property.”

“The number of investors is increasing,” adds Elena Mischicheva, sales manager at Epstein-Immobilien. “Germany is the economic engine of Europe. The country attracts investors due to its stable economy, transparent political and legal systems, and developed infrastructure.”

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

Many Russian-speaking clients are also investing in residential and commercial properties in Latvia and the Czech Republic. In these countries, 66.7% and 61.5%, respectively, of respondents underlined that investors make up “not less than 20%” of all Russian-speaking homebuyers. Even though the option “There is a lot of Russian-speaking clients buying commercial property” was not the most popular, it had a significant share: 20.8% in Latvia, and 25.0% in 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 Russian-speaking clients are gradually transferring their businesses or funds to the country, often investing in property. As of September 1, 2014, the minimum investment for obtaining a residence permit was €143,200, which is lower than in other European countries. Those who invest solely in order to obtain a residence permit are attracted by the stability of the local property market: prices remain acceptable even during periods of crisis. In addition, Latvia is a good base for launching a business in Europe, and the residence permit entitles a person not only to live but also to work in the country.”

As for the Czech Republic, most experts highlighted its Russia-friendly culture and language, convenient geographical position in the center of Europe, low cost of living, and high-quality education and health care systems. According to Boris Litsev, branch director of DumRealit.Cz in Prague-8, “low inflation, political stability and the absolute right of private property provide safe conditions for capital investment.”

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 of Russian-speaking clients investing in residential property. The option “Not less than 20%” was the most popular in the UK (71.4%) and the USA (56.3%). According to Aleksey Kovalevsky, sales manager at Berkley Group, “investing in residential properties in London is extremely popular among Russian-speaking clients. It brings them a passive income, and moreover the process is simple and straightforward. Clients are required to invest just 20–30% of the cost at the initial construction stage, and the remaining amount is payable only after the completion of construction works. It is always easy to lease or sell a good apartment, but unfortunately the same cannot be said for commercial property. During the crisis, many offices remained vacant.” Yulia Kozhevnikova added that “as with German cities, London is considered a reliable market for investment in rental housing. Apartments are in very high demand for both long- and short-term rentals all year round.”

In contrast, the largest number of Italian respondents (43.6%) stated that there were “few or no” Russian-speakers investing in residential property. According to Anna Tykhonova, director of Italy Estate di Tykhonova Ganna, “housing is bought primarily for recreational purposes, or as a ‘repository’ for private capital (in this case, people buy historical and luxury properties). It is extremely disadvantageous to invest in property for sale in Italy: taxes are high and yields are low.” Olga Skovron, realtor at Engel & Völkers, agreed that “Russian-speakers are looking for residential and vacation properties. Buying property is rarely for reasons related to investment and housing – it may be that this stems from the socio-psychological concept of separating business affairs from family life.”

There are few Russian-speaking clients investing in residential property in Greece: the corresponding option was selected by 38.9% of respondents. Yulia Kozhevnikova commented that “in resort countries, it is hard to find tenants for the whole year, so properties have low returns.” Conversely, Julia Smagina, partner at the Albatros Agency, noted that residential property in Greece was more appealing to investors than commercial property: “For lease, customers mostly buy villas rather than hotels. This market features a lower entry price and less responsibility. Hotels require expertise and permanent support, while villas offer an easy source of additional earnings. The owner can hire a manager who will pick up customers, look after the property, and manage all related issues, while the owner’s responsibility is confined to benefiting from the rental revenue.”

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 for short- or long-term lease is smaller. They usually choose properties in tourist areas located within 300 meters from the sea.”

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 clients are not even in the list of the top-20 investors. As for residential property, Russian-speakers are in the top four, together with citizens from China, Israel and Arab countries among all foreigners investing in this segment.”

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 no Russian-speaking clients in this category. Buyers generally comprise well-off citizens from Arab countries: Qatar and Saudi Arabia, even Jordan, and the Chinese are active, too; Turkish foundations participate in tenders as well… Russian assets are barely involved. There are lots of negotiations, but little action deals.”

Julia Smagina’s observations were based on the Greek market. However, market leaders from various countries expressed something similar about Russian-speakers. “Russian-speaking investors are not quick to act,” an expert comments. “They are slow to get going, and behave as if they’re not accustomed to real competition. Most drag their feet when it comes to making decisions and think that, since they have the money, the seller will wait… But if there is an interesting, well-priced property, it won’t be long before it is sold. You have to make decisions quickly! On the contrary, Russians delay making decisions and exhaust the seller and their own lawyers with interminable checks, so that finally the seller loses patience and starts looking for another customer. When there is a need to sell something, sellers don’t want to see delays – hence they get frustrated with Russian investors. Russians initially got off to a good start, but now they’re considered unreliable and far from being ideal partners.”

Realtors note that Russian-speaking clients spend longer making investment decisions than investors from other countries

2. Cost of Properties

39.8% of respondents noted that Russian-speaking clients prefer to buy commercial property priced up to €500,000, while almost the same percentage (38.1%) chose the adjacent price category – from €500,000 to €1,500,000. Two of these relatively “cheap” categories prevail in most countries, while the “expensive” segment (over €10,000,000) prevails in the UK only.

(The sum total of the survey results exceeds 100% because respondents could select one or two price categories).

What is the price of commercial property most often purchased by Russian-speaking clients?

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:

Price
category
Residential property Commercial property
Average price, € Countries Average price, € Countries
I Low 40,000 –
100,000
Bulgaria,
Thailand,
Turkey
Up to
500,000
Portugal, Turkey,
Bulgaria, Spain
II Low –
Medium
100,000 –
250,000
Germany, Greece,
Spain, Latvia,
Finland, Montenegro,
Czech Republic
500,000 –
1,500,000
Montenegro, Latvia,
Czech Republic, Greece, Italy
III Medium –
High
250,000 –
500,000
Cyprus,
Portugal,
Croatia
1,500,000 –
3,000,000
Germany, USA, Cyprus
IV High 500,000 –
1,500,000
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, Russian-speaking clients buy residential property priced across a wide range: from €40,000 to €3,000,000 – 5,000,000. In our experience, deals priced €200,000 – €250 000 are the most common, and mostly deal with residential property for long-term or seasonal lease. In this price bracket a very decent home can be bought – sometimes even with an ocean view. If an investor has a large budget, there is usually no need to spend all of it on one property. A better option is to buy a number of apartments and to live in one and lease out the others. If the total cost of the property is not less than €500,000, the buyer will get a “golden residence permit”. As for commercial properties, offices and premises for lease cost €500,000 – €800,000.”

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 moderate-sized premises and then lease them to small companies.”

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 in the high-priced market segment. George Kachmazov suggested that “the Italian economy is not that strong right now, so there are few large investment purchases. However, the country still has a lot of luxury residential properties.” According to Anna Tykhonova, “in Italy, yields on commercial property are low, so it is wiser to invest in other countries. At the same time, Russian-speaking clients buy residential property in the country for recreational purposes.” “Buyers reserve the best properties for their families, and tend to invest less in commercial property” added Olga Skvoron.

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 Russian-speaking clients invest in property in order to obtain citizenship, and this requires a minimum spend of €3,000,000.”

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 Russian-speaking clients,” emphasized George Kachmazov.

According to the experience of Aleksey Kovalevsky, “foreigners like central London and brand-new buildings, and the average price of such properties usually starts at two million pounds. There always has been and always will be demand for property in Central London: it is a reliable and stable investment, which will grow over time. According to official 2013 statistics, the growth in property prices in London was 12-17%, depending on the area. According to forecasts, the next three-to-four years will see price growth of at least 20-25%.”

3. Returns from Residential and Commercial Properties

Almost half of respondents (44.8%) said that investors expect a moderate profit from residential property, of up to 5-6% per annum. This is typical for the UK and the Czech Republic, where this option was selected by 83.3% and 76.9% of respondents, respectively.

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 is 3-5% for residential properties, and 6-8% for commercial ones. If an investor buys a property off-plan, or builds it and undertakes to let it out, the return may in some cases exceed 12-14%. However, this approach requires active investor participation in the management process.”

What is the average return expected by clients purchasing residential property for lease or resale?

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, medium-term growth potential has emerged. Perhaps this is the reason why investors expect greater returns.”

Russian investors expect an average return of 5-6% per annum from residential property, and up to 10% from commercial property

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).

What is the average return expected by clients purchasing commercial property?

The lowest expected returns from commercial facilities were cited for the Czech Republic and the UK. In both countries, the option “up to 5-6%” was selected by 46.2% of respondents, and 42.9% selected the option “up to 10%”. In contrast, in Italy the option “over 10%” was the most popular, and was selected by 42.9% of survey participants. However, experts believe that these expectations are too high. Anna Tikhonova commented, “the maximum return in Italy is 5-6% per annum.”

In Greece, according to Julia Smagina, “villas for rent can yield 6-8%, although it depends on how the property is managed. It is possible to increase the yield up to 10%. In this case, the owner has to stay in the country, and put a lot of effort into property management, hiring staff, and looking for tenants. There are such owners, but mostly they are not Russian-speaking… For example, some British owners are engaged in the process of managing their villas from start to finish. At the same time, the average yield from hotels is 4-5% per annum, although multi-star luxury hotels can bring a return of up to 7 9%. On the other hand, there are two- or three-star hotels where guests typically stay overnight – these bring as little as 2-3%.”

3.1. Expected Returns

The survey results allowed us to categorize countries by expected returns from residential and commercial properties:

Expected
return,
% per annum
Countries
Residential property Commercial property
Low
(up to 5–6%)
UK, Czech Republic,
France, Latvia
UK, Czech Republic, France
Medium
(up to 10%)
Italy, Montenegro,
Bulgaria, Spain,
Turkey, Portugal
USA, Latvia, Cyprus,
Spain, Greece,
Montenegro, Portugal
High
(over 10%)
Germany, USA, Cyprus,
Thailand, Greece
Germany, Turkey,
Bulgaria, Italy

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 a 1-2% higher return than commercial properties. “In the US, the proper conduct of a residential property business results in a 10% higher return than from commercial property,” said Oleg Kadyaev, realtor at Bosshardt Realty Services. Speaking of Cyprus, according to George Dokuchaev, “residential property is currently more cost-effective, and yet in the near future office property could catch up with resort property, thanks to the development of the gas industry.”

In contrast, in Latvia, Turkey, and Bulgaria, commercial property is 1-2% more profitable. Julija Kuharjonoka clarified as follows: “residential properties in Latvia bring returns of around 3-4%; commercial ones 6-7% and more. Rental rates for commercial properties are always higher than for residential ones.” Diana Dzalbe, realtor at StayInRiga, added, “commercial property is certainly more profitable, but only in cases when the investment is big.” According to Yulia Kozhevnikova, “in Latvia, customers buy residential property mainly for private use, for obtaining a residence permit, or for both. Therefore they don’t expect any significant returns.”

3.2. Inflated Expectations of Russian Investors

Realtors around the world underline one typical feature that is shared by most Russian-speaking investors: they expect to buy a quality investment property at prices that are well below the market average, and at the same time they want to derive a profit from it that is far higher than the overall market situation allows.

According to Vera Kolarova, “many Russian-speaking clients investing in property in Bulgaria think: ‘the cheaper, the better’. They almost always want a discount – this time, ‘the more, the better’ applies – and they prefer to have their costs returned. We often hear statements along the lines of: ‘It’s very expensive for Bulgaria.’ Russian-speakers don’t want to face up to the fact that high quality is expensive wherever you go.”

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 5-6%.” “As for business in Greece, a medium return is 5-7% per annum,” said Alexey Sorokin. “For Russian investors this is not high enough; they want 15-20%, although this is far from realistic.” According to Julia Smagina, “it sometimes happens that we offer a property with an annual return of 6-7% at minimal risk, and the buyer retorts, ‘Oh, that’s nothing…’ What kind of ‘nothing’ is this, if a deposit in a solid and reliable bank will not bring more than 4-5%?” “In the segment of expensive commercial property in Portugal, investors expect a return of not less than 8% per annum,” said Michael Chulkov. “Unfortunately, very few such opportunities exist.”

“In Germany, one can secure a maximum return of 7-9% per annum,” said Yulia Kozhevnikova. “However, this trend is oversubscribed and the market is overheated – everyone is talking about Germany. As a result, many investors with unrealistic expectations are diving in, who want a return of 10, 15, and even 30%.” According to Tranio.com expert Elena Milishenkova, “some customers want to get 20-30% per annum from an Austrian hotel purchased for €1,000,000; they also want this hotel to be managed by a professional company, preferably with a worldwide reputation. This is completely unrealistic.”

“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 by a third-party management company without the owner’s representatives, it is unlikely to get more than 5-7% per annum. To get 10-20%, one has to be more involved, for example, by redeveloping and subsequently reselling the property, or by living and working in their own mini-hotels.”

However, some experts are observing a gradual improvement in investment expertise among Russian-speaking investors. “Customers and the Russian market have become more mature as well,” says Roman Grigorjev, head of LonGrad (UK). “In the past, owners just withdrew cash; now, they are beginning to think about their investment. Previously, one could secure a considerable income from property in Russia, but the situation has changed. The more income in Russia shrinks, the more attractive England becomes.”

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 at 10-12% per annum. Nowadays, the situation is not the same; rates in Russia have fallen, so investors have started to become more skilled at understanding the market. Less profit, and yet lower risks. Moreover, buyers will always own their land and a house, no matter what happens.”

“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. “The buy-to-let segment is growing in popularity. Investors are less focused on income compared to the boom years – they seek to minimize risks. In addition, after the crisis of 2008, the property market has been significantly regulated. Offers are now much more realistic and have grown in quality.”

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 Russian-speakers who are willing to invest in overseas property.” Each homebuyer expects an increase in property capitalization. In addition, there is another group of customers: investors who buy property to obtain income from rent and resale. Over the past year, we have noticed a change in motivation patterns. Previously, most Russian investors were looking for an impossible return of 15% per annum from a regular rental business, whereas now their expectations are far more modest, and their main motivation has shifted to preserving their assets. In our practice, the number of transactions closed with Russian investors who are willing to accept actual European rental return rates (4-7% per annum) has significantly risen. On the other hand, in some locations capitalization growth brings total returns of up to 10-15% per year, which encourages new purchases. We feel confident that in the next couple of years the number of professional and knowledgeable investors from Russia will increase.

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.”

What is the reason for purchasing residential property?

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:

After which period do investors expect to resell a bought property?

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”.

How many clients who purchased a residential property for own use lease it while away?

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, Russian-speaking clients who buy property for own use will not lease it out when they are away from the property

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 Russian-speaking investors

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.”

Which commercial properties are the most popular among Russian-speaking clients?

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.”

Customers buying commercial property more often prefer to…

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.”

The majority of Russian-speaking investors purchasing commercial properties prefer to buy an already established business than to set one up from scratch

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%).

Are there many instances of loans being taken out to purchase commercial property?

“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.”

Very few Russian-speaking investors take out loans to purchase commercial property

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.

What share is usually covered by loaned funds in commercial property purchases?

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