An investment in real estate can bring greater returns than any bank deposit

Real estate is quickly becoming an important asset class, along with equity investments, and outstripping bank deposits, as investors in Russia look to boost their income.

Real-estate investments – residential, business and commercial – are averaging returns of 15 percent annually in hard currency, far outpacing what a bank deposit can earn. No wonder, therefore, that more funds are heading into real estate than to the bank vaults, analysts say.

Real estate is now seen in Russia as a reliable, flexible investment. It can be divided into three categories – cheap, economy-class and elite.

Investment in elite commercial real estate brings the largest returns, and the largest risks are linked to establishing property rights to new buildings.

The economy-class sector consists of residential and commercial property. Investors reap gains from both the rising value of the real estate itself and from the income that comes through renting out the property.

Fraser Lawson, co-founder of British realty company Intermark, says that the real-estate sector in this country has become a stable investment with good growth prospects.

"Today, the Russian market looks more mature and more attractive, including from a taxation point of view, and there is confidence about doing business here," he said. "Compared with other major real-estate markets, the Russian market is more attractive because prices are relatively low, and there is a lot of potential for growth."

He adds that in London, for example, the market has peaked and begun to flatten. "But prices for buying real estate in Russia remain quite high and are set to increase further," he said.

Commercial real-estate broker Andrei Svorov agrees. "The new real-estate sector is the most attractive segment at the moment," he said. "Prices and demand are higher in this sector than, for example, for newly renovated buildings. Russian investors prefer to put their money into new buildings, but foreign investors like the secondary market – they’re keen on the high ceilings and the big windows in old buildings."

A sum of $30,000-$60,000 is enough to begin investing in real estate, industry players say. The cheaper end of the market is mostly residential, while investments of $500,000 and more tend to be in commercial real estate.

Analysts say that, on the secondary or renovated market, good returns can be generated by residential property with a value of $100,000-$120,000 – usually two- or three-room apartments in good condition located in reasonably prestigious districts of Moscow. According to Intermark, this type of apartment can generate gains of up to 18 percent a year in hard currency as the value of the property increases in value, figuring in rental income.

Buying property under construction can bring high returns if played properly, experts say. If construction has begun but the building will only be ready in two to three years, the price per square meter is usually two or three times cheaper than in a similar completed building. Many realty and construction companies prefer to buy housing under construction in installments – either interest-free or at a low interest rate.

There are two types of investors, private individuals and companies, and, within these groups, Russian and foreign investors have different preferences

But there are risks associated with this type of investment. "Often, it takes more than a year [after construction is complete] to formalize property rights to residential property in new buildings," said Yevgenia Zenitova, a consultant at international law firm Evro-Trust.

"This is especially true if the building was built by private firms, and there are many problems that in most cases depend on how good the construction company is at sorting things out with the agencies that have to give their approval."

Also most new buildings are delivered without finishing work, meaning the investor will need to put in another 20-30 percent of the apartment’s value to get it shape to be rented out. However, some investors are finding they can profit by selling a new apartment as is on the secondary market.

As for the elite sector, the size of the investment return depends heavily on location, the number of apartments in a particular building and the state of its infrastructure, especially the availability of above-ground parking and telecommunications possibilities.

Natalia Tikhonovskaya, director of the new-buildings department at Miel Real Estate, says that elite buildings are mainly in the traditionally prestigious Moscow districts in the center, west and southwest "The Smolenskaya and Rostovskaya embankments have begun to see much more demand over recent years," she noted.

The state of the economy has less effect on the elite sector than it does on other segments of real-estate investment, experts say. Alexander Shatalov, a partner at Intermark, says that turnover on the market can drop, but prices usually remain steady even during times of economic crisis – as the 1998 financial meltdown showed. The minimum investment in this sector is about $500,000.

Private investors invest an average of $500,000-$2 million in elite real estate. In short-term speculation deals of one to two years, the market value of an apartment can rise by 80-100 percent and more. Renting such an apartment brings in an average annual profit of 10-12 percent. Profits from renting elite apartments in old buildings can reach 14-16 percent a year, but the market-growth potential for these apartments is lower than for ones in new buildings. Profits from renting apartments could reach 20-30 percent three to five years ago, but rent prices are not rising as fast as real-estate purchase prices

There are various strategies involved in elite investments. Some people buy with a view to living in the apartment themselves, renting it out or keeping it as long-term investment and profiting on value appreciation given. Others see it as a short-term speculation vehicle – buying an apartment at the early stages of construction at a discount and, then, selling it at a higher price once the building has been completed.

There is still stable demand for small individual houses, but they are hard to find and investors often have problems with the historic-building-protection services. A building classified as a "historical monument" is better than one listed as an "architectural monument," experts say. Regulations allow the interior of a historical monument to be pulled down and renovated, keeping only the facade in its original state. An architectural monument must be restored in full keeping with its original design.

There are two types of investors, private individuals and companies. Within these groups, Russian and foreign investors have different preferences, experts say.

Shatalov says that foreign companies prefer to invest in shopping centers and offices and take longer to make decisions because of concerns that all is legal and that they can insure all the risks. Russian emigres with money to spare have also become big investors here. Many have invested in construction projects at an early stage on a share basis.

Russian big business is showing a great deal of interest in real-estate investments. They are generally flexible when it comes to real estate and usually do deals worth $2 million-$3 million and up to $5,000 per sq. meter.

Investors from the regions are also getting into the act. "They come to Moscow in a roundabout way, first buying somewhere to live in their place of permanent residence, then buying real estate abroad and, finally, buying a place in the capital," Intermark’s Shatalov says. "They usually buy something for themselves, so they won’t have to stay in hotels when they come here. We don’t have too many clients from the regions, but the ones we have prefer to make investments for the long term."