Russia's house prices are picking up again
Maria de Guzman | October 19, 2018
- In Moscow, the price index for resale apartments rose by 1.2% during the year to Q2 2018. Inflation-adjusted apartment prices fell by 1.2% y-o-y.
- In St. Petersburg, resale apartment prices rose by 2.6% y-o-y to Q2 2018, and inflation-adjusted prices were up by 0.2%.
"The main reasons for this [is] advantageous ...loan conditions for “secondary housing” and the ambiguous situation in the market of new buildings associated with changes in the rules of the game, and the bankruptcy of some major players," said Pavel Lutsenko, general director of the portal Mir Kvartir.
"Growth in demand has stimulated the increase in the cost of second homes."
"Changes in the rules of the game" means amendments to Federal Law 214-FZ "tightening qualification requirements for developers, changing patterns of development companies, the introduction of compulsory bank support and reformat the targeted control using cash holders", according to the Internet portal irn.ru. The amendments also restrict the number of building permits per developer.
Internet portal irn.ru. notes that while the volume of secondary housing supply in Moscow is declining (at least in annual terms), the demand for housing units continues to rise, supported by increased mortgages. However it believes that the trend is only a "temporary phenomenon" due to cheaper mortgages, and predicts a price decline in the foreseeable future. It expects the average market price level to decline by around 5% to 10% per year, and by the end of 2020-2021, expects prices to have dropped by 15% to 20%, according to irn.ru.
Both locals and foreigners can own landed properties, according to the Land Code of 2001. The legislation was extended to Moscow in January 2006.
Yields poor in Moscow, good for very small apartments in St. Petersburg
An apartment in an elite neighborhood in Moscow costs on average EUR 10,000 to EUR 14,500 per sq. m. If you have a million Euros, you can only buy a small apartment. A 75 sq.m. apartment costs on average EUR 750,000 or EUR 10,000 per sq.m.
Monthly rents per sq.m. in Moscow range from EUR 32 to EUR 41. This means that a 120 sq.m. apartment can be rented out for around EUR 3,800 per month.
In St. Petersburg, prices per sq.m. of apartments range from EUR 3,860 to EUR 6,600. This means that a 120 sq. m. apartment costs on average EUR 590,000 or EUR 4,900 per sq. m.
Monthly rents per sq. m. in St. Petersburg range from EUR 18 to EUR 20. This means that a 120 sq.m. apartment can be rented out for around EUR 2,100 per month.
Gross rental yields from apartments if fully rented range from 3.07% to 3.82% in Moscow, while in St. Petersburg, rental yields range from 3.46% to 6.20%.
Round trip transaction costs can be very high for foreigners buying residential property in Russia. See our Russia residential property transaction costs analysis Italy residential property transaction costs analysis and our Residential property transaction costs in Russia compared to other countries.
High, flat taxes for non-residents
Rental Income: Rental income for nonresidents is taxed at the flat rate of 20%.
The rental income of foreign legal entities without a permanent establishment in Russia is subject to withholding tax, levied on gross rentals at 20%.
Effective Tax Rate on Rental Income
|Click here to see a worked example|
|Source: PWC Disclaimer|
Capital Gains: Capital gainsrealized by nonresidents for selling Russian property are taxed at a flat rate of 20%.
Effective Tax Rate on Capital Gains
|Property Value||€25,000||€2 million|
|Click here to see a worked example|
|Source: PWC Disclaimer|
Inheritance:There are no inheritance taxes in Russia.Residents: Residents are taxed on their worldwide income at a flat rate of 13%.
Buying costs in Russia are among the highest in Europe
According to Global Property Guide research, total roundtrip costs are between 22.71% and 27.50% of the property value, among the highest in Europe. Bulk of the cost goes to VAT at 20%. Brokerage fees amount to 2% for properties more than US$2 million; otherwise the fee is 5%. The buyer should be cautious when buying unfinished units.
Pro-tenant rental market in Russia
Russia’s rental market is pro-tenant.
Rents: Rent is by agreement between the parties. However, rents can only be adjusted after one year.
Tenant Security: The tenant can only be evicted after non-payment of rent for six months. However, the tenant is given up to a year to amend the violation. The tenant can also cancel the contract anytime simply by giving a three months’ notice.
Positive outlook for Russia, a new set of US sanctions, and another term for PutinThe Russian economy by 1.5% y-o-y in 2017, according to the Federal State Statistics Service (Rosstat). This economic recovery has continued during the first half of the year. Russia's GDP rose by 1.9% during the year to Q2 2018, according to Rosstat.
However, Russia's economics ministry has revised down its GDP growth forecast for 2018 to 1.9% from an earlier estimate of 2.1% for 2018, followed by a slowdown to 1.4% (from a previous forecast of 2.2%) in 2019.
The weaker growth estimate was partly attributed to the expected capital outflows following the new US sanctions against Russia. Aside from that, the government also proposed raising its VAT rate from 18% to 20% beginning 2019. The move is expected to lead to higher inflation that could dampen consumer spending.
Oil prices have been rising since last year, following the agreement between the Organization of Petroleum Exporting Countries (OPEC) and other non-OPEC members to cut oil production. This has been a key part of Russia's economic rebound, since almost 70% of the country's GDP is directly or indirectly dependent on oil.
As of September 28, Brent crude, the global benchmark for crude oil prices, was trading at US$ 82.72 per barrel, while the US benchmark West Texas Intermediate traded at US$ 73.25.
However the other underlying risk to the Russian economy - economic sanctions - persists. In June 2017, the US Senate has approved a legislation which imposes sanctions on Russia due to its involvement in the 2016 presidential elections, as well as to further punish the country for its support for the Syrian government and annexation of Crimea. This legislation prohibits the White House from easing or lifting sanctions without approval from the US Congress. A further set of sanctions was imposed on Russia by the US in August 2018, to punish Russia following the poisoning incident of a former Russian agent Sergei Skripal and his daughter in the UK last March.
In a similar manner, the European Union also extended its economic sanctions until January 31, 2019, putting pressure on Moscow to accomplish the Minsk ceasefire agreement.
In August 2018, Russia's unemployment rate stood at a record-low 4.6%, according to Rosstat. The unemployment rate was slightly down from the previous months' 4.7% rate, and even further below the EU's average unemployment rate of around 6.8% in August 2018.
Russian President Vladimir Putin will lead the country for another six years, having won a second consecutive term during the 2018 presidential elections last March with 77% of the vote. Putin's nearest competitor, Pavel Grudinin of the Communist Party only got almost 12% of the vote, while Putin's most serious competitor and the main opposition leader Alexei Navalny was barred from the race due to an earlier criminal conviction for corruption.