St Petersburg leads Russia's house price surge
Lalaine C. Delmendo | January 03, 2021
Fueled by very low interest rates, Russia's housing market continues to strengthen. The Central Bank's proactive interest rate policy to counter the economic repercussions caused by the COVID-19 pandemic is pushing up the housing market.The nationwide price index for resale apartments rose strongly by 8.08% during the year to Q2 2020, following y-o-y rises of 7.12% in Q1 2020, 6.56% in Q4 2019, 8.09% in Q3 and 6.91% in Q2, according to the Federal State Statistics Service (Rosstat).
When adjusted for inflation, the price index for resale apartments increased 4.82% during the year. Quarter-on-quarter, resale prices rose by 1.37% in Q2 2020 (-0.2% inflation-adjusted).
- In St. Petersburg, resale apartment prices surged by 16.19% y-o-y to Q2 2020, an improvement from the previous year's 14.6% growth and its best showing since Q2 2009. Inflation-adjusted prices rose by 12.69%.
- In Moscow, the price index for resale apartments rose by a modest 2.39% during the year to Q2 2020, a slight slowdown from the prior year's 3.16% growth. Inflation-adjusted apartment prices fell slightly by 0.7% y-o-y.
House prices plunged nationwide by 12.7% (-47% inflation-adjusted) from 2010 to 2017. Then in 2018, the housing market started to pick up.
Residential investment in Russia totaled RUB 55 billion (EUR 595 million) in 2019, up by a whopping 70% from RUB 33 billion (EUR 357 million) in 2018, according to CBRE.
Surprisingly, strong demand has continued this year despite the pandemic. In the second quarter of 2020, real estate investment in the residential segment soared 35% y-o-y to RUB 31 billion (EUR 335 million), according to CBRE.
“Purchasing was led by developers including PIK, Sberbank investment, Sminex, INTECO, Akvilon and some others, all of which acquired residential development sites in Moscow,” noted CBRE. “Similar activity by Setl Group, Legenda Group, RBI Group and LSR Group and some others was observed in Saint Petersburg.”
Moscow remains Russia's dominant market, accounting for around 88% of real estate investment volume in both H1 2020 and Q2 2020. In St. Petersburg, 0n the other hand, activity has weakened, accounting for just 12% of sales volume in H1 2020 as compared to 33% in H1 2019.
The share of foreign real estate investment has continued to decline, falling to a meagre 1% in Q2 2020, from 6% in the previous quarter.
Both locals and foreigners can own landed properties, according to the Land Code of 2001. The legislation was extended to Moscow in January 2006.
Russia's GDP shrank by 3.8% year-on-year in Q3 2020 as the country took a hit from COVID-19 as well as a fall in oil prices, but this was an improvement from a contraction of 8% in Q2 2020. The Economy Ministry of Russia recently upgraded its 2020 economic forecast to a contraction of 3.9%, from a 5% fall. The International Monetary Fund (IMF) expects the Russian economy to contract by 4.1% this year.
Analysis
of Russia Residential Property Market »
Russia less expensive now, but yields poor both in Moscow and St. Petersburg
Due to the decline of the Ruble, foreign buyers will find property prices in Moscow and St Petersburg are a lot less expensive now than they used to be. Residential prices have been on a slight downward trend over the last few years, but the Ruble’s decline in 2015-2016 (when the Ruble halved in value) is what did it.
Not that apartments are inexpensive. A 2 bedroom apartment in an elite neighborhood in Moscow costs on average EUR 5,000 to EUR 7,000 per sq. m. Rental yields are moderate at between 4% and 5%, so landlords can make a moderate income (but not a lot).
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 | |||
| Monthly Income | €1,500 | €6,000 | €12,000 |
| Tax Rate | 30% | 30% | 30% |
| 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 |
| Tax Rate | 60% | 60% |
| 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$2 million; otherwise the fee is 5%. The buyer should be cautious when buying unfinished units.
Pro-tenant rental market in Russia
Russia’s rental market is pro-tenant.
Rents: Rent is by agreement between the parties. However, rents can only be adjusted after one year.
Tenant Security: The tenant can only be evicted after non-payment of rent for six months. However, the tenant is given up to a year to amend the violation. The tenant can also cancel the contract anytime simply by giving a three months’ notice.
Russia’s economic crisis and recovery
The Russian economy has had a rough time in recent years. Following an annual average growth of 4.5% in 2010-12, economic growth slowed to 1.8% in 2013 and to 0.7% in 2014. The country’s GDP contracted by 2% in 2015 and grew by a minuscule 0.2% in 2016, according to the IMF.A brief snapshot of key events:
- First, a catastrophic collapse in the price of oil, of which Russia is a major producer
- Then, Russia’s intervention in Ukraine, which caused the country to be placed under an economic embargo
- The ruble then collapsed. The ruble devalued to an all-time low (US$ 1 = RUB 85.91) on January 21, 2016
- Rapidly rising inflation followed; inflation went up to 15.5% in 2015
- The central bank raised the key interest rate in six rapid steps to 17% in December 2014
- Russia sovereign debt was then downgraded to "junk status" (BB+) by Standard & Poor’s (S&P) in January 2015, a move followed a month later by Moody’s
Low incomes combined with skyrocketing prices have pushed millions of Russians into poverty since 2014. Russia’s economic downturn prompted ordinary Russians to protest against the economic crisis. In 2015, real wages in Russia fell by 9.5%, to an average of just over RUB 30,300 (EUR 426) per month, according to official data.
Russia’s poverty rate reached a peak of 16% of the population in 2016, up from 11.2% in 2014. Almost 20 million Russians were living on less than 9,691 rubles (EUR 136) per month or roughly 13.5% of the population.
The economy started to improve in 2017, with GDP growth of 1.8%. This was mainly due to a rebound in oil prices, following the agreement between the Organization of Petroleum Exporting Countries (OPEC) and other non-OPEC members to cut oil production. Almost 70% of Russia’s GDP is directly or indirectly dependent on oil.
In 2018, the Russian economy expanded by 2.5% from a year earlier – the highest growth in six years. However last year, economic growth slowed again to just 1.3%.
Due to better-than-expected results, the Economy Ministry of Russia has recently upgraded its 2020 economic forecast for the country to a contraction of 3.9%, from its previous estimate of a 5% fall. The International Monetary Fund (IMF), on the other hand, expects the Russian economy to contract by 4.1% this year.
“The more moderate hit to Russia’s economy is likely due to a shorter and ‘softer’ lockdown, and the lower share of consumer services in Russia’s consumption,” said EvgheniaSleptsova of Oxford Economics. Accordingly, economic activity is now back at around 95% of pre-pandemic levels.
In September 2020, Russia’s unemployment rate stood at 6.3%, sharply up from 4.5% in the previous year, mainly due pandemic-related layoffs. The overall jobless rate fell to 4.6% last year, from an average of 5.3% in 2012-18 and 7.7% in 2000-11, based on IMF figures.
Yet even before the pandemic, economic growth was weak, mainly due to sanctions imposed by the US, EU and other countries since 2014, including travel bans and asset freeze for top government officials, and financial assistance bans to Russian oil and gas companies.
Recently the US broadened the sanctions against entities involved in the construction of Nord Stream 2, in a renewed attempt to prevent the Russia-led gas pipeline project from completing. It follows the December 2019 US sanctions on the said project, which caused Western vessel and technology providers to pull out. Likewise in October 2020, the EU agreed to impose targeted sanctions against Russian officials allegedly involved in the poisoning of Russian opposition leader Alexei Navalny.