House prices in Russia are still falling
September 04, 2017
- In Moscow, the price index for resale apartments fell by 2.64% during the year to Q2 2017. Inflation-adjusted apartment prices was down by 6.56% y-o-y.
- In St. Petersburg, resale apartment prices slightly dropped by 0.62% y-o-y to Q2 2017 - a 4.62% decline when adjusted for inflation.
"Last year the economic situation was worse, the value of the rouble was lower, the price of oil was lower and GDP was worse," said a global adviser surveyed by PricewaterhouseCoopers (PwC) in Emerging Trends in Real Estate 2017.
"[But] everything is very, very slow for us right now, and while a recovery looks like it’s on its way, it is coming through very slowly."
The PwC survey however noted that local advisers are "less gloomy" as compared to their international counterparts.
The same sentiment was echoed by the Internet portal irn.ru. Irn.ru doesn't expect a sharp house price drop to happen - but a gradual price decline of 5% to 15% this year.
There's been a reorientation of buyers from the secondary to the primary market. This phenomenon is very noticeable in areas with high shares of old housing stock along with a lot new construction. The preference for new apartments has been boosted by the higher quality of many newer apartments, and by generous mortgage conditions for new apartment buyers. This has led to the drop of secondary housing values below newbuild costs in some cities such as Moscow, Belgorod, Murmansk, Arkhangelsk, Novosibirsk, and Leningrad region
"In the 2nd quarter, the trend of the first three months of the year has developed - an outflow of buyers from the regular market to primary," notes Pavel Lutsenko, general director of the portal Mir Kvartir. "The continuing fall in price tags is, of course, [also] the result of a decline in household incomes and a further reduction in effective demand".
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 20% and 25.5% of the property value, among the highest in Europe. Bulk of the cost goes to VAT at 18%. Brokerage fees amount to 2% for properties more than US$2 million, otherwise the fee is 5%. The buyer should be cautious when buying unfinished units.
Pro-tenant rental market in Russia
Russia’s rental market is pro-tenant.
Rents: Rent is by agreement between the parties. However, rents can only be adjusted after one year.
Tenant Security: The tenant can only be evicted after non-payment of rent for six months. However, the tenant is given up to a year to amend the violation. The tenant can also cancel the contract anytime simply by giving a three months’ notice.
Economic recovery is underway in 2017The Russian economy expanded by 2.5% during the year to Q2 2017, following y-o-y gains of 0.5% in Q1 2017 and 0.3% in Q4 2016, based on a preliminary estimate by the Federal State Statistics Service (Rosstat).
"Growth in both the construction and industrial sectors picked up sharply, while retail sales growth returned to positive territory. Agriculture was the only key sector to contract in the second quarter," noted Capital Economics.
The World Bank expects the economy to grow by 1.3% in 2017, with the aid of the country's improving consumption. The IMF predicts 1.4% growth in 2017 and 2018 due to better financial conditions and stabilization of oil prices.
Despite the positive economic outlook for 2017, the country still faces structural and policy obstacles, making its economic recovery fragile, according to the OECD. These risks were also cited by the credit rating agency Standard & Poor’s (S&P) even as it revised Russia's outlook from stable to positive and retains Russia's sovereign credit rating at “junk status” (BB+).
"There are some issues on the horizon. One is the possible new round of sanctions, another is the oil price, a third is whether this recovery in Russian GDP growth is going to be sustained," according to Ravi Bhatia, S&P Global's director for sovereign and international public finance ratings.
As of September 2, Brent crude, the global benchmark for crude oil prices, was trading at US$ 52.75 per barrel, while the US benchmark West Texas Intermediate traded at US$ 47.35.
Unlike oil prices which have been stabilizing since the beginning of this year, the other underlying risk to the Russian economy - economic sanctions - persist. In June 2017, the US Senate has approved a legislation which imposes new 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 also prohibits the White House in easing or lifting sanctions without an approval from the US Congress. The following month, the White House announced that US President Donald Trump will sign the legislation. According to the US Treasury Department, the sanctions imposed on Russia “will remain in place until Russia fully honors its obligations under the Minsk Agreements".
The European Union also extended its economic sanctions until January 31, 2018. This was agreed upon by EU leaders at a summit held in Brussels last June. The sanction deadline has been extended for a few times as the EU puts pressure on Moscow to accomplish the Minsk ceasefire agreement.
The Russian ruble ended 2016 the second-best performer among emerging market currencies, only next to the Brazilian real. The gains by the ruble against the dollar were supported by increasing oil prices and the country's positive economic outlook. The currency also got a boost after US President Donald Trump's win, with hopes that economic sanctions imposed on Russia will soon be lifted.
In a survey conducted by Bloomberg during its FX17 Summit this May, around 48% of respondents predict that the ruble would rise to between 55 to 60 per USD, while 38% predicted that the ruble will range between 60 to 65 per USD.
In July 2017, Russia's unemployment reached 5.1%, the lowest level for two-and-a-half years, according to Rosstat. Russia's unemployment is lower than the EU’s average unemployment rate of around 7.7% (June 2017).