St Petersburg's housing market booms, as Russian real estate gains momentum
Lalaine C. Delmendo | October 25, 2019
- However in St. Petersburg, resale apartment prices surged by 14.6% y-o-y to Q2 2019, a sharp improvement from the prior year's 2.22% growth. Inflation-adjusted prices rose by 9.16%.
- In Moscow, the price index for resale apartments rose by 3.16% during the year to Q2 2019, in contrast to an annual decline of 2.82% in Q2 2018. Inflation-adjusted apartment prices fell by 1.75% y-o-y.
In the first half of 2019, real estate investment in Russia rose by 24% to RUB 102 billion (US$1.6 billion) from the same period last year, in contrast to a 39% decline in 2018, according to JLL.
“Growth in the first half of this year can be explained by the closure of several large transactions,” said Natalia Tischendorf of JLL Russia & CIS.“Increased stability in the financial markets and the CBR easing monetary policy are helping the recovery of real estate investment market activity.”
About 27% of the total real estate investment was for residential properties. Total housing debt outstanding rose by 18.9% to RUB 7.16 trillion (EUR 100.49 billion) in September 2019 from the same period last year, according to the Central Bank of the Russian Federation. One of the biggest deals was the residential complex Prime Park, purchased by A1, the investment arm of Alfa Group.
Moscow remains the most important market in Russia, accounting for about two-thirds of real estate investment in 2018. It was followed by St. Petersburg, which represents more than 21% of total investment.
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$2 million; otherwise the fee is 5%. The buyer should be cautious when buying unfinished units.
Pro-tenant rental market in Russia
Russia’s rental market is pro-tenant.
Rents: Rent is by agreement between the parties. However, rents can only be adjusted after one year.
Tenant Security: The tenant can only be evicted after non-payment of rent for six months. However, the tenant is given up to a year to amend the violation. The tenant can also cancel the contract anytime simply by giving a three months’ notice.
Russian’s fragile economy, a new set of US & EU sanctions
The Russian economy grew by 0.9% y-o-y in Q2 2019,an improvement from the previous quarter’s 0.5% growth but sharply down from last year’s 2.2% expansion, according to a central bank press release in August 2019. It was the country’s 11th consecutive quarter of positive growth.
The central bank has recently revised down its 2019 GDP growth forecast to 0.8% - 1.3%, from an earlier estimate of 1% - 1.5%, amidst the worsening US-China trade conflict.
“The growth in our main trade partners, China and the EU, is slowing down, so Russian export has slowed down as well, and it’s one of the main external factors that caused deceleration of the Russian economy in the first half of this year,” said Russian central bank governor Elvira Nabiullina.
Following a two-year price growth, oil prices have been falling again lately. In September 2019, Brent crude, the global benchmark for crude oil prices, was trading at US$ 62.83 per barrel, down 20.4% from a year earlier. Likewise, US benchmark West Texas Intermediate traded at US$ 56.95 in September 2019, down 18.9% from a year ago.
The weak growth was partly attributed to capital outflows following the extension of US sanctions against Russia. Aside from that, the government also raised its VAT rate from 18% to 20% at the start of 2019, which dampened consumer spending.
In March 2019, US President Donald Trump extended sanctions against Russia for another year, until the spring of 2020. The travel bans and asset freezes were first imposed over Russia’s annexation of Crimea in 2014 under former US president Barack Obama. The punitive measures have been extended and expanded since.
In a similar manner, the European Union also extended its economic sanctions again until January 31, 2020, putting pressure on Moscow to accomplish the Minsk ceasefire agreement.
Russian President Vladimir Putin will lead the country for another six years, having won a second consecutive term during the March 2018 presidential elections with 77% of the vote. Putin’s nearest competitor, PavelGrudinin 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.