Russians eyeing foreign property with caution in crisis

(Moscow News – themoscownews.com – Nathan Gray – April 8, 2013)

The ongoing financial crisis may be hitting European economies hard, but the continent retains a good deal of interest for Russian customers looking to invest in property abroad.

Reasons vary according to country, of course: prestige in Britain, skiing in Switzerland and Austria, warm climates in Spain, Italy and Greece, and a combination of the above – depending on region – in France.

Added to these, however, is a usual feature of economic cycles, that a crash in prices raises interest in property. The phenomenon is already being seen in Ireland, where the government is taking active measures to attract personal and corporate investment to revive the property market and the wider economy.

Weighing the risks

Despite the failure of the banking sector in Cyprus, the crisis’ latest victim, a rush away from the Mediterranean island’s property market is not guaranteed. For some, investment in Cypriot property even now does not entail an unusual risk.

“The risks from the side of the banks is understood,” said Pampos Charalambus, the Moscow agent for Cypriot property firm Aristo Developers. “Acquiring real estate is a completely different issue.”

According to Charalambus, because much of the land Aristo is developing was bought and registered before Cyprus’ accession to the European Union, tax liability is minimal and prices for the properties are lower. The crisis, moreover, has not removed the earlier advantages of property ownership, such as a low crime rate and a pleasant climate.

Other analysts caution that the market has been declining since 2007, to the point that properties sold in 2012 were fewer than half the sales in 2000, said Nigel Howarth, an independent property adviser in Cyprus. In addition, the crisis is bound to send sales and prices lower.

“People with more than 100,000 euros deposited at the Laiki [the country’s second-largest bank] or Bank of Cyprus have seen some of their money ‘disappear,'” Howarth told The Moscow News in an e-mail. “So anyone who was saving to buy a house will have lost some [or] much of their savings.”

Another risk is the title deeds issue, in which deeds are not handed to owners upon purchase but can be retained by developers. A new law was passed in 2011, but problems still remain, Howarth said.

No stranger to problems

Significant dislocations of the population resulted from the de facto 1974 division of the island into a Turkish-Cypriot northeast and a Greek Cypriot south – the internationally recognized country of Cyprus. Especially since Cyprus’ accession to the European Union in 2004, property claims by Greek Cypriots have led to litigation against EU nationals purchasing disputed land in the north.

As with many investments, in property, the attitude toward risk depends on the investor. The danger of expansion of a crisis can especially affect the commercial property sector, said Yulia Ovchinnikova, director of international business development at IntermarkSavills in Moscow.

“There is naturally a risk for hotels and office centers in a crisis, that the number of tourists or tenants will contract, and that means that income will fall,” she told The Moscow News in an e-mail.

A decline in prices can revive interest in a moribund property market, but only with time to determine the market’s direction.

“If we’re talking about countries in deeper crisis, such as Greece or Cyprus, where the crisis arose very recently, then the behavior of buyers is somewhat different [than in Spain or Italy],” said Anna Batizi, head of international sales at Moscow Sotheby’s International Realty. “Customers have taken a wait-and-see position. The market for residential real estate is responding to the situation with a small delay, in all likelihood with a significant fall in unreasonably high prices.”

For residential real estate, though, the attitude toward risk can be far more idiosyncratic than with commercial property: the personal enjoyment of a country’s environment can overrule cold, hard figures.

“There are those who buy real estate in those places that are simply pleasant for living, independent of the level of unemployment in the country and of economic forecasts,” IntermarkSavills’ Ovchinnikova said.

Asia not rising… yet

A truism in studies of the global economy and of its future direction has become the rise of Asia, as wealth and hence consumption increase in countries such as China, shifting the world’s economic center to the Pacific.

The growing interest in the East, however, has not taken off in residential property, at least not for Russians, for a number of reasons, analysts said. First, the state of crisis in the world economy is making investors hesitate before entering unfamiliar markets, and second, cultural and legal understandings are stronger between established Western markets and Russia, than with the booming Asian markets.

“There are basic markets that profit from demand on the part of investors, as well as on the part of those that buy foreign properties for their own habitation,” Ovchinnikova said. “In the first place, these are stable markets like Britain, France, Switzerland, Germany and the United States. Resort destinations, such as Italy and Spain, also take advantage of demand… Interest in Asia from the point of view of residential real estate is not yet that big.”

She added, however, that Russian buyers have a wide scope when it comes to property, a thought shared by Batizi from Sotheby’s – and that as with Cyprus, areas of Asia will be of interest to neighboring Russian regions as the markets become more familiar.

“Among Asian countries where there is buyer demand, we can put Hong Kong, China and Thailand,” Batizi told The Moscow News. “We think that the geography [of interest] will only broaden in the East, especially from the regions that are closer geographically to these countries than to Europe.”

Cultural ties, climate and stability attract foreign buyers

Cyprus

Cyprus became independent from Britain in 1960, with a majority ethnic Greek population. Despite efforts to balance interests between the ethnic Greek community and the significant ethnic Turkish minority in the government, tensions frequently became violent from 1963. In 1974, Turkey responded to a Greek-sponsored military coup by invading the island, a situation that resulted in a de facto partition of the country, including its capital, Nicosia.

The Greek section is the Republic of Cyprus, and the Turkish northeast was declared the independent Turkish Republic of Northern Cyprus in 1983 – a state that only Turkey recognizes internationally. The partition resulted in large-scale dislocations of the island’s inhabitants, as Greek Cypriots flooded south in 1974 and Turkish Cypriots streamed north.

These dislocations have had repercussions on the property market.

Since Cyprus joined the EU in 2004 – an accession that applies to the whole island, but that has been suspended for Northern Cyprus – residents of the southern part of the island have been able to sue foreign EU buyers of disputed property in the north even in the buyers’ home countries.

Still, the disputes have not dented interest in the island’s property market. A favorable climate and a central location, allowing easy access from Turkey, European Russia, Ukraine, the Middle East and southern Europe, have allowed a boom in real estate development to grow. Historically, of course, this access has been a boon and a curse, bringing both merchants and armies to the island.

Lingering colonial connections have resulted in a large British presence on the island, in vacationers, expats and retirees. The proximity to European Russia has brought a large Russian community there, as well as money, whose owners sought what was once considered a safe haven, and corporations looking for more advantageous tax rates. A common Orthodox religious and cultural heritage has also contributed to the genial atmosphere for Russian property buyers.

The Czech Republic

The Czech Republic became a separate country following the peaceful dissolution of Czechoslovakia in 1992. As with other popular real estate destinations for Russians, such as Bulgaria and especially Latvia, close historical ties as a result of the Soviet period make the Czech Republic another home away from home.

Older Russians may be familiar with the country, home of the historic Karlovy Vary spa, from the Cold War, and younger Russians from Prague’s reputation from the early 2000s as the “new Paris.” A year-round tourism season can help maximize income from rental properties, and the cost of living remains low compared to Western Europe.

Access to the EU helps boost the country’s hospitality for Russians not just for residency purposes, but also for business. A developed infrastructure and an educated workforce make the country a strong investment destination, and legal requirements for corporate property ownership for foreign companies have been equalized with those for Czech companies.

The Czech Republic’s central location in Europe gives close access to many countries, and 58 flights connected Prague and Moscow in the winter of 2012 and 2013, according to the Czech Airport Authority. Membership in the Schengen area also offers visa nationals unhindered travel to most of the country’s neighbors.

France

While France’s cultural relationship with Russia is more distant than that of the latter’s Slavic cousins in the Czech Republic, it is still enduring. Voltaire and Diderot corresponded with Catherine the Great in the 18th century, and Russian nobility fleeing the revolution in 1917 received asylum in France – though the Napoleonic invasion and the Cold War were not times of closeness.

The attractiveness of the country has taken a bit of a hit with the election of the Socialist Francois Hollande as president, and with taxation policy toward high earners turning more aggressive. The famed 75-percent tax on incomes of more than 1 million euros was declared unconstitutional by the Constitutional Council in December, but a tax increase on rental income, from 20 to 35.5 percent, remains in effect. Most famously, the actor Gerard Depardieu obtained Russian citizenship in January, seeking refuge from the new policies.

Still, France remains an international cultural touchstone, with not just Paris, but the Loire Valley, the Riviera and the Alps lending prestige to the country’s addresses. Knight Frank’s Wealth Report for 2013 said that Paris is still one of the top investment destinations for commercial property, and in 2012 France boasted a GDP of $2.6 trillion, fifth in the world and second both in the EU and the euro zone. Growth remains sluggish, however, and unemployment is close to record levels, Bloomberg reported

Buyer priorities changing, investors gauging Cyprus

1. What effect is the crisis having on where Russians are looking to buy? Will the problems in Cyprus deter people from purchases there?
2. As other economies become less stable, are Russians more apt to wait and see before buying properties abroad?
3. Are buyers expanding into other markets, such as Asia, or are European markets still remaining attractive?

Yelena Yurgeneva, regional director of residential real estate, Knight Frank Russia and CIS

1. On the whole, demand has grown for reliable, stable markets such as Switzerland, Britain (primarily central London), New York (Manhattan) and Austria (Vienna, Kitzbuehel and ski resorts).

2. As is well known, the bottom of the real estate market, like the fund market, is impossible to catch, but there are investors who are ready to assume risk and invest in distress properties – properties with large discounts. Currently such investors are watching the situation in Cyprus, waiting for the right moment for a profitable purchase. They can wait for a long time: the fall on the Spanish market is in its sixth year. On the other hand, Dubai and Miami have come out of a period of stagnation. We have been seeing a smooth growth in buyer interest in ready-for-habitation property in these regions for more than half a year. Russian buyers, however, still have a cautious attitude toward projects in the off-plan [pre-construction] stage.

3. Asian markets are less understood for Russian buyers than Western Europe and America. These are young, developing markets that are traditionally considered risky for amateur investors. Leaseholds and other restrictions also limit ownership by non-residents.

Therefore, demand is concentrated on the mature markets of Western Europe (England, Switzerland, Austria) and the United States.

Natalia Zavalishina, general director, Miel-DPM

1. We can say that as a result of the crisis, the priorities of buyers and the budgets for purchases have changed somewhat. Before the crisis, many were actively buying resort real estate in Montenegro, Bulgaria, Egypt, Turkey, etc. Very many hoped for essential growth of these properties and a later resale, successful entry into the European Union, the possibility of receiving a Schengen visa and a long-term stay in these countries.

In addition, budgets shrank. For example, in 2007-2008, the average budget of buyers of Bulgarian real estate was 100,000 to 150,000 euros, now it is 40,000 to 50,000 euros; of Montenegrin real estate, 150,000 to 200,000 euros, now it is 50,000 to 80,000 euros, etc.

As for Cyprus, this destination was and has remained popular, regardless of the crisis. In Cyprus there is a continuing possibility for Russians to receive residency, so the combination of a long resort season, good English education for children, access from the European part of Russia and a range of other advantages has not reduced interest in Cyprus. Currently the situation is not clear, but this will not last long. Chances are that people oriented toward the advantages listed above will not turn away from buying real estate in Cyprus, while people oriented toward investments will hold off on a purchase and wait for a substantial discount.

2. Everything depends on the goal of the purchase. If the question is to buy property today with some kind of concrete goal, a potential buyer is hardly going to wait for a substantial discount. But as a rule, a specific interest in real estate that has gone down in value appears among those who have planned a purchase for a long time and now feel that the right moment has come. For example, many are now interested in a purchase in Spain, but count on receiving a 50-percent discount, which does not often appear in real estate.

3. In general, according to our assessment, Russian buyers are more oriented toward European countries or America, where the mentality is similar, the laws are better understood, and there are higher-quality levels of service. In the majority of Asian countries the risks are reasonable high, and this deters many buyers. The majority prefer a conservative strategy: less income, but stability of investment and predictability of law.