Why Russian overseas real estate investment has shifted
Russian overseas property buyers adopted a profound shift in 2016 from residential to commercial real estate.
The move was carried out to help safeguard their capital, following the 2014-2015 devaluation of the rouble and domestic economic instability, says the popular international real estate website, Tranio.com.
In fact, Russians spent less than half of what they spent in 2014 on foreign money transfers for purposes of purchasing foreign properties, according to the Central Bank of Russia. In 2016, Russians were expected to spend about $800million to set a new low behind 2009’s $904million.
But writer, Yulia Kozhevnikova, points out, “Despite fhe Central Bank’s statistics, Tranio.com has experienced a surge in requests from Russian buyers wishing to acquire property abroad. During the first 11 months of 2016, we received 60% more requests from prospective investors than during the same period of the previous year.
“That said, fewer Russian buyers are closing sales abroad. According to Tranio.com analysts, Russian citizens closed about 30% fewer transactions in 2016 than in 2015.”
However, among Tranio’s Russian buyers’ average budgets are on the rise. Between January and November 2016, the average such purchasing budget increased from $295,000 to $415,000 for residential properties, and from $860,000 to $2.1million for commercial real estate.
Web statistics support our conclusion that Russian buyers are increasingly interested in expensive foreign properties. Our analysis of web data obtained from Russian search giant Yandex revealed a significant uptick in searches for properties traditionally considered to be incredibly expensive.
In some cases, this may be attributable to major political and economic developments. For example, between January and November 2016, users searched for homes and flats in the United Kingdom 56% more frequently than during the first 11 months of 2015. This is likely attributable to a surge in Russian investors’ interest in the UK property market following June’s Brexit referendum.
While during the first 11 months of 2016, Russian users searched for properties in the United States 37% more frequently than during the same period in 2015. In November 2016, Knight Frank reported a 35% increase in Russian requests for prime residential properties in Miami and New York as compared to 2015. The Knight Frank analysts associated this development with Donald Trump’s victory in the recent U.S. presidential elections.
As they flock to these high-end markets, Russian buyers have shown increasing reluctance to purchase property in the traditional hotspot of Turkey. Between January and November, Russian demand for Turkish real estate dropped by some 60% according to the Yandex statistics.
“This is likely attributable to deteriorating relations between Turkey and Russia following the former’s downing of a Russian military jet in late 2015. In December 2016, Russia’s ambassador to Turkey Andrey Karlov was assassinated in Ankara. The impact of the latter on the property market remains to be seen. Russian investors also appear to be wary of political instability in Turkey, which manifested in the form of an attempted coup d’etat in July.”
Tranio has noticed a considerable decline since 2015 in Russian buyers’ interest in purchasing residential properties in seaside resorts. Instead, investors are eager to invest in commercial properties in cities across Central and Western Europe
“Tranio.com conducted a survey at the end of 2016 among Russian real estate professionals, the results of which will be released in full at a later date. Preliminary results indicate a considerable uptick in the number and market dominance of commercial and residential property investors.”
When asked if many of their Russian clients were purchasing foreign properties for investment purposes, 85% agreed. By comparison, that figure for 2015 was 71%.
The percentage of respondents who considered property investors one of the main categories of the market rose from 17% to 26%.
Russian investors have also exhibited a surge in demand for commercial rather than residential property. A survey Tranio.com conducted in 2013 revealed that 43% of respondents believed the number of Russian commercial property investors to be considerable. By our 2016 survey, that figure had soared to 78%.
Looking ahead, the behaviour of Russian investors in 2017 will likely be shaped by the fact that the yield rates in the EU countries have been declining for several years. For instance, if in 2009 a retail property in Europe yielded 6% per annum on average, in 2015 it yielded 4-4.5%. The situation is similar across other property segments. For this reason, investors are striving to boost their yields by any means necessary.
“In 2017, we expect the following trends to become increasingly prominent: First, Russian nationals will put more capital into short-term (2-3 years) redevelopment projects in growing European markets. Such investments typically yield 12-15 % per annum, as compared with an average 4-6% per annum associated with simple rental businesses. Redevelopment projects will be especially popular in Spain, where property prices have fallen by 40% since 2007 and are expected to increase by 20% between 2016 and 2020.
“Second, investors will continue to actively take out loans with European banks in order to create a leverage effect, thus adding 2-3% per annum to their yield rates. Therefore, Russian nationals will likely close even fewer vacation real estate transactions and invest even more in commercial property next year.”