Russian REITs

REIT with regard to Russia

Real estate investment trusts, or REITs, an established and dominant force within the U. S. world of commercial property investment, have more recently caught on in many other developed economies, such as Germany and the U. Nited kingdom. Russia has its own equivalents to REITs, and players on the market feel the country looks set to develop these early prototypes additional still.

“Basically, a REIT is a tax efficient vehicle for owning property, ” said Lee Timmins, a senior vice president of Hines within Russia. REITs exist in the U. S., and elsewhere you will find analogous versions of these structures. In short, REITs have become a whole asset class in themselves.

There are publicly-traded REITs in the actual U. S., listed on stock exchanges, and there are non-traded REITs, that are not governed by exchange rules and are not required release a so much data. Investors range from individuals to large establishments or pension funds, and REITs can raise sums into the vast amounts of dollars for investment into real estate. A REIT is only susceptible to and, arguably, only benefits from regulation in the country it’s registered, although many REITs have overseas properties in their portfolios.

REITs vary from country to country – and not simply in name. In the U. K., for example, where REITs had been introduced in January 2007, the primary benefit is not spending corporation tax, yet unlike in the U. S., such an automobile must in all cases be listed on a stock trade. For Russia’s REIT equivalent, introduced via legislation in 2003, the actual differences go further still: for a start the entity can’t be listed directly, but must be sponsored by another company — a manager.

In most countries, REIT status comes on particular preconditions, notably the high proportion of revenue that must end up being distributed to investors as dividends, generally around 90 percent. But Timmins said this dividend distribution sits well using the “project-based nature of the real estate sector”, whereby return on investment is quickly distributable and never so commonly required for further or ongoing investment, as could possibly be the case in other industries.

But the fundamental advantage over an investment inside a standard listed property company is that investors do not encounter a double round of taxes. Added to this, Timmins stated, a REIT can provide more flexibility for investors who want every single child put money into and take money out of a project on the frequent basis, than if they were locked into a less liquid arrangement inside a direct property investment.

In Russia, most normal real estate investments are corporate, not fund-based, and under this scenario, shareholders are necessary to pay both a corporate tax and a tax on income. But the creeping presence of REITs, known here as property PIFs (mutual investment funds), offer something of a competitive edge for domestic investors – “one from the more promising opportunities”, a recent report by Ernst and Youthful, a consultancy agency, said.

A trust – not a business entity

The term ‘trust’ is the key to understanding the actual Russian equivalent of REITs, explained chief executive of Moscow-based RWM Funds, Vadim Korsakov. “In Russia, the closed-end investment fund (PIF), that is the closest comparable instrument for investing in real estate, isn’t a legal entity, but a trust. ” This is as opposed to the U. S. or the U. K., where a REIT is really a more standard corporate entity.

The fact that Russia’s real estate PIFs do not benefit from corporate status means their liabilities need to be protected by a third party and the structure is, a minimum of outwardly, less robust. “But the question is, as the PIF regulation begins to mature, with greater investment by pension funds as well as individuals, it could be used as effectively as REITs within the U. S., ” Timmins believed.

The apparently stark difference in current legal classification might seem significant and risky, though Russia does have a number of systems made to protect investors in such funds. Russia’s closed-end real estate PIFs are monitored through the Federal Financial Markets Service, FFMS. The FFMS is a federal body that regulates all financial markets and security issuance and acts like a watchdog for the financial sector, the equivalent of the Securities and Exchange Commission within the U. S.

In all, there are over 600 such funds listed through the FFMS on its online register, which provides a breakdown from the parties responsible for each fund, the fund’s registration details as well as, importantly, the asset management company that tends to the account. This declaration is a key stipulation of any PIF within Russia, and the management company is the key legal entity that presides within the fund.

Furthermore, there is a range of laws that exercise demands in the management of the fund’s assets, such as the requirement for the fund to possess a custodian and an appraiser. And the duration for any investment fund in Russia is currently no more than 15 years. Not long, you might think, but then Russia’s MICEX continues to be only around 17 years old.

“There are harsh rules, but for the investor this is good, ” said Korsakov. “Russia has undergone a series of checks and analyses to determine if it’s ready for a more analogous model of Western REITs and also the country fully meets the required standards. It’s more a case of how and when this is often implemented. ”

“The idea is to make the Russian PIF much more tax efficient, ” said Timmins and, “the legislation will develop within the coming years. ” The process is not an immediate 1, Timmins explained, more a long accumulation of legislative changes that eventually constitute the tax efficient structures people invest in today. In the actual U. S., this process began in the 1970s and only really fully developed within the early 1990s, Timmins said.

But firms in Russia are not really lobbying for legislative alacrity along direct lines. “There are management companies which effectively do that with respect to the fund operators, through meetings and discussions with the FFMS, ” stated Korsakov.

In the U. K., where REITs were given the green light just before the housing market was hit by the credit crisis, one major precondition for REITs may be the ‘ring-fencing’ of at least three quarters of REITs’ assets. These should be placed into an effectively separate property letting business. Additionally, restrictions are placed on the amount that REITs can borrow as well as the maximum amount of equity that shareholders are able to own – 10 %.

In Russia, because REITs are not companies, things are various. The amount of freedom and variety of investment options open to the fund’s investors depend on their qualifications, which in turn have an effect on the way the fund can function. For certain actions, the investor needs to be ‘qualified’.

A qualified investor, essentially a registered industry professional, can dictate far more clearly what capital ought to be spent on, as well as operate in a range of funds over the PIF spectrum, such as venture capital or hybrid funds – they’re not just limited to real estate.

“Russian legislation has basically distinguished between private individuals and those who understand how a investment fund market works – namely the qualified investors, ” described Korsakov. “Translated into real estate fund terms, the qualified investor can perform a lot. ” A real estate qualified investor can construct, buy land, buy constructed buildings, indeed buy the right in order to construction on certain plots; whereas the unqualified ‘layman’ can only buy land or perhaps a building.

Classic U. S. REIT investment is generally an obtainable asset class. “It’s an investment which is open to all sorts of investors, ” said Leo Wells, president of Wells Property Funds. An investor in the Wells REIT II, that recently opened a business center in Moscow included in its portfolio, can place a sum as low as $5, 000.

One major strive for the REIT industry in Russia is to exploit the amendment of Russia’s property offshore position with Cyprus that will come into force within 2014. Industry players hope that the increased use of REITs like a tax-friendly investment mechanism will help boost the popularity of this particular nascent asset class. Moreover, as Timmins described, there is probably be an increasing tendency among international REITs to work alongside Euro PIFs as local partners, which currently may be more appealing to domestic investors in Russia due to certain legal limitations.

Nonetheless, Russian REITs still have a long way to go when it comes to developing any kind of secondary security market, a key dimension towards the U. S. ’s REIT industry. “There is no secondary, derivative market for that PIFs that currently play the REIT role over here. In this manner, they’re very young and, really, not REITs, ” Korsakov accepted.

The Russian real estate PIF may be a new resource class, yet before the crisis it was growing quickly. Experienced that trajectory continued, then a secondary market might have been about the cards, Korsakov said.

Large Russian pension fund helps seed a brand new REIT

PIK Group, a Russian real estate developer focusing upon large scale residential projects, has won Blagosostoyanie, one of the biggest Russian non-governmental pension funds, as an initial investor in its first ever Russian-regulated investment trust (REIT).

The investor’s initial allocation amounts in order to over RUB310m (€7. 8m). The total side from the pension fund is RUB227. 7bn at April 1, so only at that initial stage the investment comprises a small proportion of complete assets.

The investment vehicle is part of the PIK List programme launched last autumn, which aims to improve the lifestyle quality within the residential districts it invests in through property management projects. Formerly commercial properties were sold to retailers piece by piece, however the new scheme allows unified ownership of properties and centralised home management. The PIK Retail portfolio holds around RUB2bn in property.

Yuri Novozhilov, chief operating officer of Blagosostoyanie said: “The fund’s investment policy would be to pay special attention to the real economy sector, which offers security, liability and profitability of long-term pension money investments. The PIK Retail programme meets each one of these requirements, simultaneously playing an important social role in improving the infrastructure of Moscow and also the Moscow region. ”