Russians Have Become Real Estate Sharks, Snapping Up Cheap Second Homes Abroad and Pricing Locals Out of the Property Market
After just barely recovering from a debilitating recessionary hit, more well-heeled Russians have been turning to foreign banks for mortgage loans to buy residential property abroad, a report jointly released by the Gordon Rock International real estate agency and the mortgage broker Lowell Finance reveals. And with the euro plummeting and European interest rates at record lows, the trend is only set to continue.
Unlike in the pre-crisis years, ever more Russians are now taking out mortgages for the sole purpose of buying properties in Europe, the report titled «Overseas mortgages for the Russians in 2010» found. This year alone, more than 50 percent of foreign real estate transactions were made by Russians using mortgage loans received from Western banks, the report said.
Wealthy Russians continue to take advantage of low interest rates on mortgages abroad as well as the dip in the value of European currencies to make bargain purchases in real estate, even as the government tries hard to liberalize the country’s mortgage-finance market, experts say. «As a result of the current economic situation, mortgage loans suddenly became a very convenient way for Russians to finance real estate transaction abroad,” said Kirill Dolginskiy, the managing director of Mortgage Brokerage Lowell Finance. “Right now, about 45 to 50 percent of our clients are willing to take advantage of the low interest rates on mortgages overseas to acquire properties.”
With interest rates on European mortgages at record lows, Dolginskiy said, it is not surprising that Russians are in the forefront of investors willing to seize the opportunity to buy residential real estate. “It is like killing two birds with one stone,” Dolginskiy said. “They can obtain low-interest credit to invest in new objects while keeping funds already invested in other projects intact.”
In pre-crisis days, wealthy Russians loved to spend big, often paying cash down for priced properties in France, Italy, Spain, Bulgaria and Croatia. But as the ripple effects of the liquidity crisis hit harder at home, wealthy Russians appear to have had a change of heart and of style, experts say. «There is no paradox in this,” Stanislav Singel, the president of the international real estate agency Gordon Rock, said. “What we are seeing are big buying opportunities for those looking for bargain deals that are not yet available in post-crisis Russia. Right now, you can hardly obtain mortgage loans in Russia at less than 12 percent interest. In the West, you can get the same for just four percent, which is three times cheaper. In addition, processing mortgage loans is faster and the background check for eligibility is snappy.”
Russian investors, he said, prefer to use mortgages, rather than cash, to purchase property, because it is an easy way to create a credit history and boost their credit score. Once a first-time loan is fully repaid, borrowers have a sounder credit history and can get a new mortgage at a considerable discount. After a passive first quarter, the number of real estate transactions conducted by Russians using mortgages grew by more than 30 percent as of May this year, Singel said.
Yelena Yurgeneva, the head of international residential sales at Knight Frank, said the number of Russians willing to take out mortgages to buy property in the elite segment of the foreign real estate market has doubled over the past 12 months. “In places like Italy, up to 80 percent of all purchases of luxury real estate made by Russians were financed using mortgage loans,» Yurgeneva said.
Russian Prime Minister Vladimir Putin has consistently pledged to lower mortgage interest rates in order to boost the domestic market, and has earmarked more than $8.3 billion in government aid to enable banks to grant moderate mortgage loans. However, the 12-percent average rate for Russian lenders is a far cry from the single-digit mortgage loan rates offered by the European banks, experts say. Russian real estate investors are also becoming much more risk averse in their investment decisions, underscoring lessons learned during the financial crisis. «After the crisis, many wealthy Russians regard investment in Russia as entailing a certain level of risk, and that is why more and more are looking at foreign markets in order to protect their assets from the country’s debt crisis,” said Yulia Nikulicheva, the national director of the strategic consulting department at Jones Lang LaSalle.
She added, however, that the increase in the activities of Russians willing to buy residential estate overseas using cheaper mortgage loans will not impact the domestic mortgage loan market, as people only buy second or third homes abroad. “The fact that many Russians are now heading to Europe for mortgages to buy real estate is a sign that the housing market has hit bottom in those places,” Nikulicheva said.
Summary of terms of mortgage lending for the Russians in 2010 in countries most popular among Russian buyers of real estate
While wealthy Russians love to take advantage of cheaper mortgages and the falling euro, investment is not yet their top priority. Over 70 percent of those buying properties abroad still use them primarily for vacation, while only a handful use acquired property as investment, the report revealed. However, the number of those using their apartment as both investment and a resting place is growing, Dolginskiy said. “It is easier these days to buy an apartment on the Côte d’Azur for, say, €350,000 and invest an additional €80,000 in renovation and then rent it out,” Dolginskiy said. “This brings in a guaranteed income, which can also cover part of the mortgage expenses.” Residential property in Europe could now be acquired for the average price of €250,000, which is about 20 percent lower than before the crisis, Singel said. The use of cheap European credit allows investors to significantly increase the return on invested capital, he said.
Dolginskiy said another new trend is for Russians to obtain cheap credit to buy properties in Europe and later use those properties as collateral to obtain bank loans for their businesses in Russia, he said. This is an especially popular practice with well-heeled Russians who buy properties on the Cote d’Azur. Industry experts say that the depreciation of the euro and pent-up demand amassed during the financial crisis are the main drivers for growth in demand for European real estate. By forcing prices down and making cheaper mortgages available, the global financial crisis greatly helped foreign real estate investors hunting for bargain deals abroad, experts say.
On the other hand, however, mortgage banks and other financial institutions have become more demanding and require better credit worthiness and credibility from their customers, and thus only about 70 percent of applications for mortgage loans submitted by Russians were approved in the past five months, figures from Gordon Rock show. In anticipation of a surge in the number of Russians using mortgages to buy property abroad, a number of mortgage brokerages, including Gordon Rock, Lowell Finance and Knight Frank Finance have set out to help individual lenders who might otherwise have found it extremely difficult to pass stringent background checks by mortgage bankers. “For Russians, the best guarantee for obtaining mortgage loans in Europe is to go through dedicated mortgage brokers,” Singel said. «The main advantage is that brokerages give their Russian clients additional guarantees and credibility required by European mortgage bankers.”
As in the pre-crisis days, Europe is still the favorite destination, with France, the United Kingdom, Italy and Spain as the preferred locations. “For those Russian making acquisitions solely for holidays and rest, resorts in France, Spain and Italy are at the top of the list,” Yurgeneva said. “But London still enjoys the pride of place on the wish-list of those buying real estate that they would later sell for profit.” Yurgeneva said that analysts project that the price for residential property in central London, which climbed by 25 percent this year, will continue to grow until 2017, giving further impetus to those Russians who hope to buy and resell afterward.
“Our prediction is that more than 50 percent of Russians will buy real estate abroad this year using mortgage loans,” Singel said. “The rates are very low and the euro has lost at least ten percent of its value. All this is making Russians put their money in various investment projects and buy residential estate. Therefore, Europe will continue to remain an attractive place for investment in the nearest future.”