The Acquisition of Real Estate in Russia by Foreign Investors

Foreign investments in Russia over the last 5 years has been low in comparison to those in other countries, such as China, Brazil and Mexico. One of the primary reasons for this comparatively low rate of investment has been the instability and unpredictability of the Russian legislation. It is expected that in time, the Russian government will be able to take the measures necessary to update and stabilize the rules and procedures applicable to foreign investors, thus allowing for increased, more reliable investments in Russia. In the meantime, opportunities do exist for Russian investment, the most promising one being investments in real estate.

From 1918 until 1990, the concept of private property was not recognized in Russia. The state had the sole, exclusive right of ownership in real estate, land and other property. Following the democratic reforms beginning in the early 1990's, two statutes were enacted, both in 1991, which dramatically altered the state of the real estate market in Russia, the first relating to the privatization of state and municipal entities, and the second to the privatization of housing funds. Of equal importance was the adoption of a new Russian Constitution in 1993, which established equal property rights for the state, municipalities and private persons.

Over the last several years, the real estate market in Russia has been changing and expanding rapidly. Real estate, such as buildings and apartments, became the subject of sales, leases, mortgages, gifts and inheritances and the acquisition of real estate became to be seen as a sound investment. Low prices and the lack of "Eurostandard" premises made purchasing real estate for eventual leasing an attractive investment possibility. While real estate and leasing prices have decreased and have somewhat destabilised since August 1998, when the current Russian economic crisis struck, this situation is considered by most to be a temporary one and it is expected that the time for increased Russian investments is set to return.

In respect of legislative reform, the New Civil Code of 1994 introduced regulations of real estate transactions. Under Article 131 of the Code, the right of ownership and other related rights in real estate, as well as limitations and terminations of these rights, are subject to registration in a single state register. Non-compliance with the requirements of state registration will, under Article 165 of the Code, result in the invalidity of these rights. The statute "On State Registration of Real Estate

Transactions" of 1997 sets forth the procedures for state registration, as well as provides for a registration fee for both private persons and legal entities.

Special consideration should be given to the acquisition of land in Russia. Prior to 1993, land in the former Soviet Union was considered as an object of nature with no monetary value and no effect on the economy. Today, however, land is considered as "real estate" and thereby, subject to the real estate legislation. Land property rights are additionally regulated by various land legislation, which includes the Land Code of 1991 (although most of its articles were subsequently declared in contravention with the 1993 Russian Constitution), numerous presidential decrees and laws of the Russian Federation.

While Russian legislation does not prohibit the transfer of land ownership to an investor, in practice, a foreign investor, whether a private person or a legal entity, may only achieve the rights of a lessee for up to 49 years as part of the investment conditions for participation in land development, rehabilitation, the completion of unfinished construction projects and the like. Subject to the terms and conditions of any agreement that may be reached between the state authorities and the foreign investor, the lease can be free of charge or at such price that may be set by the state authority of the region in question.

When considering making an investment in the Russian real estate market, and particularly when dealing with the state authorities, such as in construction projects, a foreign investor should be particularly mindful of the rather complex, often duplicative governmental procedures, which may, unfortunately, be subject to less than open and honest practices. Further, as the legislation itself is under constant change and development, a potential investor must tread carefully in order not to violate unintentionally any of the applicable laws, rules and regulations. As such, assistance and guidance from a local attorney, specialized in the area, is highly recommended.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.