Domestic buy to let investment means residential properties purchased and let out on mid-long term contracts. But buy to let abroad can mean that, or short-term lets to holidaymakers. In the case of Russia, because of the population size and resurgent economy the former is the preferred model, but with the winter Olympics due to be held in Sochi in 2014 and the World Cup in 2018 Russia is gearing up for some serious tourism growth in the next few years.
There is still a lot of poverty in Russia. For example of lot of the 139 million consumers still don't have their own home, they live in a multi-generation household, or are a married couple living with one of their parents. Of the rest many live in sub-standard accommodation. But incomes are rising, in fact a 60% growth in disposable income is predicted by 2015. As incomes rise with it rises demand for quality rental accommodation.
Figures on the Russian residential market are hard to come by, especially as to the rental market. However, we can look at other things to guage rental demand, namely the resurgent economy, falling unemployment, rising wages, huge untapped consumer market, weak construction figures and other sectors of the property market.
The Russian economy grew 4.3% in 2010 and the same in 2011 according to the IMF, more than recouping the 7.8% decline in 2009. The unemployment rate in Russia currently stands at 5.3%. down from a high of -9.4% in 2009. At the same time wages have risen from an average 15,000 RUB per month in at the start of 2009 to 26,256 RUB in Ocober of this year. The historical chart (see below) shows wages have consistently over the last decade. There are over 139 million consumers in Russia, and only 14.4% of adults have a credit history, indicating a huge and largely untapped consumer base. Add to that weak construction figures since the crisis because of the troubled property market and difficult credit landscape and you have enough to suspect growing rental demand.
On top of that we see the rapid recovery across the office and St Petersburg residential markets as further evidence of a strengthening market set to support solid rental demand. According to Knight Frank office occupier demand rose 3% year on year in 1H 2012, while the class A vacancy rate fell from 12.5% to 11.9% over H1 2012, and the class B vacancy rate fell from 17.2% to 14.2%. At the same time another report from Knight Frank tells us that supply levels in St Petersburg were at record lows in 2011, supporting a 12.9% growth in new build prices over the year. The report also shows a 1.9% drop in resale prices, but this can be explained by the fact that 75% of apartments sold were worth over $1mln.
Of course it would be nice to have cold hard data on the rental market, but what we do have is enough evidence to conduct much deeper research into individual residential buy to let opportunities in Russia.
As was mentioned, holiday letting is not something that will immediately jump to mind for Russia as it would for some of the world's great beach locations, despite the fact that Moscow and St Petersburg have some of the most spectacular architecture and art in the world – while they are popular with tourists hotels are very much dominant.
But that is changing. Each year more and more people book their own holidays using the internet and more often than not they book self-catering private accommodation. This is improving holiday rental property occupancy around the world including in Russia. For that reason, if you have your heart set on a holiday home in Russia it may be worth doing research into individual areas and properties to see if they are viable to make an income from at the same time.
Buy-to-let investment on a short term basis brings the benefit that during the time your property is being rented out and earning you an income, it is still appreciating in value, while someone else is paying your mortgage. Meanwhile it is providing an off-peak holiday home for your personal enjoyment.
John decides to purchase an investment property and he decides that the "Buy-to-Let" investment strategy is for him.
John has savings of around €80,000.
Our investment advisors suggest property development X meets with John's deliverable criteria.
Investment property X is a plush modern city centre apartment priced at €250,000.
Initially John pays his reservation fee of €3000 to hold the property.
Next John pays a 30% deposit of €75,000 (minus his €3000 reservation fee already paid)
Our investment specialists negotiate a mortgage for John for the remaining €175,000 at a rate of 2.75% (example only) this translates to a monthly mortgage repayment of €481.00 (interest only) which is equal to €5772.00 over 12 months.
The average rental rate for such an apartment in a city like Moscow or St Petersburg would be around €1,500 for long term rental (based on the $2000 per month quoted in this impartial article). As a residential buy to let investor, if you can find a good tenant it is possible to have them for years, which means no overhead on finding new tenants, and also good tenants keep the place maintaned. But as we don't live in a perfect world let's say John rents for an average of 10 months per year.
Total Rental income = €15,000 after subtracting the €5,772 Mortgage repayments John has made a profit of €9,228.
During this example we have not included any rental management or community fees that may apply but also we have only assumed rental income for 10 months of the year, which is very conservative on long term lets of the €250,000 city-center apartment variety in undersupplied and high demand cities like Moscow and St Petersburg.
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