Russian Federation: Investments in Real Estate in Russia

Last Updated: 22 July 2005
Article by Elena V. Sapegina

In recent years, the real estate market in Russia has been one of the most dynamic markets in terms of volume of investments. In 2004, prices in major sectors of the market reached levels which existed prior to the financial crisis of 1998. In terms of the number of transactions and the volume of construction, Russia has also reached pre-crisis levels, and such growth continues.

Traditionally, growth rates vary by region. The leading regions are Moscow, Moscow Oblast, St. Petersburg and Leningrad Oblast.

The legislative base necessary for stable development of the real estate market has been created and steadily continues to develop. Also, an effective state system of registration of real estate objects, rights thereto and transactions therewith has been established. Existing court practice evidences the recent increase in the effectiveness of court protection of rights and lawful interests of owners of real estate and investors working in the real estate market.

This article reviews basic provisions of Russian legislation that must be taken into consideration while planning investment activities in the real estate sector in Russia.

The Concept and Main Types of Real Estate

Pursuant to Russian legislation, real estate includes land plots, subsoil plots, solitary water objects and everything that is securely attached to land, i.e. any objects which may not be relocated without incommensurate damage to their purpose, including forests, perennial plantings, buildings, and constructions.

According to Russian law, the main characteristic of real estate objects is inseparable attachment to land. However, regardless of existing attachment to land, by virtue of direct stipulation of the law, real estate also includes other property, namely: aircraft and sea-going vessels, vessels of internal navigation, and space objects. In the housing sphere, real estate objects include residential premises and elements of engineering infrastructure.

A prominent feature of the legal regime for real estate objects is state registration of rights to real estate and transactions therewith in cases and in accordance with the procedure stipulated by Russian legislation.

Certain types of real estate have distinctive features that must be taken into consideration when planning and implementing investment activities.

Land Plots

According to Russian legislation, a land plot is a part of the earth’s surface (inclusive of the soil layer) whose boundaries are described and approved by competent state authorities in accordance with the procedure established by law.

According to its designation, land in Russia is divided into seven categories:

  1. agricultural land;
  2. settlement land;
  3. land for industry, the energy industry, transports, communications, radio broadcasting, television broadcasting, informatics, land for maintaining space activities, defense and security land, and land of other special designations;
  4. land for specially protected territories and objects;
  5. forest fund land;
  6. water fund land;
  7. reserve land.

While performing investment activities, it is important to take into consideration that land plots may be used only in accordance with their designation. The designation (category) of land, including privately owned land, is determined and changed by state and local authorities. Unauthorized change of a land plot’s designation by owners and other holders of rights is not permitted.

From the point of view of restrictions on turnover-ability, Russian Federation land legislation distinguishes between land plots barred from turnover and land plots with restricted turnover. Land plots barred from turnover may not be privately owned or the subject of civil transactions. Land plots with restricted turnover are not granted to private owners, but may be the subject of civil transactions.

Furthermore, it should be taken into account that, in accordance with Russian Federation legislation, land is considered not only as a real estate object, but as an important natural object and basic natural resource as well. Due to this, land must be used by owners and other holders of rights in consideration of the requirements of Russian ecological and subsoil legislations.

Buildings and Constructions

Buildings and constructions are real estate objects due to being inseparably attached to land and the impossibility of relocating them without incommensurate damage to their purpose.

While performing investment activities concerning buildings and constructions, particularly while constructing new buildings and erections and reconstructing existing ones, it is necessary to consider the norms and rules established by Russian legislative acts on city-planning activities, in particular it is necessary to have the construction project approved and obtain a construction permit from the proper state authorities.

Buildings and constructions of special historical, cultural or scientific importance may be acknowledged as cultural heritage objects in accordance with the procedure established by law (historical and cultural landmarks). The basic principle for using such a building or construction is preservation of its original exterior and interior. Reconstruction, restoration and reconditioning of cultural heritage objects are performed under the supervision of the state authorities responsible for protecting such landmarks.

Residential and Non-Residential Premises

Residential and non-residential premises are not directly and inseparably attached to land and are acknowledged as real estate objects only by virtue of direct stipulation of law.

Residential premises are distinct premises designated for individuals’ permanent residence that must meet sanitary and technical requirements and rules established in the Russian Federation. Residential premises include residential buildings and parts thereof, apartments and parts thereof, as well as rooms. Non-residential premises are premises not designated for individuals’ permanent residence.

Residential and non-residential premises must be used in accordance with their designation. Non-designated use of premises is allowed only after preliminary transfer of the premises to another category.

System of Registration of Real Estate Objects and Rights Thereto

In Russia, real estate objects, rights thereto and transactions therewith are subject to registration.

Registration of Real Estate Objects

Real estate objects are registered by means of cadastral and technical registrations (inventory). During these registrations, the characteristics of the real estate object are described, which allows for unambiguously distinguishing it from all other real estate objects. Furthermore, the real estate object is assigned unique cadastre and inventory numbers. As a result of registration, the respective object is formed as an object of civil rights. Civil transactions concerning a real estate object may be conducted only upon completion of cadastral and technical registrations (inventory).

Registration of Rights to Real Estate and Transactions Therewith

As a general rule, rights to real estate and transactions therewith are subject to obligatory state registration in the Single State Register of Rights to Real Estate and Transactions Therewith. The state registration is a legal act of the state’s acknowledgement and confirmation of the rights to the real estate object. The legal effect of state registration is that rights to the real estate commence and transactions with the real estate that are subject to state registration shall be considered valid only upon their state registration.

In certain cases, state registration of rights to real estate is not required. For example, rights to real estate that commenced prior to entry into force of the Federal Law "On State Registration of Rights to Real Estate and Transactions Therewith," i.e. prior to January 31, 1998, are recognized as legally valid without state registration. State registration is also not required for agreements on lease of land plots, buildings and constructions concluded for a term of less than one year.

State registration of rights to real estate and transactions therewith is performed at the location of the respective real estate object by the competent state authority – the Federal Registration Service. A performed state registration of commencement and transfer of rights to real estate is confirmed by a Certificate of State Registration of Rights. Performed state registrations of agreements and other transactions are confirmed by special registration inscriptions on the documents that convey the content of the transactions.

Acquisition of Rights to Real Estate

Rights to Real Estate

The following rights to real estate objects may be acquired:

- ownership rights;

- lease rights;

- liens;

- servitudes.

The following non-standard rights to land plots, which do not exist in other countries, may also be acquired:

- right of permanent (perpetual) use of a land plot;

- lifetime ownership with hereditary succession of the land plot;

- right of free terminable use of a land plot.

From the point of view of investment activities, acquisition of ownership or lease rights to a real estate object is most attractive.

It is important to note that in Russia there are a number of restrictions on rights to land held by foreign legal entities and individuals. Some of the established restrictions also apply to Russian legal entities in whose share capitals foreign entities participate.

Procedure for Acquiring Rights to Real Estate

Rights to real estate objects may be acquired by investors from private parties (legal entities and individuals) as well as from state and local authorities. It should be noted that real estate objects suitable for the purposes of implementing an investment project are most often not privately owned, but rather owned by the state or a municipality.

Acquiring rights to privately owned real estate involves a relatively simple procedure, which includes approval of the conditions for acquisition of the rights to the real estate object by the owner of the object and the investor, conclusion of the respective agreement, and state registration of the transfer of the ownership rights or lease agreement.

The main distinguishing feature of the procedure for acquiring rights to state or municipally owned real estate is the necessity to observe a number of additional administrative procedures established by current legislation on state and municipal property.

In particular, the procedure for acquiring rights to state or municipally owned real estate objects includes adoption by the proper state or local authority of a resolution to grant the investor the real estate object for ownership or lease.

Moreover, while performing investment activities it is necessary to take into account that, as a general rule, rights to state or municipally owned real estate objects are granted through auction. However, in certain cases stipulated by law – such as granting a land plot for construction with preliminary approval of the locations of the objects, acquisition of rights to a land plot by the owner of the buildings and constructions located thereon, etc. – a real estate object may be granted to an investor without auction.

Bases for Acquiring Rights to Real Estate

Rights to real estate objects may be acquired on various bases, in particular: on the basis of agreements and other transactions, by virtue of law, on the basis of court rulings, etc.

In terms of investment activities, the most frequently used option for acquiring rights to real estate objects is acquiring them from the former owner on the basis of a respective agreement (as a rule, a sale and purchase agreement or a lease agreement).

In the case of acquiring rights to real estate on the basis of an agreement, it should be taken into consideration that current Russian Federation legislation establishes a number of special requirements for their content and execution, in particular:

- the agreement must be executed in writing as one document and signed by the parties thereto;

- the agreement must contain information about the real estate object which allows for unambiguously distinguishing it.

- the price of the real estate object to be acquired (in the case of sale and purchase) or the rent amount (in the case of acquisition of lease rights) must be indicated in the agreement.

There are additional requirements as to the content of sale and purchase agreements, lease agreements and agreements on exchange of land plots.

In comparison with land plots, the distinctive feature of acquisition of rights to buildings and constructions is that the ownership rights to these objects may be acquired either from the former owner or by means of creation (construction) of a new building or construction.

Creation of a new building or construction is possible by means of constructing such real estate object or as a result of reconstructing an existing object.

In creating a new building or construction it is necessary to take into account that a special permit (license) is required for carrying out design and construction activities in Russia. Prior to commencement of construction, the investor must have the construction project approved by all competent state authorities and organizations as well as obtain a construction permit. Completion of construction must be confirmed through execution of an act of the state acceptance commission or an act of the interdepartmental commission on acceptance of the particular object into operation. The investor’s ownership rights to the newly created buildings and constructions are subject to state registration and commence as of such registration.

Particularities of Regional Legislation

Subjects of the Russian Federation regulate investment activities in the respective territories, mainly by means of adopting regulatory acts on granting investors ownership and lease rights to real estate objects owned by such subjects of the Russian Federation.

Particularities of Investments in Real Estate in Moscow

Moscow Government policy is aimed at regulating the various forms of investment activities (construction, reconstruction, capital repairs of buildings and constructions, financing investment projects, etc.) performed in the real estate sector. For this purpose, development programs in various spheres (residential, garage construction, development of non-residential premises and hotel complexes, etc.) are prepared in Moscow, and the main investment projects in the territory of Moscow are being implemented within the framework of such programs.

Rights to construct, reconstruct, and capitally rebuild buildings and constructions are granted mainly by tenders (auctions). Based on the results of a tender (auction), an agreement for the right to implement an investment project is entered into (investment contract) between the Moscow Government and the investor, which, in particular, provides for the investor’s and the Moscow Government’s property rights to the investment object. Fulfillment of the conditions of such an investment contract is confirmed by an act on the results of implementation of the investment project, which serves as the basis for state registration of the investor’s and the Moscow Government’s rights to the respective real estate objects.

While planning investment activities concerning land plots, it should be taken into account that granting land plots for lease is the main form of granting land plots for investment activity purposes in Moscow.

Particularities of Investments in Real Estate in St. Petersburg

In 2004, the St. Petersburg legislation regulating the procedure for investing in real estate was significantly changed. As a result, in St. Petersburg there currently exist several procedures for granting investors rights to real estate objects owned by the city.

As a general rule, rights to real estate objects are granted to investors by tender (competitions or auctions). However, St. Petersburg legislation stipulates cases in which real estate objects may be granted without a tender for implementation of certain investment projects such as residential construction, reconstruction of dormitories, development of the hotel and tourist infrastructures, etc.

Real estate objects are granted to investors on the basis of Regulations of the St. Petersburg Government, which, in particular, indicate the type of right granted with respect to the real estate object, specify the particular result and deadlines for implementation of the investment project, and establish the mutual obligations of the investor and St. Petersburg.

Presently, for the purposes of improving the region’s investment climate, a number of industrial zones in St. Petersburg and suburbs thereof are being formed. According to the perspective financial plan for 2005 – 2007 adopted by the City Government, allocation of funds for development and engineering preparation of the following industrial territories is planned for 2005: Shushary-2, Metallstroy-2, Konnaya Luhta, Predportovaya-3 and Neudorf (Strelna). Land plots located in the above territories will undergo required cadastral registrations and engineering development and will be granted to investors through auction as formed land plots.

For more detailed information, please refer to our brochure "Investments in Real Estate in Russia" at www.bblaw.ru.

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.

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