“Closed-end real estate unit investment funds investing into finished commercial property, whose target investors are retail clients have not been very common until now. The main reason being a wide range of alternatives with matching rates of return yet higher liquidity and less risks. Nowadays, with the low deposit rates, the interest for alternatives is growing as ever,” says Vladimir Potapov, Chief Vice President, VTB. He points out at the increasing interest for such products as today they provide for a higher yield over the ones with a fixed rate of return.
The expert adds that the major driver for further development of this format should be positive experience with such investments. It is also important to improve the liquidity of closed-end real estate unit investment funds by distributing them to a wider range of investors, both private and institutions, including via retail channels. “To develop a pooled realty fund one must possess professional expertise, a wide distribution retail chain to sell the product and promote the brand identifiable in the market,” says Vladimir Potapov.
Legal issues
Answering the question why REIT formats have not picked up in Russia, General Director of S.A. Ricci Alexander Morozov refers to “the rules of the game”. “In the West, the institutional and legal form of such funds has been thought through and developed. As a result, REITs attract attention of significant numbers of small investors, which makes realty more affordable. As for Russia, a realty investment fund must be closed and have a term of 3 to 15 years. You can leave it when the fund is closed and the fees are high. Besides, an investment fund is not treated as a corporation while it must pay both corporate and income tax. The second-hand market, aka selling shares at a stock exchange, is not developed at all, which kills the main idea of such a fund, its high liquidity,” explain the expert. As for the format of closed-end real estate unit investment funds in Russia, the way they exist now is “not really flexible nor liquid”, says Alexander Morozov.
closed and the fees are high. Besides, an investment fund is not treated as a corporation while it must pay both corporate and income tax. The second-hand market, aka selling shares at a stock exchange, is not developed at all, which kills the main idea of such a fund, its high liquidity,” explain the expert. As for the format of closed-end real estate unit investment funds in Russia, the way they exist now is “not really flexible nor liquid”, says Alexander Morozov. So the main problems lie with the law. According to the explanations of the realty investment manager Igor Indriksons, founder of Indriksons.ru, western REITs must pay off at least 90% of their rent or capital increase profit after its sale to probably millions of the shareholders, who can live in various countries. Classical REITs
are traded at stock exchange; they are bought and sold million times a day. In addition, 90% of the profit a REIT dividends among its shareholders exempt from corporate tax. The person, who receives the dividends, pays the tax. “In Russia, a REIT would first have to pay the income tax and then the receivers of dividends would have to pay a tax again. It is obvious; the market is not interested in such a scheme. On the other hand, if REITs in Russia had the same format as in the west, it would bring a lot of foreign investment with local investors also giving their money. At the moment, our legislators are not concerned,” says the expert.
Income-yielding pension
A different issue, which is still not solved due to legal peculiarities in particular and underdevelopment in general, is how to bring pension money into the segment of realty investments. Assets of Russian private pension funds consist of pension money and pension reserves (voluntary contributions). Russia law states that only pension reserves could be invested into realty, while pension money is allowed to be invested into the least risky instruments, such as bonds of the first echelon. Realty investments for such money are not allowed.