Despite the arrest of Mikhail Khodorkovsky last year and the subsequent calls for the deprivatisation of property by some political parties such as Rodina, the real estate market has been little affected so far. As Oleg Myshkin, Director at Colliers International in Moscow, says,
the arrest of Khodorkovsky and all the talk about the possible deprivatisation of assets has not really affected the business community and the stock markets that much, let alone real estate.
In fact, most real estate professionals believe that property rights are unlikely to be touched in the future and remain sanguine at prospects both for the Russian economy for the real estate sector. Tamara Kushwaha, Senior Director at Stiles & Riabokobylko in Moscow, admits that
re-privatization of any kind would send a negative message to the overall economy, which in turn would eventually impact negatively on all real estate activity and many of the foreign investors currently looking into Russia. Those that are already present in Russia would become more cautious and consider divesting. However, I believe the chances of reprivatization are small and continue to work every day in this expanding real estate market with optimism and confidence. My sense is that the real estate community (developers, investors, owners and their consultants – primarily local and some foreign) do not dwell on the issue of reprivatization. Instead the community is exceptionally busy with projects at hand such as development, investment and acquisition of income-producing real estate.
Gerald Gaige, Partner for Valuation and Real Estate Advisory Services at Ernst & Young, agrees that if de-privatization did proceed, investment would be hit.
Foreigners have enough trouble as it is coping with operating regulations, tax laws, currency issues, and local cultural requirements in Russia, so they certainly don’t want any increased risks regarding property rights. If real estate rights were to be challenged, foreign and domestic investors alike would probably react in the same way. If they perceive that the property rights they hold are coming under risk, they would look for guarantees of those rights. If they don’t see any, or believe that they cannot be upheld, then they would probably reduce any further activity here and opt for less complicated markets.
But real estate professionals say that such arguments are mostly hypothetical and point out that the government is in fact fully aware that any deprivatisation of property would frighten away investors and sit very uncomfortably with its overall political and economic strategy.
“Of course, in Russia anything is possible,” says Gerald Gaige,
But while there are some legal actions underway which are reportedly attempting to correct some perceived inequities of the early processes of privatization of enterprises in Russia, these do not relate specifically to real estate. The president of Russia, his administration, and the representatives of the Russian government have all reinforced the idea that enterprises and commercial property are best managed by the private sector, and not by the government. At the same time, they emphasize proper protection of the state’s interests with regard to the disposition of natural resources and certain natural monopoly functions. This in turn results in taxation and regulation and is a normal position for a sovereign state – it shouldn’t normally disturb business interests. The last ten years have taught those in the power structure in Russia the value of participating in the global economy, and I think the free market experienced so far by Russia has brought too many benefits to the country and its people for it to be easily reversed. Any factor that inhibits investment hurts the people of Russia, as they would lose the ability to participate in an economy that is growing optimally, and Russia would become even more dependent on its natural resources to improve living standards here. So whatever else they may do, the indications are that the political leadership will work to preserve the favorable perception of Russia as a market that has been so hard-won over the last several years.
Myshkin at Colliers agrees that there is a major distinction between a natural monopoly like oil and real estate.
Whereas in the early 1990s real estate was subject to a much more orderly process of deprivatization under stricter regulations, the assets of the oil industry were privatized in a very uncontrolled and unregulated way. And of course since then, these assets have greatly increased in value. With real estate now under much tighter legal control, there is also much less scope for corruption. So investor sentiment remains strong and I expect that the positive trends we saw in real estate during 2003 will continue during this year.
Gaige at Ernst & Young believes that in any event it would simply be impracticable to reprivatize real estate.
If we did have a significant amount of interference with property rights, it would obviously inhibit additional private investment. But from a practical point of view, no real estate specific businesses were privatized, except for state construction entities – and they did not end up owning much property, only their constructing abilities. So instead of having an entire business to deal with, only individual projects would be subject to any reconsideration of ownership. This would yield relatively little value for the state, and do far more damage than it would be worth. So I don’t think that the fears of a general deprivatization for real estate are well-founded. The discussion is not coming from any credible source, comments are mostly based on election year rhetoric and not the real situation.
Written for The Moscow Times Business Review, Real Estate Quarterly Q1 2004 and published in February 2004.