Academic journal article Journal of Real Estate Literature

Developing Vehicles for Collective Investment in Real Estate in the Russian Federation

Academic journal article Journal of Real Estate Literature

Developing Vehicles for Collective Investment in Real Estate in the Russian Federation

Article excerpt

The downturn in the Russian Federation economy that began in 2013 continued into 2014-2015. However, at present, the Russian economy has started to show evidence of economic recovery. The ruble remains stable and looks to strengthen further due to the recovery in oil prices, stable financial markets, and a slowdown in inflation. These changes will facilitate further improvements in economic performance in the mid-term.

Real estate plays a vital role in all aspects of the Russian economy, society, and the environment. In the context of the ever-changing geopolitical situation and weakening Russian currency, market participants should pay attention to real estate as an investment vehicle. Real estate is considered to be one of the most reliable investment vehicles and less challenging for an inexperienced investor than financial investment fields, and also delivers a relatively favorable risk-return profile with relatively low liquidity (ease of entry and exit).

Thanks to the development of new financial vehicles and institutions, investment in real estate is becoming more and more accessible to small- and medium-size investors. one of the promising schemes for investing in real estate is collective investment through the purchase of real estate investment trusts (REiTs). The REiT industry, which has been actively developing in recent years in many countries, contributes to increased accountability in corporate governance; the industry has strict requirements on professional management, which has improved disclosure (Global Real Estate Transparency Index, 2016).

A REiT is a collective investment scheme that allows several investors to combine their savings and invest them in real estate in order to achieve economies of scale and to diversify the portfolio's risks. Collective investment vehicles allow the accumulation and distribution of investors' funds, and typically generate secure regular revenue flows and ensure long-term growth in the value of invested capital. Experts in financial markets note that from the standpoint of capital safety and liquidity, REITs and their Russian counterparts, unit investment trusts (UITs), are the most convenient means for investing in real estate. There are fundamental differences between REITs and UITs (Exhibit 1).

Russian and foreign investment real estate funds differ in their organizational and legal structure, the source of income, and the method of distribution of profits. In Russia, the opportunity to invest in real estate is fairly recent: the first real estate fund appeared in Russia in March 2003. Therefore, the study of the prospects for the development of UIT as an effective tool for collective investment in real estate is especially relevant. Thus, we conducted an analysis of the dynamics of UIT development indicators in Russia. The Russian experience can be of interest to other developing countries where these instruments are being introduced, as well as to countries that have long used these forms of collective investment as a means of international diversification.

A UIT is a ring-fenced property complex consisting of property transferred for trust management to the managing company by the founder(s) of the trust management with the intention of combining this property with other properties, where the share in the ownership is certified by a security issued by the manager (Federal Law No. 156-FZ, November 29, 2001).

The industry of collective investment has been actively developing in Russia in recent years. For example, the number of UITs in the Russian Federation had increased almost 1.4 times over the 2008-2016 period. The active use of trusts as an investment vehicle is due to their numerous advantages including: advantageous taxation system, additional legal protection of investors, confidentiality of information on the owners of investment units, and convenient model to manage (structure) projects with different investors.

In addition to UITs, other participants in the Russian real estate investment market include incorporated investment funds, credit unions, non-governmental pension funds, and bank-managed mutual funds. …

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