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Contact: Petr Yudin
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REIT is a new opportunity to improve operating performance

Moscow, 3 July 2009 — Use of Russian closed end real estate mutual funds (REITs) is one of the mostly hotly debated current topics among real estate professional market players – and rightly so. Economic turmoil, plummeting margins of development projects and the resulting serious decline in the appeal of investing in real estate makes many companies give up established business models for new opportunities to improve operating performance. As demonstrated in practice, most experts believe that the use of Russian REITs is one of the more promising opportunities. On 17 June 2009 real estate market leaders assembled in Moscow at a round-table discussion organized by Ernst & Young and the Urban Land Institute (ULI) to look at the prospects of effectively using this instrument.

The attendees, including representatives of RWM Capital, Svyazinvest, Marshall Capital, Troika Dialog, Aberdeen Property Investments, Hines, Horus Capital and Forum Properties spent three hours discussing the most difficult issues related to the operation of Russian REITs, and also identifying potential ways to resolve them.

Based on the result of the discussion, regulatory limitations and tax uncertainties were named as key challenges to the seamless increase in use of Russian REITs, including the following examples:

  • A REIT (unless for qualified investors) is not allowed to raise debt financing
  • There are strict requirements to the composition and structure of REIT assets
  • The limitation on the lifetime of such funds
  • And other constraints.


On the tax front, the participants of the roundtable noted significant tax advantages that Russian REITs offer; for example, absence of property tax on the REIT property. At the same time it was admitted that a number of material tax issues remain outstanding, such as inefficiency of recovering VAT on contribution of assets to a REIT, or less than perfect approaches to the tax treatment of income of foreign investors receiving interim revenue from a REIT or redeeming their units. Lack of clear guidance from the competent authorities, and insufficient practice of taxing foreign investors of Russian REITs, leaves room for different interpretation of the rules by managing companies that make the tax decisions in respect to a particular REIT.

In spite of all the issues outlined above, participants observed that those issues are resolvable in many cases through proper and timely structuring. Russian REITs as an investment instrument have already proven their right to exist and are being used in practice more and more often. The experts also believe that Russian REITs have great potential for further development and may successfully work in the real estate market as an alternative tool to raise investment capital. Bridging the remaining gaps in the law as soon as possible, will not only encourage the growing inflow of foreign investment in the Russian real estate, but also strengthen Russia's positions in the global markets.

About Ernst & Young

Ernst & Young is a global leader in assurance, tax and legal, transaction and advisory services. Worldwide, our 135,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.

Ernst & Young expands its services and resources in accordance with clients’ needs throughout the CIS. 3,900 professionals work at 16 offices throughout the CIS in Moscow, St. Petersburg, Novosibirsk, Ekaterinburg, Togliatti, Yuzhno-Sakhalinsk, Almaty, Astana, Atyrau, Baku, Kyiv, Donetsk, Tashkent, Tbilisi, Yerevan and Minsk.

For more information, please refer to www.ey.com.

About ULI Russia

ULI Russia has a mission to promote the best corporate practice and expertise.
Arnaud Dubois, Chairman ULI Russia, has a perfect vision for Russia and wants to develop the Professional Real Estate community and industry. ULI Russia connects local expertise with global knowledge to create opportunities. ULI Russia is ready to organize all the necessary meetings and roundtable with the help of the local and international experts, participants, investors, administration and government representatives in order to create the right corporate Russian model and to attract and invite large international investors to structure long trust term investments.