Residential: Russian invasion of the UK
Led by the highly visible Roman Abramovich, the Russian invasion of the UK residential property market is the stuff
of headlines. It seems barely a week passes without some billionaire snapping up a multi-million pound show home in
Chelsea, Mayfair or Knightsbridge.
Russian money may be keeping some of the heat in London's residential market and gossip pages, but many believe
that the Russian billionaires, replete with trophy postcodes, will turn their attention to UK commercial property.
"Our gut feeling is that they will invest in real estate, because they will begin to understand the fundamentals
of the UK commercial market," says Chris Bell, managing director Europe of Knight Frank.
Gary Hersham owner of Beauchamp Estates, believes that the Russians will follow the same route as historic newcomers
to the UK market. "Like Middle Eastern investors Russians will start with residential, move to residential for
investment and move into small and then bigger commercial investments."
However, given yields of about 15 per cent in the Moscow office market and vacancy rates of only 3 per cent, it seems
hard to see why Russians would bother with the more sedate UK market and its yields of 5 per cent.
"It's all about security," says Jeremy Waters, commercial investment partner at Knight Frank.
"Here they will have a tenant for at least 10 years and can increase the rent every five years and it can't go
down. London is a way of balancing their portfolios and offsetting the risk at home."
Political upheaval that saw president Vladimir Putin sack his entire cabinet could also act as a driver for
investment outside of Russia, argues Mr Hersham.
The promise of new money has seen a flurry of investment agents setting up in partnership with local agents in
Moscow.
"We opened Russian offices because we know that it is going to be a big market and we see the potential of
Russian money coming to the UK. So we are going to Russia to understand the market," says Mr Waters.
In Knight Frank's Moscow office Natasha Reteyum, development director, believes that even if Russian money is
successfully accessed it will be difficult to tell who is investing, and where, given that many investors are reluctant
to let people know where they are putting their money.
The trend for privacy in business matters, although typically Russian, says Ms Reteyum, has been exacerbated by the
Russian government's decision to arrest Mikhail Khodorkovsky, the former Yukos chief executive, on suspicion of
fraud and tax evasion.
The desire for privacy, coupled with the increased investment in the property market by Russian billionaires, has,
however, raised concerns about money laundering.
Property investment is an easy way of laundering so- called dirty money, as a commercial property in a legitimate
economy like the UK provides a clean income stream that can in future be sold to create legitimate profits.
It's a process that has not escaped the attention of the Russian authorities. Viktor Zubkov, Russia's first
deputy finance minister and chairman of the financial monitoring committee of Russia, is stepping up efforts to combat
money laundering with new co-operation and information exchange agreements with various European governments.
Mr Zubkov says: "If there are suspicions that property is being bought with 'dirty' money, we will
work on the information of our opposite numbers. And if there is, for example, a request from British financial
agencies, then we are sure to conduct our own financial investigation too."
The focus on money laundering has also been intensified by the introduction this month of Money Laundering
Regulations 2003 legislation.
Agents can now face jail sentences and fines if they assist clients in money laundering. Mr West of DTZ says:
"It is a genuine concern, and now if anyone has suspicions that money is being laundered they will have to report
it immediately."
Mr Waters, however, says there are steps agents can take to protect themselves. "Ask as many questions as
possible up front. If you are worried about the financing, speak to bankers or any other financial sources you have.
Check that they have lawyers acting for them, as it is their solicitors who are responsible for signing off the deal for
them."
Notwithstanding worries about money laundering, many in the industry are counting on the fact that the Russians are
coming.
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RUSSIA IN FACTS
