Taking a Chance in Belarus's Real Estate Market

SOFIA: Belarus is the last Stalinist-era, centrally planned economy in Europe but a small and hearty group of Western investors are starting to probe the former SovietRepublic, seeing it as the last all-but-untouched real estate market in Europe.

Yet, even as outside investor interest is swelling, there continue to be solid obstacles to buying properties in the 207,600-square-kilometer, or 80,155-square-mile, country.

All land in Belarus is publicly owned - even Belarusians who buy homes or commercial buildings usually receive only a 50-year lease on the land. And all transactions involving state property valued at more than the equivalent of $150,000 must be approved personally by President Alexander Lukashenko.

(Sale prices are expressed in U.S. dollars but paid in Belarusian rubles; rents usually are expressed in euros.)

Neither foreigners nor foreign legal entities are allowed to buy properties, although it can be done indirectly through Belarusian companies. "Everyone has their own strategic plan to participate in projects in different sectors here," says Mikhail Gradovich, managing director of Colliers International Belarus.

In May Colliers opened an office in the capital of Minsk, the first international real estate consultancy in the country. It focuses on commercial property sectors: retail, office, industrial and hotels.

Gradovich says customers generally can be divided into two groups: locals with access to land who are seeking investment to help fund development, and outsiders who are eager to buy properties but generally cannot. Last year, he says, private investment funds, mostly from Europe, started to show interest in Belarus for the first time.

Despite the strong demand for new properties, Gradovich says investment in construction projects are almost unheard of because Westerners are still very cautious about placing money in a country that will not grant them rights to land. Also, new commercial construction is generally of low quality. Only a small number of buildings would be considered "A" class by international standards.

Russians, who are used to operating in a similar environment, comprise most of the foreign investors in new construction. There is no official border between the two countries, so capital can be transferred from Russia into Belarus more easily than from anywhere else.

The economy is still very Soviet-like, putting Western buyers at a disadvantage. Gradovich says the government still employs five-year plans and strong central control. During the Soviet era, control was exercised by the central committee of the Communist Party, Gradovich said, while "today it is exercised by just one person," referring indirectly to Lukashenko.

When Western buyers negotiate with potential local partners, Gradovich says they are discouraged by the "sometimes strange" steps they need to take and often "quietly withdraw." The process of building is frustrating and extremely bureaucratic, he says, with high fees and lengthy permit processes required during every step of the construction process.

Although foreign direct investment made up only 1 percent of Belarus's GDP last year, the economy grew by 9.9 percent and real incomes increased by 27 percent, according to official statistics cited by Colliers. In 2006 the private sector generated 25 percent of the Belarusian GDP, which totaled $77.4 billion at 2006 exchange rates - or $7,903 per capita.

Residential properties in Minsk average about $2,000 per square meter, up from $1,000 two years ago, according to realt.by, a Belarusian real estate Internet site. The prices vary slightly according to the number of rooms, with units with more rooms being slightly more expensive. Gradovich attributes the jump to fierce competition for insufficient housing supplies due to increasing incomes and buyers seeking an investment or better housing.

Most of Belarus was flattened during World War II so residences today are tall apartment blocks built during the Stalin era; a similar style is used for about 80 percent of all new residential construction. Outside the cities, most people live in houses.

Kevin Smith, a part-owner of Belarus Trade House, says the company is planning on entering the properties market for a very simple reason: "Price."

"Prices have been going up rapidly," says Smith, who also imports sparkling wine and crystal from Belarus to Britain. "Minsk is still fairly cheap compared to many other cities in the region."

By comparison, residential prices in Moscow average more than $6,000 per square meter, according to Evans Property Services, a real estate agency with offices in Moscow and New York. And in Riga, Latvia, they average $3,234 a square meter, according to a rough estimate by Colliers.

"The country seems to be opening up much more to the U.S. and Europe over the last year than they have done previously," Smith said, attributing the change to Belarus seeking new partners following a dispute with Russia over oil deliveries in January 2007.

Smith says he is looking at several different approaches, including bringing in big investors on big property development projects on one end, and smaller deals in residential properties.

Even with supplies short and prices growing in all property sectors, Gradovich says the office market is the most promising due to the high and growing demand. As an illustration, he says his office rent was â'¬18 per square meter last January and it now is â'¬24 per square meter.

Retail real estate prices are increasing by an average of 25 to 30 percent per year, according to Colliers. The average cost of retail space in Minsk is â'¬1,400 to â'¬2,100 per square meter, excluding the value-added tax, while small areas of less than 20 square meters in shopping centers are â'¬3,500 to â'¬4,000 per square meter, also excluding VAT.

For warehouse and industrial space, the demand has doubled while supply remained low according to Colliers. For example, the prices of unheated warehouses in Minsk rose by 60 to 80 percent over the last year.

There are no international hotel operators in Belarus and the majority of all hotels are state-owned.

Smith says prosperity is growing in Belarus and the market could eventually become as hot as the Baltics next door. After mortgage lending increased in Latvia, Smith points out, property prices took off.

"In Belarus, it's not possible for Belarusians to borrow, but for foreigners to buy, that's starting to move," Smith said.

"Working in this region, there are always hoops there that you weren't quite aware of," said Smith, who says he is in the early stages of transactions. "It's easy to fall down holes, but if you know they are there, it's easy to avoid them."