New Russian property tax will hit capital values, JLL warns

An amendment to Russian tax law could affect real estate capital values in the real estate market by reducing net income, Jones Lang LaSalle has warned.

The changes, submitted by Duma deputy Sergey Katasonov in July this year, bring in a new base for tax calculation for office and retail property from next year. The amended calculation switches from using an annual average net book value as the taxable base to cadastral value.

In addition, the amendments introduce new rates for real estate tax. Despite last-minute attempts to postpone its adoption by OPORA Rossii (which represents small and medium enterprises), the bill was approved on 30 October by the Federation Council.

Jones Lang LaSalle said the use of cadastral values as the tax base is logical from a tax revenue point of view and should encourage better utilisation of under-developed assets.

However the property adviser's experts are concerned that the resulting higher property tax could have a negative effect on Russian real estate capital values by reducing net income.

In its research paper on the change, JLL says: 'This is especially true for older properties. Some office and retail properties constructed before or in the early 1990s could be affected, as their book value should significantly differ with the cadastral value. Newer properties have their book value very close to the cadastral value, so will be less influenced by the change, we think.'

Jones Lang LaSalle recommends that buyers take the time to check whether the cadastral value has been identified for a property they are purchasing and to consider carefully the difference in the current tax obligation based on book value and the future tax obligation based on cadastral value to make an informed decision on how the capital value will be affected.

The research paper is available the link below.

The November edition of PropertyEU Magazine features a special focus on the Russian real estate market