In-Depth: Land: Laws and the Market


Before discussing the difficulties that arise for Moscow developers and companies seeking to invest funds in construction projects in Moscow let us dwell on some critical, structural discrepancies in current land legislation.

Dwelling on a Few Points

One of the issues that is most regularly debated in the media is, undoubtedly, the origin of Moscow’s right to the land within the boundaries of the capital as a constituent part of the Russian Federation. Moscow’s right to land is the cornerstone of which the city lays claim to its special status.

Historically, when defending their position in the dispute on Moscow’s right to land city officials usually refer to the law “On the status of the capital of the Russian Federation”, of April 15, 1993.

In line with Article 8 of that law, plots of land under buildings and other constructions or installations situated on the territory of Moscow, and properties housing the upper bodies of the legislative, executive and judicial authorities of the Russian Federation, the Prosecutor General’s Office, the Central Bank, the Pension Fund, are owned at the federal level.

High-placed Moscow officials insist that the list is exhaustive. But even if their interpretation of the law may sound convincing to a less sophisticated audience it has a number of serious drawbacks.

The main one being that the city officials conveniently ignore the more recent law – “On the delimitation of state land ownership.” None of the three grounds for securing a land title by a region stipulated in that law ever existed in relation to lands within the boundaries of the city of Moscow.

None of the list of land plots on the basis of which those plots can be delimited between the federal government and the city authorities has ever been agreed upon by the two sides.

Furthermore, it has been reported that such a list has never been drawn up. Nonetheless, City Hall’s stand on the issue was fully reflected in the law of the city of Moscow “On land use and construction in the city of Moscow”, of May 14, 2003.

Another much-talked-of problem is that Moscow’s land laws effectively restrict the right of property in land, which is at odds with the Constitution of the Russian Federation that proclaims the equality of property rights.

In truth, however, it transpires that state and municipal land ownership is possible in Moscow, while private ownership is outlawed. Despite a great number of lawsuits, harsh criticism from lawyers, Moscow continues to assert its absolute right to the ownership of land.

This has resulted in the emergence of an “exclusive” quasi-legal provision concerning payment for the right to enter into an agreement for the lease of a land plot under the ownership of the city of Moscow (Article 23 of the Moscow law “On land use and construction in the city of Moscow”), more widely known as “purchase of the tenant right”.

Neither the Land Code of Russia, nor any other federal law contains anything of the kind. Moreover, the provision is in conflict with Russia’s Civil Code, including Article 1, which enshrines the freedom of contract.

Of course, it is impossible to disagree with Moscow city officials who claim that the maximum land rental charge set by the federal law often fails to match the city land market. Nonetheless, by declaring war on “speculating in public wealth” the bureaucratic machine of the city has, in effect, become the main “speculator”.

The city government receives excellent support from Moscow’s legislators whose remarkable inactivity results in their failure to adopt transparent clear-cut rules for investors. Take, for instance, the procedure of registering a plot of land in the cadastral register.

In line with the federal law “On the state land cadastre” the list of documents to be submitted for registering a plot of land in the cadastral register must be formulated in a legal act by the regional authority. In Moscow there is no such act, and owing to the efforts of the municipal bodies the number of documents an applicant has to submit and the amount of permission needed verges on the absurd.

Such problems are common for Moscow. Before the 2003 Moscow law on land use and construction was adopted practically the entire city’s land legislation was based on mayoral and vice-mayoral decrees – by-laws that were far from effective instruments of land regulation in a megalopolis such as Moscow.

On the whole, looking at the situation in Moscow from the standpoint of a developer or an investor who is not really interested in the legal aspects of the land issue, the situation hardly seems cheerful. The system of distributing land plots through tenders is not working while examples of land plots being allocated on an non-competitive basis still exist.

In my opinion, the essence of that system itself is defective, because even if a tender is held the city administration still reserves the right to lobby the interests of a certain bidder.

Everyone knows about the recent tender for the right to redevelop the Rossia Hotel, where the winner was named on the basis of a design competition, i.e. not on the basis of facts, but on the basis of the aesthetic tastes of city officials.

I will not dwell here on the doubts regarding City Hall’s allegedly unbiased approach to the tender participants and their project designs, noting only that most of the invited experts were inclined to give preference to one of the designs that had not been included in the short list, and the outcome of the tender was predetermined by the officials.

It is also worth mentioning the so-called “one window” regime, of which much has been said in the media. In truth, that mechanism designed to ease the red-tape burden has not improved the situation one bit because the authorities have overlooked the most important link of the chain – the applicant himself. He is mostly interested in speeding up the procedure of obtaining all the necessary permits and documents. As a result of that innovation the circle of people who could speed up the procedure has been restricted, and the price of ‘acceleration’ has increased. It is possible to write endlessly about the traps awaiting investors involved in real estate development.

Results

As a result of the extreme bureaucratization and complete lack of transparency in the procedures for obtaining construction sites and securing permission for development, these days the most interesting and largest projects in Moscow are being implemented by a small pool of large companies.

Those companies secure the best plots and receive permission from the authorities much faster than all the others. Small developers and firms interested in building properties for themselves find it increasingly difficult to implement their projects in the city.

That is why many retail operators, and companies interested in the development of combined projects – e.g. office and warehouse facilities – have switched their attention towards the Moscow Region where land is cheaper and plots are available for sale, while a company’s ability to deal with the authorities is not as important as in the capital.

Quite often investors are raw materials producers who enter the market through affiliated development companies. This situation is one of the main characteristics of the Russian real estate market and differs greatly from the situation in developed countries where such investments are made for the most part by pension funds and insurance firms interested in real estate due to its low-risk factor.

In Russia the role of such companies remains insignificant and they are unable to compete with raw materials producers in terms of the size of investments.

Major western investors and developers are not very active in Russia either. The reasons for that are not only of a political nature. Without considerable administrative contacts many of them face serious problems in Russia.

But, being aware that the Russian market is highly attractively, many of them actively consider joint projects together with local partners. This brings about quite an interesting symbiosis. A Russian partner provides a land plot for construction and takes care of securing approval from the authorities.

The western partner contributes to the project by providing his understanding of future tenants’ needs and his experience of implementing similar projects abroad. His participation adds a prestigious brand to the project attracting international corporate clients, and of course, project financing at foreign bank rates is much cheaper than in Russia.

In conclusion, I would like to note that as of today, in fact, there is no land market in Moscow, while the legislation governing it is riddled with holes and discrepancies, which seriously impede a more active development of the real estate market in Moscow.