Russian real estate industry moves closer to Western standards

Real estate services in Russia are undergoing big changes as the national government implements massive reform, with the aim of making real estate transactions closer to Western standards of business conduct.

The reform is expected to take place when a package of bills is adopted, which will raise the state control over the activities of Russian real estate brokers and tighten liability for  illegal activities.

The Russian real estate services industry is very young – it has only been in existence since the mid-1990s. It features little competition (especially in the luxury real estate segment), a large number of unscrupulous real estate practitioners, and a lack of legal regulation of the market. Current Russian legislation does not establish an official definition of “real estate agent” and the scope of their activities.

The insufficient state control has resulted in the appearance of so-called “black brokers” – agents who do not guarantee the fulfillment of their obligations and are sometimes simple fraudsters.

However, much may change in the near future. In accordance with state plans, a new specialized law will officially establish a legal basis for the activities of real estate brokers in Russia. The new federal law, which is known as “On real estate activities”, is expected to come into force on Jan. 1, 2013. 

It will provide an impetus for further development of the Russian real estate services industry and limit the access of non-professionals and fraudsters in the market.

The government also plans to introduce compulsory licensing for all domestic brokers. Applicants will have to pass a special training course and a unified state exam. The practice of licensing was used in the 1990s, but it was abolished in 2001. This resulted in a significant increase of the number of real estate agencies in Russia.

According to sources close to the Russian government, in order to implement stricter control over domestic real estate brokers, a regulatory body like those in North America is required. It will have the ability to revoke licenses in the case of non-compliance of brokers’ activities with established state regulations and standards.

The government hopes that new laws will make the activities of brokers more specialized. Unlike Western countries, the majority of Russian real estate agents work in all segments of the market and have no specialization. Many brokers double-end, representing the interests of both the seller and the buyer.

Some brokers also provide legal services, but the Russian government is considering banning this practice in the proposed law.

Julia Kondratenko, general director of Berger & Partners, a Russian law firm specializing in real estate transactions, says, “There is a need to impose a ban on the provision of legal services by Russian real estate brokers to their customers. 

As in the Western countries, Russian real estate brokers should not act as lawyers and, conversely, lawyers should not provide any services in the domestic real estate market. It should be prohibited by the new law.”

In addition to plans to make the activities of Russian real estate brokers more specialized, the government plans to create conditions to boost their skill level, through the establishment of specialized universities and courses.

Ina Budnikova, head of the Moscow real estate agency Domostroy, one of Russia’s brokerages, says there are currently no universities in Russia that specialize in training real estate agents. Many brokerages are forced to hire people who have no experience.

Anna Lupasco, vice-president of the Moscow Association of Realtors (MAR), says up to 50 per cent of real estate transactions in Moscow are closed with the participation of unregistered brokers, 25 per cent of whom are “black brokers”. The same situation is observed in the majority of Russian regions.

One proposal to combat unscrupulous real estate agents might be the introduction of a guarantee for the transaction, in the form of the broker’s own funds as a means of security for the transaction.

All of the planned state measures are expected to make the Russian real estate industry more transparent and will contribute to its consolidation. According to some Russian analysts, during the next several years many small domestic real estate agencies will withdraw from the market as they are acquired by larger players.

This could also have negative consequences, as it will result in even less competition in the market.