Informal Economy Reports

RUSSIAN FEDERATION: Experience of the Russian Federation in Evaluating Transactions of Individuals, Related to Acquisition of Real Estate Abroad

Introduction

The acquisition of real estate abroad by Russian households has significantly increased due to the development of foreign economic relations, the growth of income of some particular social groups, the elimination of barriers to cross-border flows of capital, increasing mobility of the population due to the development of transportation infrastructure and decrease of psychological barriers. Investment in the real estate abroad is now viewed not only from the perspective of individual consumption, but also as a profitable form of capital investment. Over the past decade, the volume of investment in real estate abroad has risen by almost 4 times, accounting for more than 10% of the total volume of Russia`s direct investment abroad. In terms of external sector statistics quality, accounting for such transactions is a challenge for compliers due to lack of directly reported data from households, which are available, for example, from enterprises` reports.

Scope, Methodology, Compilation Methods and Data Sources

The applicable tools recommended by international methodology to measure transactions of households with real estate abroad, are:

• Banks’s reports on individuals` transactions related to the purchase and selling of real estate;
• Households surveys;
• Models using administrative and other data sources as well as expert assessments;

All three data sources are used in the Russian practice of Balance of Payments (BoP) and International Investment Position (IIP) compilation.

Reports of all operating banks are collected quarterly. These data include the number of transactions and gross volume of transfers of individuals abroad for real estate purchase. That includes both transactions that require opening a banking account and those that do not include transactions that are conducted via money transfers systems [1]. At the same time, the indicators are broken down by counterpart economies, sectors and by currency of payment. Transaction purpose is determined on the basis of the documents submitted by an individual to the bank. Usually it is a contract for purchase of real estate ownership rights; besides, it can be a contract for the acquisition of real estate ownership through equity investments or share contributions. Taking part in timeshares also refers to this category of transactions. This source of information has the following disadvantages:

• Mixed payments: transactions that involve both – payments for real estate and amounts of agents` and lawyers’ fees. In this case, the reporting institutions encounter difficulties, allocating the exact amount to the value of the purchased property.
• Payments in advance may not result in the future purchase of the property, and could be returned if the deal is cancelled.
• An individual can transfer funds from a banking account in a Russian bank to a banking account in a foreign bank, and then carry out the deal of purchasing real estate. Full information concerning the final purpose of such operations is not clear as individuals have to report only the fact their account presence in a foreign bank for tax purposes. After that, the individuals are able to carry out these transactions with no legal restrictions. That is the reason why the reporting bank cannot predict future flows of funds, which might as well be used to purchase real estate.
• When making a transfer via money transfer systems individuals submit neither the information on the purpose of the transaction, nor any contracts on the purchase of real estate to the banks.

Given the above mentioned reasons, the Bank of Russia with the participation of large banks and the members of money transfers systems conduct a survey of individuals about international money transfers on a semi-annual basis. The main goal of this survey is to determine the structure of remittances and obtain more information about the money transfer counterparties to develop the methodological approach to the compilation of BoP indicators. The survey is carried out on a voluntary basis and is focused on the resident and non-resident individuals, who carry out cross-border money operations. Each survey is based on the manual compilation of reporting forms by the individuals themselves or with the help of staff in the offices of banks. The survey periodicity (the first and the third quarter of the year) was chosen in order to obtain the most representative data about transactions, taking into consideration the seasonality of the remittances. The survey is conducted within the five working days in the middle of the quarters.

The questionnaire model includes items of the following categories: remittance direction, individual resident status, transfer purpose, currency, transfer amount, counterparty countries, duration of payment system usage.

Based upon the information received, the share of the operations related to real estate acquisition by individuals abroad in the total amount of remittances is defined.

Data, which is based on reporting bank’s financial statements together with all necessary information from the results of the survey conducted among the payment system operators, is used for to reflect the BoP transactions with real estate abroad. The indicators are formed on the balance basis as the difference between funds, which are transferred in order to purchase real estate abroad, and the funds received from the sale of real estate abroad.

The import of services, related to purchasing real estate abroad – such as legal services, attorney’s fees and realtors fees, are assessed (evaluated, estimated) by experts. The amount of total remittances is reduced by the amount of services import.

They are included in the BoP item – “Direct investments from Russia/Equity”

In the IIP compilation process there is a problem of accounting for accumulated reserves. Changes in stocks are caused by, the current period operations, from the submitted reports, together with other factors, including:

• exchange and market revaluations associated with the real estate price changes in different economies
• other changes related to the assets retirement (the change of residence status)

In order to estimate the position of assets in case of real estate, the Bank of Russia has developed a model based on the expert evaluation.

The total sum of stocks at the end of the reporting period is calculated as the sum of the accumulated value of investments in the real estate abroad at the beginning of reporting period and the sum of the current period BoP operations, less the estimated amount of other changes in real estate abroad.

Other estimated changes are evaluated, taking into consideration that the part of real estate abroad will be used by the individuals as a future permanent residence. The amount of migrants according to the data of the Russian Statistical Agency and the average cost of the real estate abroad is taken into consideration in the valuation process.

Monitoring of the Results, Current Issues and Conclusions

In order to improve the IIP compilation process connected to the real estate abroad, the Bank of Russia is currently elaborating the methodological approach to the revaluation process by taking into account the market value changes and dynamics of the real estate prices in different economies. At the moment, the revaluation is not made due to lack of reliable data.

Furthermore, the close collaboration with different countries in case of mirror statistics comparisons on remittances of individual related to the purchasing of real estate abroad. So, in 2017, on the basis of the Deutche Bundesbank’s expertise, within the international working group on elimination of cross-country discrepancies in Coordinated Direct Investment Survey, a number of meetings were held on “mirror statistics”. These meetings have given an opportunity to identify significant discrepancies in mirror data on individual investment in real estate abroad. As a result, the decision to carry out future collaboration has been made to identify the reasons of these discrepancies and the ways of their elimination. The Russian Federation has also begun to carry out such mirror comparisons on a regular basis with the EAEU members [2].