Commercial mortgage in Russia

Recommendation points

• Commercial mortgage – a tool for purchasing real estate for business
• Legal aspects of commercial mortgage
• The modern market for business mortgages in Russia
• What the future holds for us

Commercial mortgage – a tool for purchasing real estate for business

Commercial mortgage is a loan that is issued by banks for the purchase of non-residential premises: retail space, warehouses, offices and others..

Like residential, commercial mortgages are provided against the security of the acquired real estate. However, the specificity of this market is that this type of loan has rather short maturities and relatively high interest rates. The term for granting a mortgage loan for the purchase of commercial real estate, as a rule, can be a maximum of 10-12 years, but most often banks issue money for 5-7 years. Also, a potential borrower will have to make an initial payment of 30 to 40% of the total value of the property.

Of course, the bank carefully checks its clients, the minimum requirements for obtaining a commercial mortgage are a profitable balance and a period of work in the market from 1 year.

The advantages of this method of purchasing commercial real estate for business are that the object is used directly for profit (renting out premises, using for retail trade, providing services, etc.), so the real estate pays for itself.

Legal aspects of commercial mortgage

Currently, Federal legislation does not provide for registration of ownership of commercial real estate encumbered with a mortgage. Therefore, the mortgage agreement in this case is concluded on the basis of the general rules of the Civil Code of the Russian Federation on the conclusion of agreements, taking into account the provisions of the Federal Law “On Mortgages (Real Estate Pledges)” dated 16.07.1998 No. 102-FZ. Note that the right to use non-residential premises as collateral was established by this law only in 2009..

According to the requirements of Art. 9 of the Federal Law No. 102 in the mortgage agreement must indicate the subject of the mortgage, its estimated value, the essence, the term and amount of the fulfillment of the obligation, which is secured by the mortgage.

There is also a very important point here. The current legislation does not allow mortgaging real estate until the moment of its purchase. Therefore, the real estate must first be purchased (draw up a purchase and sale agreement), after which it can be used as collateral for obtaining a loan from the bank.

The modern market for business mortgages in Russia

Many experts believe that commercial mortgage lending in our country is still a hostage of banks’ reinsurance: even the post-crisis decline in interest rates has not yet become an incentive to increase the volume of loans issued.

In general, the market is still the same main players – Sberbank, VTB 24 and RosEvroBank. Nevertheless, the lending policy after the crisis has undergone changes: the requirements of banks to borrowers have seriously tightened. Which, of course, does not contribute to the growth in the number of issued loans secured by commercial real estate.

Dave Knerler. Bank. 2002

Despite everything, commercial mortgages in Russia are beginning to gradually recover. Rates are now at the level of 12-16%, rates are decreasing because no one will simply take a loan at a higher percentage. The down payment is 20-40%. The most favorable conditions in Sberbank interest rate 8-16% per annum, installment 20%, maximum loan term 10 years. And VTB 24 has the most stringent conditions – 18-26% and 50% down payment.

Interest rates in most banks have fallen by almost 2 times over the past year and have almost reached the pre-crisis level. However, stricter requirements and a difficult registration procedure still scare off potential customers..

When issuing a commercial mortgage, Russian banks may require a collateral in excess of the amount provided by 2, and sometimes 3 times as security for the loan. In addition, credit institutions, according to the terms of the agreement, fully control the spending of the funds received by the borrower. At the same time, domestic banks want to attract clients with a real estate acquisition budget of over $ 10 million, but they themselves are not ready to soften their conditions yet..

However, since the beginning of 2011, there has been a slight increase in the demand from SMEs for commercial mortgages. At the same time, about half of all requests are associated with the desire to buy an office, 30% – retail space. The thing is that it is practically impossible for Russian entrepreneurs to purchase a property with their own funds. Moreover, it is not possible to obtain a license for some types of activities if the enterprise does not have the appropriate premises in its ownership. Consequently, for them, a mortgage is the only available tool for continuing their business, which confirms the need for further development of commercial mortgage.

What the future holds for us

Obviously, since there is a demand for commercial real estate, including its purchase under a mortgage, which will gradually grow, as the business is gaining momentum after the crisis, then commercial mortgage becomes one of the promising areas of the Russian mortgage lending market. It is also obvious that the development of the country’s economy and the improvement of the business climate in general depend on the availability and mass of these loans.

It is very difficult to make any predictions about the development of commercial mortgage at present..

However, even with such an obvious need for real estate among domestic entrepreneurs, the future of commercial mortgages in Russia is clearly uncertain. Many experts agree that it is very difficult to make any predictions about the development of commercial mortgages at this time. With a certain degree of confidence, we can only say that the demand for this product will grow, but how Russian credit institutions will react is completely unpredictable..

Domestic bankers do not like to take risks and are afraid of difficult transactions, as a rule, banks do not seek to throw money away, but wait for solvent clients, offering them standard conditions. In our country, commercial mortgages are still the lot of large companies that have a certain financial stability and guarantees, smaller enterprises are often simply ignored by banks. If banks no longer trust business, this mortgage sector will stand still for a long time..

Western banks are more active in this area, they trust small and medium-sized businesses more. This is due to the fact that Western companies declare all their incomes officially, therefore it is much easier for credit organizations to obtain reliable information about the financial situation of a potential borrower. In this case, the transparency of doing business is the key to success, and this should be striven for in Russia as well..

It should also be noted that the development of the commercial mortgage market for non-residential premises is hampered by the fact that credit programs offered by domestic banks are often short-term. This is primarily due to the lack of long-term financial resources of banks. Therefore, for the development of the market, it is necessary for banks to actively raise funds from the capital market. This will help to gradually solve this problem, as well as simplify obtaining a loan and become an incentive for this sector of commercial lending..