Belarus has never been in the news as often as in 2020, which might serve as evidence that the country is currently facing challenging times. The COVID-19 pandemic has been a catalyst and revealed problems in the still widely unreformed Belarusian economy, while the political crisis hit the country hard. With the economy slowing down, demand for commercial real estate has dropped, and investors have put most of their plans on hold and have been monitoring the situation carefully, awaiting further developments.
This applies not only to foreign but also to local investors, so that the number of transactions involving real estate has been at a multi-year-low during recent months. Purchase prices and rental rates have declined for every type of real estate across the country, preserving the huge differences between the city of Minsk, some regions close to Minsk, and the rest of the country. However, the impact on prices has not been as significant as one would expect.
Looking at projected or ongoing construction, financing for construction projects – always a challenge, very often leading to different owners for each floor of a building – has become even more difficult, as banks have restricted their lending activities. Nevertheless, construction is continuing in those projects which have already started, for several reasons.
First of all, under Belarusian law, acquiring ownership of a land plot for construction is allowed only in certain cases. As a rule, land plots are allocated by the state on the basis of long-term rental agreements. These agreements are concluded after an auction at which the right to conclude an agreement and the right to use the land plot is awarded to the highest bidder. Since this process can involve multiple uncertainties, in practice most land plots for commercial real estate construction are granted on the basis of investment agreements. In an investment agreement the competent authority grants a land plot and the investor undertakes to invest and to build on that land plot.
Second, investment agreements contain very strict rules regarding the timeframe for completion of the construction project. In principle it is possible to extend the term of an investment agreement, but this is very burdensome, since the amendment requires that the entire procedure for conclusion of the agreement be repeated. In any event, there is no guarantee that the term will be prolonged, and investment agreements contain substantial penalties in the case of delays. In extreme cases the right to use the land plot can be withdrawn. Indeed, the authorities have made use of this option several times, leaving investors with huge losses.
With all this in mind, investors and developers try everything in order to comply with the terms for continuing construction, even in these uncertain times, using any funding available. Of course, this will simply shift problems to a later stage, and it leads to an increasing amount of unfinished construction in the future since available funding – while allowing developers to continue for several months now – might well be insufficient to finish the building and put it into operation.
Tenants are presented with ever-greater choices, since many projects have been finished recently and many commercial premises are currently empty. As a rule, however, there is little movement since relocation to new premises involves expenses, which must be calculated against possible savings.
For many tenants of state-owned properties, rental rates were lowered by decree, initially for several months, and now for a period of two years, as a reaction to the COVID-19 pandemic. Many private lessors achieved a similar result by way of negotiation, and there is also a tendency in the market to switch to private tenants since they are more flexible, it is easier to negotiate agreements with them, and the standard of facilities is usually higher. The impact of the possible relocation of IT companies is not clearly visible in the market. The retail sector – and in particular smaller retail spaces in shopping malls – and the catering sector have been hit harder than the office market.
In the near future no significant change is expected since the Belarusian market works only under limited “market conditions.” The volume of transactions with or in connection with distressed assets is expected to increase and development of property in prime locations by upgrading them to a higher standard will be another challenge.
By Alexander Liessem, Partner, bnt