Closed-end Real Estate Investment Funds in Russia

General review

June, 2005

Closed-end Real Estate Investment Fund (CEREIF) is trust managed by Management Company and doesn’t represent a legal entity. Assets of such vehicle are effectively in mutual ownership of unit holders. CEREIF is tax transparent structure[1]. At the same time, CEREIF are legally prohibited to use financial leverage in their investments and subject to strict regulation and control by government agencies

The Closed-end structure presumes that Management Company doesn’t have to redeem the Units from the Unit holders; however, the Secondary market for CEREIFs’ Units exists on Over-the-Counter market, as well as on organized stock exchange. The CEREIF is the Limited life structure.


1. The legal Framework

CEREIF are subject to strict state regulation. The legal framework is determined by following Federal Laws and Decisions:

1. Federal Law No 156-FZ of November 29, 2001 On investment funds/trusts

(with amendments and additions of June 29, 2004)

2. Decision of the Federal Commission of the Securities Market No 31/ps of August 14, 2002 on Approval of the Regulations for the Composition and Structure of the Assets of Joint-Stock Investment Funds and of the Assets of Share investment Funds (with Amendments and Additions of April 23, February18, 2004)

3. Decision of the Government of the Russian Federation No 564 of July 25, 2002 on the Model Rules of Trust Management of a Closed Unit Investment Fund

4. Decision of the Federal Commission of the Securities Market No 03-41/ps of October 22, 2003 on the Reporting of the Joint-Stock Investment Fund and the Reporting of the Management Company of the Unit Investment Fund

5. Decision of the Federal Commission of the Securities Market No 15/ps of April 27, 2002 in the Minimal Value of Property Making up a Share Investment Fund upon the Attaining of Which the Share Investment Fund is Considered Established 


2. The operational environment of the CEREIF 

Fig. 1. Operational environment of the CEREIF

The Federal Commission of Securities Markets is a state agency, which license and controls a Management Company, Custody and Registrar. A Management company is obliged to register a Fund Charter upon creation of the CEREIF in the Federal Commission of Securities Markets.

A Management company actually manages the assets held in trust.

A Custody holds fund’s assets, controls the legality of a Management company operations. All transactions with CEREIF’s assets are subject to a Custody approval.

A Registrar maintains Unit Holders’ register.

An Auditor execute annual audit of CEREIF’s operations.

An External Valuer provides independent appraisal of CEREIF assets for calculation of Net Asset Value (NAV). According to the law the portfolio has to be valued at least annually, and at each acquisition or disposition transaction. A Valuer has to be licensed by the Federal agency for management of federal property. A Valuer can’t be affiliated to a Management Company, Custody and Auditor of CEREIF.

First CEREIF was created in 2003. Since that time the CEREIF experienced remarkable growth. Currently there’s more then 50 CEREIF with total NAV reaching over 9 billion RUR (~280 millions US Dollars). The major share of their assets is invested in residential development projects. However there are several rental (or current yield) funds that invest their assets in income producing properties.

Fig. 2. Net Asset Value of Closed-end Real Estate Investment Funds as at 20th of June 2005, RUR



3. The main problems of slow development of CEREITs.

However, CEREIFs don’t play a sufficient role in commercial real estate investment market yet, what can be explained by several factors, such as undercapitalization, legal contradiction and prohibition of gearing.

  • Undercapitalization

First funds were created mostly for “educational” reasons, when management companies were just breaking in this field. So funds’ size was marginal to mitigate the risks inherent in new vehicle. Also unfamiliarity of investors with such product inhibited raising of funds by asset management companies.

Undercapitalization of such funds prohibited CEREIFs from investment in commercial real estate. Here we can consider a simple example. The market value of small (4 000 sqm) class A office building in Moscow is around 600 millions RUR (20 millions US dollars). Currently only 2 CEREIF has NAV, which is over this amount.

Fig.3.  Distribution of Closed-end Real Estate Investment Funds by Net Asset Value, as at 20th of April 2005


  • Legal contradictions

Another issue, which inhibits development of CEREIF, is immaturity of legal framework. So far the key issues were taxation. There is no direct regulation of procedure of Property tax and VAT payment yet. On the one hand, the CEREIF is not a legal body, so it is not subject to taxation. On the other hand, the CEREIF is mutual property held in trust by Management Company. The unitholders are obliged to pay a Property tax and VAT on CEREIF’s operations according to its share of ownership. However this situation is complicated by the fact that individual investors and corporations are subject to different tax rates. So for taxation reasons it would be reasonable to have a separate register for private and corporate unit holders. Currently the working group led by League of Management Companies of Russia initiates the Tax Code amendments. The general idea is to make a Management Company a tax agent of unitholders, so taxes will be paid by Management Company (instead of tax payment by every single unit holder) at the expense of CEREIF’s assets. Also according to proposed scheme common tax rate should be applied on CEREIF regardless classes of unitholders.

  • Prohibition of gearing in CEREIF

Gearing is legally prohibited for CEREIF. The major intent of such restriction was to protect the unit holders from financial risk, which can be imposed on them by reckless fund managers. However such ban constrains the ability of return enhancement, and could make investments via CEREIF in some cases less attractive comparing to direct property holding.

(In review the information of Colliers International has been use)



[1] There is no Income tax on the corporate level. Income tax on Dividends and Capital gain is paid only on Unit holders’ level.


Cost of investment units can be increase and decrease, results of investment in the past do not determine incomes in future, the State does not guarantee profitableness of investments in share investment funds. Before to buy investment unit, it is necessary to familiarize attentively with rules of trust management of unit investment fund.


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