New Horizons

In this, the first of a series of MIPIM Horizons articles giving you a clearer outlook on the issues at stake at the show, MIPIM magazines editor Paul Strohm gives an overview of developing countries’ hottest segments… as such, the future stars of MIPIM Horizons.

Uncertainty prevails in the conventional “safe” markets traditionally favoured by institutional investors. But emerging markets in growing economies present numerous opportunities that are yet to be fully exploited.

Furthermore, emerging markets’ sources of finance are not always governed by the same criteria as more established markets; where petrodollars are available, the western model of dependency on bank credit may be irrelevant. In many cases emerging markets are marching to the beat of a different drum.

Recent reports also show that office markets in emerging countries, including Russia’s, are faring rather better in capital growth terms than capital cities in the mature, established investment destinations. According to global real estate adviser DTZ in its European Quarterly for the first quarter of 2008, the Russian investment market is rapidly evolving and is one of the few European markets where yield compression is projected to continue.

The Urban Land Institute (ULI) Pricewaterhouse Coopers Emerging Trends Europe 2008, a survey of expert opinions, saw Moscow and Istanbul take the top slots among favoured investment destinations, knocking Paris and London into fifth and fifteenth places respectively.

And, while 2007 saw real estate investment growth fall to 4% in the USA according to Jones Lang LaSalle in its Global Real Estate Capital report, Brazil and Mexico combined saw investment in the sector grow 80% to $7bn. Although Mexico’s fortunes are heavily linked to those of the USA and it is vulnerable to a decline in its northerly neighbour, Brazil has promising prospects. Morgan Stanley forecasts $21.7 trillion in infrastructure spending across emerging markets over the next decade. While China and India are expected to account respectively for 43 per cent and 13 per cent, Russia will receive 10 per cent and Brazil, 5 per cent – the smallest share, but of a huge pot.

It is often the case that the hot opportunities to be found in emerging markets don’t fall into the traditional, comfortable “offices, shops and sheds” categories.

The development of a thriving tourist industry, often exploiting natural scenic and cultural resources, can be a catalyst and precursor for more far reaching economic development. Capital trickles down, perhaps initially enabling the development of luxury housing and associated retailing and eventually providing wherewithal for the development of middle- and low-income housing for a local population, who will also benefit in other ways as the tourist “dollar” circulates and multiplies. More conventional, commercial development may follow.

The presence of local wealth – perhaps in the form of petrodollars – merely serves to accelerate the process. Witness the Middle East. The rapid emergence of Dubai (Motor City, pictured) as a vast international destination that is now targeting multinational corporations and has ambitions to be an international financial centre, has followed this path. Abu Dhabi is not far behind and the benefits are spreading throughout the region as investment and development initiatives radiate outwards to other UAE countries, through Egypt to Morocco and beyond.

Building new resorts and hotels as part of the development of a tourist industry is familiar in Southern Europe and now it is Romania and Bulgaria’s turn to exploit more fully their natural advantages. Likewise other Black Sea countries, including Turkey and Russia, whose Krasnodar region has long been popular among Muscovites but has ambitions and potential among overseas investors and customers.

One thing these countries have in common is the need for outside participation. Even where petrodollars are plentiful, the hunger for progress means expertise may be in short supply. Times may be tough on traditional turf; but the grass certainly appears to be greener in emerging markets.

This is the first in a series of articles exclusive to the MIPIM Horizons newsletters. Don’t miss future editions to get the first insights into the following fast-growing regions:

• Focus on North Africa
• The Black Sea, a new Eldorado for hotel & tourism?
• Focus on Latin America
• Focus on Russia
• Focus on Gulf countries

Learn more at MIPIM Horizons: www.mipimhorizons.com

This post is provided by Global real estate research firm Real Capital Analytics.

With global real estate markets slowing to a crawl, investors are caught between high prices and low returns on core properties in developed markets and the risk and potential high returns of new development schemes in emerging markets.

Property investment in emerging markets is attracting so much capital the world over that some are wondering if there are sufficient opportunities to invest in it all. Already investors have had to expand into tertiary markets in China and secondary markets in India as prices in the major cities have steadily climbed. Others are looking for even better investment returns beyond the so-called BRIC countries—Brazil, Russia, India and China.

Investment in emerging markets continues to shine even though property transactions in the developed world have plunged. In Q1’08 emerging markets posted a 43% increase in transaction activity while the developed world witnessed a 54% drop in volume. Emerging markets accounted for nearly 25% of all property sales in Q1’08, achieving a significant milestone. Over the past twelve months, direct property acquisitions in emerging markets have totaled $162bn, but this is only the tip of the iceberg. Developable land represents about two-thirds of total acquisitions in emerging markets; however development costs are not included and this additional investment is certainly a multiple of the land price. In addition, a considerable amount of capital is also being used to acquire stakes of companies in emerging markets that have local real estate expertise and development experience.

China is the target destination for much of the real estate capital earmarked for emerging markets and was home for nearly two-thirds of the property acquisitions over the past year. Russia placed second, although Brazil and India are not far behind and both of these countries are experiencing a surge in transactions so far this year. The BRIC countries are capturing roughly 75% of emerging market property capital, but investors are increasingly looking beyond these four countries.

Fifty countries that the IMF has designated as “emerging” have seen significant investment activity over the past year, with 18 of these countries located in Europe. Taken as a whole, Eastern Europe recorded over $25b in property sales over the past year, making it the second largest region for emerging market property investors. Poland rivals Russia in terms of investment and Romania and the Czech Republic also boast robust activity. In Southern Europe, Turkey has attracted the attention of a number of investors. Africa witnessed $2.6b of major commercial property transactions with most occurring in South Africa. Malaysia has become the most active market in Southeast Asia although investor interest in Vietnam is also high. Emerging countries in Latin America have posted some of the largest gains in activity over the past year. Brazil and Mexico account for 90% of investment, but increasingly, investors are finding Peru, Argentina and Chile attractive alternatives as well.



©2008 Real Capital Analytics, Inc. All rights reserved. Data believed to be accurate but not guaranteed; subject to future revision; based on properties & portfolios $10m and greater. www.rcanalytics.com


Learn more at MIPIM Horizons: www.mipimhorizons.com