Fundamentals of Emerging Real Estate Markets

Emerging markets in Africa, South America and Asia represent some of the riskiest real estate investments in the world, however, they can also present the potential for opportunity. Buying property, developing projects, securing funding and finding investors takes a strong constitution. Select global investors are jumping in where they see stability and manageable risks. Before rolling the dice, they assess many factors that both drive and undermine newly emerging economies.

How do they decide if the rewards will outweigh the risks? In general, regions on the cusp of development share certain common characteristics that make them more attractive than others. Their economies, demographic trends and political climates indicate  they are primed for rapid and sustained growth. These factors include:

Economic Growth

A promising emerging economy may experience several years of solid and stable growth in gross domesticproduct (GDP). For instance, both China and Brazil, widely considered to be “emerging real estate markets,” have had particularly impressive gains in GDP over the last decade.

Investment Returns

Substantially better rates of return are needed to draw foreign direct investment (FDI) out of developed countries and into emerging economies.

Population Trends

Emerging market populations can grow two or three times faster than developed countries, with demographics heavily weighted toward the young. According to Euromonitor International, a London-based market research firm, about half the world’s population is under the age of 30. However, roughly 90 percent of them live in emerging markets. People under 30 are tomorrow’s workers and spenders, critical gears in economic growth.

Middle Class

A rising GDP and youthful population can often lead to the creation of a new consumer middle class, which further fuels the economy.

Urbanization

In developing countries, people are migrating to cities as economic opportunities dwindle in rural areas. Future-focused governments are investing in infrastructure, housing and urban planning to generate an attractive environment for FDI.

Inventory

As outside corporations move into regions with limited commercial property options, their preference for modern Western-style buildings and facilities creates development opportunities.

Potential Setbacks

Even when emerging markets appear promising, things can go wrong quickly. “There are significant issues to be considered,” says Howie Gelbtuch, principal, Greenwich Realty Advisors of New York City. “For example, Brazil’s economy is now in recession, Russia is being economically sanctioned and Africa is dealing with political instability and a health crisis.”

All these factors, and others, can exacerbate the risks of investing in emerging real estate markets. Developing countries are often battered by challenges that Western nations don’t typically grapple with, including:

Political Risk

At its worst, political upheaval can result in social turmoil and violence. Even when change occurs peacefully, policy changes can shift an economy’s future course. Investors look for stability and legal systems that support individual and corporate rights.

Health, Safety and Crime

Western corporations moving into frontier markets need to ensure their workers’ safety; similarly, if customers in these markets are under threat, business is disrupted. Recently, terrorism and disease have emerged as major concerns in certain regions. In other cases, crime and corruption contribute to the uncertainty and cost of doing business.

Property Rights and Market Transparency

Reliable market information may be difficult to obtain in emerging markets. Property rights may be nascent and ownership records, where they exist, may not be ccessible. Buyers lack the protection of title insurance, which is nonexistent in most of the developing world.

“In some parts of Africa homeowners spray-paint ‘not for sale’ on the front of their houses,” reports Gelbtuch. “Con artists claim they own properties and sell them to unsuspecting buyers. Or, actual owners may sell the same property repeatedly to different people.”

Property Preferences

Foreign investors tend to focus on commercial and industrial opportunities over residential real estate. The types of properties high on their list include:

Hotels

Emerging business centers need modern hotel accommodations. Worldwide franchises step into the void to provide space for business travelers,
tourist and transferred executives.

Older existing hotels in these markets tend to lack Western-style amenities like air conditioning, on-premise restaurants, covered parking and guest security. Major hotel chains bring these features and provide brand familiarity for Western visitors. Chains making inroads into emerging markets include Marriott International and Hilton Worldwide.

Retail

In developing markets, a growing middle class is eager to buy food, clothes and goods. Typically, a retail vacuum exists in these areas because, previously, the market was highly decentralized and local. International retailers are taking note and moving into urban centers to tap this growth.

Malls and supermarkets are proliferating to offer consumers comfortable and convenient shopping experiences. U.S. and European retailers like Walmart and French grocer Carrefour are building supermarkets in several nations or acquiring and expanding established retailers’ operations.

Office Space

When multinational corporations enter developing regions they look for modern, comfortable and secure office space. Developers in up-and-coming urban centers are meeting this demand by building and leasing new office buildings. In well-established lower-risk cities, international companies are acquiring and/or building their own space. Funding is also beginning to pour into some markets from real estate investment trusts and private equity groups.

Industrial Facilities

Giant multinational producers of pharmaceuticals, consumer goods and electronics are establishing facilities in the emerging markets they are entering and serving.

Agricultural Land

Foreign investment in emerging markets isn’t limited to structures. China and the Gulf States, for example, are acquiring farmland in Africa for food and biofuel production. “Land in China is being put to use in ways that produce a higher return than farming. Instead, China buys cheap but fertile farmland in Africa, lets up Chinese management and ships product back to China,” reports Gelbtuch.

Emerging markets offer high returns over the long term but may be a roller coaster until fully mature. Each market poses unique dynamics, challenges and niche opportunities. Investors who dig in to uncover and analyze long-term risks and returns, and plan accordingly for them, will do well.

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