International Real Estate Market Analysis Lecture 6: Emergent Real Estate Markets

Structure of the Lecture Characteristics of emergent real estate markets Investing in emergent markets Examples of emergent real estate markets

Characteristics of emergent real estate markets Mature market : the wider the range of use and investment objectives satisfied, more flexible, more specialised and sophisticated the property professions, the better availability and accuracy of information the more open, and the higher the standardisation of rights and practices. An emergent market is less developed in respect to these factors and much less transparent than established markets.

Characteristics of emergent real estate markets The ability to cater for a wide range of use and investment needs is an important determinant of maturity. This is partly influenced by the business and financial environment of the country and the presence of highly developed capital and financial markets. It is also determined by the investment culture towards real estate instilled into these markets. Emergent markets are much more limited in the range of opportunities they provide, and are more inclined to focus on the symbolic nature of owning property.

Characteristics of emergent real estate markets The maturity of a market is also defined by its flexibility. This relates to the ability of users, investors and developers to respond to changing market conditions. Less mature markets are less able to respond quickly and fully to market information. Changes to modify the type and location of floorspace may be inhibited by tradition, limited perceptions of opportunities and a restrictive planning framework. The urban planning system plays an important role in a market as it strives to move to modern forms of market. activity. Question : WHY?

Characteristics of emergent real estate markets Mature and emergent markets also differ regarding the level of professionalism within the market, and the provision of market information. Emergent markets are less extensively professionalised and there may be a lack of specialist property education and no single body to regulate practices. In addition, an emergent market would have limited information flows. This information may be extensive but its reliability is questionable because it is inaccurate or subject to mis-interpretation.

Characteristics of emergent real estate markets The development of analytical skills and the level of research undertaken are generally still limited in emergent markets while the standardisation of market practices still has a long way to develop. Openness is restricted in some way, or was until fairly recently, in immature markets. The level of foreign involvement in the market represents its level of openness. Exchange controls and legislation that prohibits or constrains foreign ownership are characteristic of emergent markets.

Investing in emergent markets Reasons : Strong Economic Performance eg. Economic Growth for Hong Kong, Japan, Singapore and Malaysia > 6% whereas US-UK between 2-3% (period:1966-1991) High Returns such economies generates Diversification benefits Reluctances: Extra Risks such as increased exchange rate risk; greater exposure to political risk and greater tax uncertainty

Investing in emergent markets Areas of Enquiry Volatility Greater political instability and higher levels of inflation is likely to lead to greater fluctuations in exchange rates , thus locally volatile returns becomes more volatile. Informational efficiency Tax treatment of locals versus foreign investors Regulations of market entry and exit Factors relating to the quality and quantity of information dissemination

Investing in emergent markets Risks Investment Risk The volatility of returns Modern Portfolio Theory: investors should focus on the expected return and risk as a whole rather than isolation. Currency Risk Exchange rate volatility Political Risk Explicit barriers to capital flows, taxes, expropriation and exchange controls Institutional Risk Market maturity, size and liquidity , regulation and information)

Latin America Peru, Chile and Columbia are the bright spots in the region. Peru ranked 5th, Chile 7th and Columbia 8th among 13 emerging market economies around the world (Oxford Economics) Sao Paulo and Rio DeJanerio are most expensive office markets in LATAM (prime rental rates appro. 90 and 100 USD/sqm/month, respectively) The rest such as Mexico City, Lima, Bolivia, Panama, Uruguay, their governments and economies remain unstable, real estate activity is still remained.

Africa and Middle East GDP growth within Africa is 4% in 2014, 5% in 2015 (IMF). Middle East, affected by geopolitical economic growth (Arab Spring )-strong increase robust oil prices and incentives (taxes). African land considered available has changed hands, with profound implications for local people and the environment. 56-227 million hectares globally(with 60-70% of this in Africa), what is clear is a rapid transformation of landholding and agricultural systems has taken place in the past five to 10 years . (http://www.theguardian.com/global-development-professionals-network/2014/jan/23/land-deals-africa-farming-investment ). By 2100, it is projected that nearly 40% of the world’s population will live in Africa (http://content.knightfrank.com/research/155/documents/en/africa-report-2015-2802.pdf)

Asia Pasific Asia’s emerging economies hit 6.7% , above average of all emerging markets 4.9%. With labour cost rising in China, other developing economies in Southern Asia will see an increase in international real estate investment. Investments in India such as Finance High tech city in Ahmedabad and Smart city Kochi attracts investors. Social, economic reforms in China for secondary cities are expected to positively transform the overall business and investment.