Emerging markets are forging ahead with significantly increased transaction activity, in stark contrast to the more established investment targets, as Bob White reports
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 2008, 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 the same quarter, achieving a significant milestone.
Over the past year, direct property acquisitions in emerging markets have totaled $162bn (€110bn), 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 "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 $25bn 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 $2.6bn 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.
How the BRICs stack up
For the last several years, investors in developing markets have been abuzz with "BRIC" - the acronym that stands for Brazil, Russia, India and China - the four largest and most dynamic economies in the emerging world. The BRIC countries are targets for all types of investment with much of the focus on the property sector through both direct property acquisitions, development and indirect investment through minority stakes of prominent local developer/owner/operators. Activity in the BRIC markets for direct property acquisitions is up 54% compared to 43% in all emerging markets but trends vary among the broader group.
Since January 2007, Brazil has transacted over $1bn in commercial real estate in each quarter, consistently outpacing other regional competition such as Mexico, Chile and Argentina. Development sites in Brazil have been selling for record prices, as investors aim to build in dense areas. Recent purchases include Mirae's 14.8 acres in Sao Paulo (at $28m an acre) and McCafferty contracting to purchase 4.7 acres in the same city for $61m an acre. This last transaction is believed to be the highest price ever paid for land in Brazil.Foreign capital accounts for 57% of recent investment into Brazil. Large firms backed by US interests, such as Equity International's partner firms BR Malls and Bracor, have acquired many buildings in both large and small Brazilian markets over the past couple of years.
Other cross-border players active in the region include Brookfield (having invested $1.9bn in the country from 2007-08), Imocom Grupo from Portugal and Union Investments from Germany. Domestic buyers have also been active with firms like General Shopping Brasil chasing the emerging middle class and driving a booming retail market. Over the last five quarters there were more retail property sales in Brazil than Canada, $4.1bn to $3.6bn.
Russia is the second largest force behind BRIC and accounted for approximately $7.7bn of volume transacted in the last year. Russia's commercial property pool is comprised 80% of existing properties, quite different from India and China where 75% of transactions are for land. Offices have been the most desired property type and represented $3.5bn or 34% of all Russian property trades.
Forward purchase agreements, where a buyer makes a deal now for a building to be delivered at a later date, were more prevalent in Russia than any other BRIC market with 30% of all volume over the last five quarters. For example, in March 2008, Kan Am signed a forward purchase contract for nearly $900m or $823/ft2 for 4 offices in Moscow to be built in 2009.
Russia's unique socio-political environment calls for foreign buyers to form joint ventures with local partners to engage in business. Cross-border buyers, many with local partners, represented the biggest share of the Russian commercial real estate market, with $5.2bn or 52% of market activity over the last five quarters. Out of the BRIC nations, only Brazil had a higher proportion of cross-border investors.
India experienced a 210% increase in sales volume in Q1 2008 versus a year earlier making it the fastest growing transaction market globally. The strong growth is mainly driven by the developable land sales, which accounted for 75% of the total $6.7bn sales. Two significant transactions involving development sites are a 95-acre plot of land in Noida bought by the local developer BPTP Limited for $840m in March and an 18.6 acre primary lot sold by the Mumbai Metropolitan Region Development Authority for $696m in Aug 2007.
Although India's land market is considerably smaller compared to China, India's land is the most expensive among BRIC countries with an average of $234/ft2. Unlike China, a significant factor to consider when comparing land sales in the two nations is that Indian land is sold on a fee basis whereas all land in China is leasehold. Like China, property ownership in India is regulated and dominated by the domestic buyers who are responsible for 59% of capital invested in India. Global investors, on the other hand, are constrained in their ability to invest with local partners and have a much smaller presence, representing 16% of India's volume.
China is the main driving force in BRIC in terms of sales volume accounting for $102bn over the past 12 months, nearly $89bn or 89% of commercial property sales in China involved developable land rights. China accounted for half of all development sites transacted globally. It's notable that four of the five most significant billion-dollar development site transactions are all in second and third tier cities including Changsha's 194 acre of Delta River development right granted to two Chinese developers, Beijing North Star Co Ltd and Beijing Urban Development Group, for $1.2bn in July 2007.
Among BRIC countries, China has the least expensive industrial space with an average of $44/ft2 and the most expensive retail and apartment properties at $358/ft2 and $1m/unit respectively. China-based buyers (including Hong Kong) form the biggest buyer group responsible for 69% of China's total capital and make it the leading domestic-driven market in BRIC. At the same time, the global investors' market share in China is the smallest in the group, partly due to China's strict foreign investment policy making it difficult for foreigners to freely invest without a joint venture with a local company.
Bob White is president of Real Capital Analytics