Pension and sovereign wealth funds will in future play a significantly bigger role in building urban spaces in emerging economies, despite the associated regulatory risk, the head of a leading think tank has predicted.
Sony Kapoor, managing director at Re-Define, pointed towards India’s plans to amend construction regulation and allow industrial corridors as offering “very substantial opportunities” for investors willing to work closely with governments in emerging markets.
“We are seeing increasing three-way collaborations between experts in greenfield urban developments, governments and large long-term investors,” he said.
He said India was likely to be one of the countries that would take advantage of such cooperation because of its limited ability to fund projects on its own.
“Expect the private sector pension funds and sovereign wealth funds to play a much, much bigger role than has been the case historically in the construction of new urban spaces and greenfield investments in emerging economies,” Kapoor said.
“It’s massive regulatory uncertainty, it’s big challenges as it hasn’t been done in scale before – but it’s also where the biggest opportunities lie.”
Think tank Re-Define has previously been critical of the Norwegian Government Pension Fund Global for failing to invest more in EM countries and said the fund was “unacceptably exposed” to the demographic risks facing developed nations.
Singaporean sovereign fund GIC recently invested in a residential project in India, while APG has backed infrastructure in the country.
Kapoor was also critical of the property sector as a whole, noting the “very disturbing” fact real estate had been implicated in all of the large financial crises in history.
He also argued that the perception of the real estate sector – and now developers – were viewed would need to be on the mind of pension investors.
“Before it is too late, it is very important for large funds investing in real estate, particularly when it goes beyond commercial into housing, to take into account how damaging negative public perceptions can be – given the zeitgeist, given the problems of affordability, given the problems in cities such as London of public housing and housing for public sector workers,” Kapoor said.
“It is very important to take all of those into account because reputational risk can be very large, and the last thing we want is workers’ money going into pricing workers out of housing markets – imagine how bad that would look on the front page.”
Kapoor also suggested regulators should conduct stress tests for the possibility of a decline in real estate assets triggered by the retirement of the current generation of workers in developed economies – pointing to the volume of personal and pension wealth the generation had managed to accumulate in property.