Shayla Walmsley investigates whether pension funds are truly ready to invest beyond the BRICS.
Cube Capital's announcement that it is raising capital for a $150m (€119.4m) fund targeting real estate assets in Myanmar, Mongolia and Vietnam reflects two realisations. The first is that there exist emerging real estate markets beyond BRICs - which, as economist Nouriel Roubini recently pointed out, have only partially decoupled. The second is the growing perception among some investors that formerly deal-breaking risks can be managed.
Even some cautious local authority pension schemes have not ruled out frontier markets altogether. The £1bn (€1.2bn) Clwyd local authority pension fund, for example, in February tendered a frontier market mandate, although focused on equities.
Market inefficiencies create opportunities. Understand them and, as Harvard Business School's Nicolas Retsinas has pointed out, you can capitalise on the difference between perceived risk and mitigated real risk.
The problem is that mediating risk in frontier markets is likely to mean taking on additional counterparty risk because the only route to real estate is either indirectly or via a joint venture. That is one of the issues raised recently by Suphin Mechuchep, managing director of JLL in Thailand, who pointed out that existing real estate laws have a typically been designed to protect local players. For international investors in Asian markets, only Malaysia, Singapore and Vietnam allow foreign ownership, and of those, only Vietnam really qualifies as a frontier market.
How joint ventures are conducted is one of the 'softer' issues often overlooked in risk assessments. Seth Freeman, chief executive at US emerging market fund manager EM Capital Management, is critical of what he sees as a naïve approach to relationship-building in frontier markets. "It takes a commitment of time and repeated contacts to establish and nurture that level of relationship," he says. "It isn't purely transactional. It is the opposite of most Westerners' training and experience."
Cube Capital intends to mitigate risks associated with frontier markets by diversifying exposure, requiring co-investment from local partners and specifying exit strategies, such as convertible debt, in advance. The specific catalysts are market-specific. Reform has driven appetite for Myanmar. In Mongolia, it is the anticipated 10-year, resource-led J-curve. In Vietnam, "a distressed point in the cycle is always a good time to invest", says Cube Capital CIO Tom Holland.
The big risk, of course, is that frontier market investment is a bet on future growth. The Cube fund reflects concern over Europe as much as appetite for inefficient frontier markets. "The world is running on fear," says Holland. "There's a lot of cash in the market, but people are waiting for the crash in Europe, which means larger institutions will be even slower to come to this kind of opportunity. If Europe muddles through for another three or four years, they will be looking for frontier markets for real growth. If Europe crashes, funds will go to Europe, and that will delay the attractiveness of frontier markets."
In the meantime, global private market real estate investor Partners Group is looking at both other property types with less liquid exit markets in the BRIC economies and at potential investments in frontier markets. "At a recent meeting on Asia-Pacific markets, the head of our Singapore team asked provocatively: 'Should we invest in Myanmar?' We all knew the answer - it will probably be many years before we will invest the first dollar in that market," says co-head of private real estate Claude Angeloz.
There is nothing quite like an absence of growth elsewhere to encourage a belief that perhaps the risks that recently appeared unmitigable are in fact not so risky. Yet they are. Myanmar didn't become Germany when its ruling junta released an opposition leader from house arrest.
"The long and the short of it is that there are fundamental criteria that are not met in many of these markets for us as international institutional investors," says Angeloz, "including title, credible land registries and developed lending markets".