You may have looked at Vietnam but what about Nigeria, Egypt, the Phillipines or Bangladesh? Their impressive statistics suggest that they will soon be forces to be reckoned with, as John Forbes and Yael Selfin explain
With the immediate issues of the liquidity crisis and stumbling real estate markets, it is understandable that investors are focusing on short-term issues. However, the world is also in the early stages of a major shift in the balance of macro-economic power.
In March 2006 PricewaterhouseCoopers published the report ‘The World in 2050'. The report presented the findings of macro-economic projections to 2050. The PwC macro-economic model projects growth to 2050 on two bases, market exchange rates (MER) and purchasing power parity (PPP).
This highlighted the rapid growth and increasing global significance of what we called the ‘E7' emerging economies: the BRIC economies of Brazil, Russia, India and China, plus Mexico, Indonesia and Turkey. The global economic picture in 2050 will look very different from today. The established G7 economies are already seeing a shift of their traditional economic power to the E7.
In March this year, PwC published an update to the report, ‘Beyond the BRICs: A broader look at emerging market growth prospects'. This updated our economic growth projections to take into account the latest available data and also extended the analysis to include 13 other emerging economies. Added to the 17 largest economies considered in our earlier report, this new ‘PwC 30' grouping of countries accounts for around 85% of world economic output.
Some of the highlighted projections of this latest analysis are:
• By 2050, the E7 emerging economies will be around 50% larger than the current G7 (US, Japan, Germany, UK, France, Italy and Canada)
• China is expected to overtake the US as the largest economy in around 2025
• India has the potential to nearly catch up with the US by 2050
• Brazil could overtake Japan
• Turkey could be the size of Italy
• Russia, Indonesia and Mexico could all be larger economies than Germany, France or the United Kingdom
• The projected list of fastest growing economies to 2050 is headed by Vietnam, and the top 10 includes Nigeria, Philippines, Egypt and Bangladesh
It is apparent from the current report that the trends identified in the 2006 report are occurring more rapidly than originally anticipated. The Chinese and Indian economies have grown more rapidly in the last two years than suggested by the original model and the Chinese investment rate has significantly exceeded the earlier estimates. Relative productivity growth has also been faster than estimated. All this suggests significantly greater growth for these two economies over the next ten years. As a result, China is now expected to catch the US much earlier than previously anticipated and India is also expected achieve close to the size of the US economy, whereas the earlier model suggested that by 2050 it would be 60% of the US.
For the real estate industry, what is more directly relevant than broad country level GDP growth is the economic development of major cities, driven by the rise of the middle class consumer. From China's provinces to parts of Latin America and the markets on the European Union's horizon, disposable incomes are increasing, aspirations are westernising and consumer credit is becoming available. While not exclusively urban, the emerging market middle class consumer is more likely than not to be living in a city.
The strong economic growth of emerging market cities across the world, absorbing continuing internal migration from the countryside, is resulting in a steadily growing urban pool of potential buyers of international companies' goods and services. The clustering of new consumers in relatively densely populated urban areas makes selling to them more convenient for businesses. But, in addition to the logistical advantage of urbanisation, the different speeds with which various sections of the emerging market city populations are raising their incomes provides diverse opportunities based on which income bracket is targeted.
Much of the focus of attention of the corporate world over the past five years has been on China and, in particular, among China's cities, on Shanghai. And with reason: galloping overall Chinese economic growth, even faster development of the coastal areas, and the confirmation of Shanghai as the country's commercial centre of gravity have all contributed to the emergence of a substantial - and lucrative - cohort of consumers in that city.
A PwC report last year, ‘Consumer markets beyond Shanghai', looked at the potential for other growth cities. This is based on the output of a city wealth quantitative model that estimates the number of households within different income brackets in a given geographic location and produces forecasts of future consumption capacity for these locations. The model is based on income distribution, demographic and macro-economic data for emerging markets across the world.
Certain emerging market cities have the scale to be able one day to rival the likes of New York and Tokyo as hubs of consumption measured by the absolute value of sales. While Shanghai is certainly one of such future centres, Mexico City, Moscow and São Paolo are equally entitled to the attention. In fact, based on current income levels and distributions, those three cities could be more lucrative markets for international consumer goods and services companies than the oft-celebrated trailblazer of the new China.
Other cities are also showing spectacular short term growth. Over the three years to 2010, Istanbul is forecast to solidify its position as a global consumer city, emerging as the one with the highest number of households earning more than US$15,000 (€10,200) among all the emerging market cities covered in the report. Belgrade is expected to more than double the size of its middle class within three years, while Buenos Aires could see the number of its middle-class households grow by just over 50%.
The growth of middle-class spending power has an obvious impact on retail and residential real estate. However, booming cities create opportunities for all real estate asset types. Are real estate investors taking this on board? The evidence suggests that they are already chasing GDP growth and this is resulting in an increased interest in emerging markets even in the very short-term. This is immediately apparent from the ‘Emerging Trends' reports for Europe and Asia Pacific produced jointly by PricewaterhouseCoopers and the Urban Land Institute.
The European report covers 27 markets in countries throughout Europe. It is based on detailed face-to-face interviews with over 200 of the industry's leading authorities conducted in 22 countries by 50 PricewaterhouseCoopers partners and directors along with ULI researchers. This is combined with survey responses to give a consensus view of nearly 500 respondents.
In the European report, Moscow and Istanbul top the table for returns. Many interviewees stated: "Moscow is booming." The top-ranked city is "top for rental growth". Out of all 27 cities, Moscow ranks first or second in buy recommendations for all major property types, with retail being investors' main interest area. One interviewee agrees: "The big story continues to be retail - the market has huge depth and breadth." New opportunities are often followed by new challenges. "It is not easy to get access to sites; without local partners, market entry is difficult." While another executive stated, "There are huge opportunities, but bigger risks." Survey participants agree, rating Moscow the riskiest city out of all 27.
The chase for yield and performance will lead many new investors into Turkey's real estate market. One interviewee summarises the situation by stating: "Turkey is the India of Europe, with a huge population, fantastic GDP growth, favourable economic fundamentals…" As with Moscow, survey participants fear risk in Istanbul, ranking it the fifth-riskiest city in Europe. In spite of the risk, the city offers higher buy ratings in 2008 than in 2007 for all five major property sectors, according to the ‘Emerging Trends' survey.
The story for Asia is similar, with increasing interest in China and India, but also in Vietnam, which, as mentioned above, also tops the league table for GDP growth. In another PwC report, ‘Balancing risk & reward - The PwC EM20 index', Vietnam also comes out as the highest ranked emerging market for inbound investment in manufacturing.Although the returns for emerging markets are very attractive, investors also need to be mindful of the risks, at least in the short-term.
Transparency in the markets is less than for more developed markets, although according to the Jones Lang LaSalle ‘Real Estate Transparency Index', transparency in real estate markets is improving across the board. Although Vietnam has improved significantly, it still props up the fourth division of the transparency index, only just above the opaque countries.
Regulatory risks abound. Land title regulations are often less clear than in more developed markets, and may be subject to vagaries of local interpretation. Foreign ownership rules may be restrictive and are often a political hot potato, as has been seen recently in Turkey. Debt financing may be restricted by regulation. Tax rules and their interpretation may not be as stable as in other markets and the availability of double tax treaties is generally less.
Because of the lack of suitable investment quality property to acquire, there is a greater pressure for investors to look to development. This also opens up exposure to the broader business risks associated with development in a booming but unsophisticated market.
As one interviewee in the Asia Pacific Emerging Trends report commented in respect of India, "All these guys are investment bankers, and they haven't done many deals in India. The challenge they face is in having the ability to deliver—not just on their own behalf, but from joint venture partners. We did an analysis of the top Indian developer groups, calculating how much space they have developed in their entire existence compared to how much they are proposing over the next five to seven years. We [found] that the relationship between what they have done to date and what they are proposing is, on average, between ten and 40 times. Those are scary numbers."
For investors who are prepared to come to terms with the short term risks and take a longer view, emerging markets represent a very significant growth opportunity. Many of the countries may already be on the investors' radar. Others, such as Nigeria and Egypt, probably are not.