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Emerging Market Investment Strategy

Emerging Market Investment StrategyThe idea of an “emerging” talent is easy to grasp. It’s a rock band, MC or actor who is a fast rising star. Emerging property markets are a sticky notion. The fundamentals are the same, but the criteria are fluid. Is the location emerging because of industrial real estate no one lives in? Is it dependent upon tourism? Is it coming out of a political deep freeze in danger of snapping back? Are emerging markets the domain of Asia or is resource-rich, politically fraught Africa in that club? Is still wobbly South America in that category — a continent certainly far from “emerging” regarding social civilisations and which at one time had booming economies? Not quite as easy as pegging the next Superman as the next big thing.

Coming Out
Emerging markets are the Holy Grail for investors looking for fat returns. It can take years — it usually does — but anyone that purchased real estate in Sai Ying Pun the instant the MTR announced its expansion west is likely sitting on healthy capital gains now. Ditto those who bought a villa in Thailand 30 years ago. So how does an investor identify an emerging market? “In real estate terms, an emerging market is one in which the market is still growing and therefore lacks the economic drivers and organised elements of more developed markets,” explains Anuj Puri, chair and country head at Jones Lang LaSalle India. “Another aspect of emerging real estate markets is that their economies are just beginning to pick up in earnest, usually because of increased job creation by domestic and international companies who have begun seeing it as a favourable market to enter. Real estate prices do not tend to display major upward or downward fluctuations, since they are still at the trough level in such markets.”

Sotheby’s Vietnam International Realty General Director Michael Piro agrees. “I would define an emerging market as one that is characterised by accelerated economic growth and reform as well as a growing middle class. The growth in these areas is typically underpinned by profound social and political progression.”

That narrows the field considerably. Despite perception and its association with the “emergent” BRIC states India is not in that category. By Puri’s definition, “India is definitely not an emerging market, since it has been one of the destinations of choice by multinational players in the IT/ITeS, manufacturing and financial services sectors. Also, real estate — though still largely unorganised — has been a major industry in India for more than two decades now. Finally, many markets in India have peaked and troughed many times over, in accordance with a definite property cycle.”

Smart Moves
If one can be located, there are advantages to investing in emerging locations. Investors get the chance to tap into rapid growth and the resulting strong dividends that would likely be unattainable in mature markets. But emerging markets are for the risk tolerant. Limited transparency and data upon which to base projections and low real estate valuations precisely because of uncertainty are among the downsides. “Essentially, this comes down to risk and return: the greater risk provides investors with the opportunity to capture abnormal returns,” Piro states.

The key considerations to pay close attention to when entering any emerging market are its liquidity, rental yields, taxation policies, currency, due diligences and legalities. If you’ve found a consultant you can trust and are ready to take the leap, where do you start? “This does depend on which emerging market you are entering and how long you wish to stay in that market,” begins Tim Murphy, founder and CEO of IP Global. Residential property is always a good place to start, as development often equates with urbanisation, and increased domestic housing demand. “Also if foreign companies are moving into a country and bringing employees with them, they will also have to be put up in accommodation,” notes Murphy.

Where to Go
Prominent emerging markets (according to sources as broad as Barron’s, Knight Frank and PricewaterhouseCoopers) these days include Pakistan, Kenya, Vietnam, Nigeria, Mexico, Philippines, Turkey, Myanmar, Sri Lanka and Indonesia. The recommendations come on the back of several factors, among them economics underpinned by robust consumer markets (Mexico, Philippines, Nigeria), reforms and newfound political stability (Indonesia, Mexico, Turkey) or simply lack of exposure to now (Sri Lanka, Vietnam, sub-Saharan Africa).

Though it may seem a far cry from emerging, Malaysia ranks high on Murphy’s list of strong emerging markets for 2013. Malaysia ranked tenth on The Economist’s competitiveness report, second only to Singapore among ASEAN states, Kuala Lumpur represents 20 percent of the country’s population, 30 percent of its GNI, and it has a GDP 106 percent higher than the national average. “Malaysia is a political, economic and cultural capital … It’s also a global Islamic finance hub, and accounted for 78 percent of worldwide Sukuk transactions in 2011.”

Elsewhere, Murphy singles out Istanbul and Jakarta as preferred cities right now. “Istanbul is Europe’s real opportunity market at the moment. A young demographic with half the city’s population currently under 29 and strong economic potential is attracting plenty of investment attention as global companies are setting up local bases,” he explains. Restrictions on foreign ownership were recently eased and that measure is expected to push property investment up US$5 billion per year. Prices have risen in excess of 29 percent since 2010 and residential rents increased by 15.24 percent over 2012. Last but not least, Jakarta is the darling everyone is talking about. The city posted strong GDP expansion in 2012 (6.23 percent) on the back of consumption by a massive market; domestic spending accounted for 55 percent of the GDP. “Foreign direct investment hit a record high last year and is expected to grow by 25 percent this year as MNCs are eager to invest. The nation is getting wealthier as personal income has doubled in the past five years,” Murphy points out.

Tempting, but emerging markets are primarily for committed investors. Patience, in this case, is truly a virtue; emerging markets are ill suited to short-term investments. As Puri sums up, “In short, the risk element is higher, but the potential long-term ROI can be considerable as long as the investor has not misjudged the market or bought into propaganda that is not based on substantial market indicators.”