Buying rental properties in Emerging Markets - Let's talk!

Hi everyone & Happy Holidays!

I wanted to get POVs of investors on this site. 
As we know, buying assets has become much harder now, competition is high, people are bidding high, and cap rates are decreasing at all time highs! 
Buying an apartment tower in Toronto or Paris will yield a 2.5% cap rate for Class AA towers....
 

So I wanted to understand the risks of going after properties in the Middle East, South Asia, Russia, and other Asian markets. 

About me: 
I currently own a portfolio of 12+ unit apartment towers, grocery anchored plazas, and single tenanted Industrial properties across Calgary Canada, Ontario Canada, New Jersey, USA & Wisconsin USA. 

I am continuously getting frustrated in looking for deals in the US, Europe and Canada because of how hard competition is right now. 

Therefore, I am learning about what it takes to buy real estate in the Middle East mainly. 

Main Points ~~~

1) Right now, cap rates are about 9% - 18% in India, Pakistan, UAE, & Saudi Arabia. 
2) Getting financing at attractive rates in those countries are much harder but through family relationships, I'm able to get rates at 4% - 6% 
3) My idea is to go after Class B high-rise apartment towers and Industrial properties in Class A or Class B areas of their respective country. 

4) If I can pull off a investment in those countries, my  net ROI (after inflation, taxes, FX hedging, property maintenance, debt payments) will be about 27% - 31% per year which is insane... + the notion that I can raise rents to keep up with inflation or maybe add on 0.5% - 1% of additional rent (beyond inflation rate)

5) Biggest problem is in South Asia.... In this region you really need to get your hands in the mud to make a deal work. This is because regulations are not strong, access to property data metrics are low, and thus a lot more hustling is involved. Luckily I have a wealthy well connected family member who can help me with that (he would also be investing in these properties as an LP). 

 
What am I missing? 
Any thoughts?  
 

Thank you and have a great New Years!  

Comments (15)

Jan 2, 2022 - 9:54am
CrazyHorseShakira, what's your opinion? Comment below:

Local intel is a massive asset for sure. Adjusting rents for inflation is a must in places with structurally weaker currencies. Seems like you have done homework on fx hedging. Keep in mind though that we are still in a relatively low rate environment. You definitely should consider the risk reward tradeoff vs properties in less abstract places of the world (can more leverage in a more stable macro setup create that same return profile?!?). We haven't spoken about political risk. More of an issue for some than for others

  • Principal in RE - Comm
Jan 3, 2022 - 1:57am

Yes, this is a tradeoff I'm looking into but the issue is finding good assets at fair prices. If it takes me 12 months to park my capital in a 5-unit industrial complex in a 2ndary market VS parking it in a UAE Apartment tower in less than 3 months... I think I should put the capital in the UAE. 
I can't seem to find good assets at fair prices that can generate good returns. 
I am actually looking at >12% cap rate buildings in the Middle East off-market too from tired owners who want liquidity. 

this environment is insanely competitive for a non-institutional investor. 
My latest acquisition was a Newark, NJ 24-unit Class B- Apartment building.. It's going to generate about 12% annually (was a value-add deal). This deal was done with aggressive leverage and a decent interest rate. 
 

  • Investment Analyst in PE - Other
Jan 2, 2022 - 10:34am

Legal systems is biggest risk to investments like this.

  • Principal in RE - Comm
Jan 3, 2022 - 2:01am

Oh yes... the amount of black money, price fixing, and collusion involved is high. That's why its a big advantage to have someone trustworthy who got a good grasp of government officials. Luckily one of the Middle eastern countries is where 2 family members are well connected to higher-up official's and businessmen. My goal is to leverage my family ties there to make the transaction run smoothly with little trouble from non legal players & under-the-table handouts, and more.

 

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Jan 3, 2022 - 10:02am
CRESF, what's your opinion? Comment below:

I'll also add that while I am the farthest thing from an fx expert, I have spoken with international investors that invest in the US. When markets are volatile, hedging costs can increase quite significantly. I remember speaking with a German investor who walked me through what his returns looked like buying 4% cap core RE in 2018 with what his hedging costs were. It was depressing. Now seems like you'd be going for high cap rate deals, but those deals are higher because there are risks (political, etc.) that you need to be compensated for. So if volatility increases hedging costs and reduces your cash yield from a 10%+ to a 6-7%, that might still be better than the US but is probably not adequate for the risk you are taking. 

  • 1
  • Principal in RE - Comm
Jan 3, 2022 - 3:04pm

This was something I didn't fully understand, can you elaborate on how the German international investor saw his returns decrease heavily? Are you saying FX hedging is an expensive cost item? 
 

Jan 3, 2022 - 3:18pm
CRESF, what's your opinion? Comment below:

Yeah, I think he was mentioning hedging costs at that time were 300 basis points, give or take. Tough when your returns are in dollars but your obligations are in euros and hedging costs are half your returns on core US real estate. 

  • Principal in RE - Comm
Jan 3, 2022 - 3:03pm

Happy to help. Let's start by asking some on here. 
 

Jan 4, 2022 - 3:57pm
Commissions and fees, what's your opinion? Comment below:

Its almost like.... the returns reflect the risk relative to alternative investments... 

But on a serious note; what kind of price tags are you looking at, where you would purchase fx hedges? 

Also, what exactly does a fx hedge look like for the investment of dollars going into a hard offshore asset? For example, as you know, you hedge against interest rate risk in the US by purchasing a cap on your interest rate for $x ; so how does that instrument look like and what is it applied to for a international real estate investment?    

Jan 4, 2022 - 9:13pm
Risk Weighted Ass, what's your opinion? Comment below:

Questions for you (Been thinking about the same thing as your original post but you seem to already know more than me):

  1. How did you initially get into doing this?
  1. What should I keep in mind for my first properties given I do not have family connections like you?
  1. Do you know where I can find international cap rates (including historical, not just static data)?
  1. Are you not concerned about oversupply, new entrants, or vacancy rates in the Middle East? I lived in UAE recently and noticed many empty buildings, all while construction was rampant and there was no shortage of land nearby, or cheap labor workers to build (unlike the US). Not to mention the economies of these areas fluctuate based on tourism or oil, and remote work has decreased need to work in cities. Probably a reason these landlords are selling for so cheap atm and would appreciate your thoughts.
Most Helpful
  • Principal in RE - Comm
Jan 5, 2022 - 12:37am

1) How did you initially get into doing this?

   AnS: My story is actually boring: I started off as a CRE Broker. Sold large properties and collected the commissions. I also went after development sites (Such as single family houses, land, end-of-life plazas) and invested my commissions and became a limited partner. My buying client would develop it and on average I made about 40% my original cash investments per development. I did this for 4-5yrs (started while in college). 

Next: I took what I learned from my selling & buying clients and spent a-lot of time researching and learning about the real estate investment space for 4-5yrs. 
In that timeframe I bought 4,,6,12 unit apartment buildings in my area. Kept doing this till I had a portfolio of retail plazas, Medical office buildings, Multifamily Apartments, but I don't buy traditional office towers. 
My first year in the business as a broker... I made $0 (Not even lying). In fact I was running at a loss of $12,000. Second Yr it picked up real good and went on from there. 


Then: I realized that ROI is higher in emerging markets. I then spent time looking into the European markets but found it to be a place with not so high ROI either. 
For example. the average cap rate in France for multifamily is 2.5% and in the Netherlands its about 4% - 5%. Might as well buy a 8% cap rate 4-Plex in Wisconsin, USA.....  
 

2) What should I keep in mind for my first properties given I do not have family connections like you?
My situation is a little unique. My uncle is a wealth oil businessman who dropped out of the 8th-grade. He hustled hard which is why he made over $100M. 
BUT it's not all rainbows. He is still a not-so-good human being. He caused a-lot of damage and pain to my family and my cousins. He robbed us from a lot (not even kidding). 
Now, the only reasons he works with me and as do I is because I take no BS from him. We have everything in writing and nothing left up to trust. He sees value in my deals and that's why he works with me... otherwise he will go out of his way to tarnish my business reputation. 
I wish I had a loving uncle but sadly isn't the case. 

What Can You Do? 
a) Befriend developers, property managers, PE fund employees, and all commercial real estate players. Doing this will allow you to pick their brains and do this and collect as much information you need. 

Data is hard to find from google for those emerging markets. So talking to the industry players is recommended. I do this till this day btw... 

b) Start researching about all the REITs in your desired country. Watch their transcripts, listen to their earnings calls. Doing this will help you learn about the country's real estate market at a MACRO level.
Follow the portfolios of the major real estate guys in your country. See what they're doing. 
 

3) Do you know where I can find international cap rates (including historical, not just static data)?
This is hard. Even I cannot find data online. So what do I do? Well, I cold-call and cold-email tenants, real estate developers, property owners (if public information is there), property managers, building inspectors, appraisal guys. I do this and collect data. I also study the neighbouring properties (conduct comparative analysis). 
You get the idea. 
You need to get you hands dirty.

The saying I use is ~~~ "Here in the US, we have the privilege of using large shovels to dig for gold from a large pile of Cow's shit at a low cost. In the Emerging markets, we use our hands wrapped in plastics bags when digging for gold from a large pile of Cow's shit. 
(May be a weird saying, but you get the idea) 

5) Are you not concerned about oversupply, new entrants, or vacancy rates in the Middle East? I lived in UAE recently and noticed many empty buildings, all while construction was rampant and there was no shortage of land nearby, or cheap labor workers to build (unlike the US). Not to mention the economies of these areas fluctuate based on tourism or oil, and remote work has decreased need to work in cities. Probably a reason these landlords are selling for so cheap atm and would appreciate your thoughts.

Yes. This is a MAJOR concerns in the UAE & Saudi Arabia. In Pakistan, the demand for rental is high as it also high in Russia. 
Turkey also has good Apartment buildings. 
Now, you don't need to buy Apartment buildings only... You can also pursue Industrial properties. Industrial tenants usually stay at a property for 5-10 years. Which is great. ALSO these leases are usually net-net. 

I would say to look for sub-regions of the middle-east where the people who move there and already live there have lower income and not enough for a down-payment on a house. In such areas, tenants would stay as tenants for 3-5yrs until they're making more money. 
At the end of the day Dubai is where more affluent people live. I can bet that the average UAE resident is not as affluent and needs to rent. 
Also, you can look to retail plazas. 
Apartments are one asset class... Don't limit yourself to one area if you're so new. Be wider in scope. 

Jan 5, 2022 - 4:13am
Risk Weighted Ass, what's your opinion? Comment below:

Thank you! Very helpful.

In case you are interested, regarding historical cap rates, if you search CAPR on Bloomberg, they have their own historical data, as well as data purchased from MSCI and Moody's, broken into different sectors of RE, such as Industrial, Commercial, Hospitals, Residential, ectetera. You can also go straight to Moody's or MSCI and purchase the data, but I believe it is only for the US.

I noticed CBRE has quarterly international data, which you may be able to look at each report and put into Excel to backtrack cap rates, or just purchase historical rates from them to have a more full data set.

I only asked because I don't want to pay and was hoping you may have a free way, which it seems you do, with the caveat of inputting time and effort. I have tried asking individuals in EM, but gotten variances as wide as 2%-14% cap rates in the Philippines for example. I suppose I need to ask more people, especially property managers as you mentioned. Thanks again.

Jan 5, 2022 - 4:43am
gsssa 2050, what's your opinion? Comment below:

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