Real estate in emerging markets?

huanleshalemei's picture
Rank: Gorilla | banana points 709

Such as Asia, know that currently these are the hottest markets, and are going to be for a while given the US and Europe meltdown.

This question may be general, but for western investors (REPEs, pension funds, insurance companies, etc.), what are the biggest challenges to invest in real estate assets in emerging markets and how to overcome?

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Comments (28)

Aug 3, 2012

Currency hedging and local knowledge of the building codes and political system. You partner with local developers and operators and seek outsized profits from what you'd expect in your more standard areas.

Aug 3, 2012

Biggest challenge is get to know their governments.

Aug 3, 2012

Heard some notorious stories about the gov...

What about deal sourcing? If you haven't set up any offices in these emerging markets yet, how can you hunt for potential deals?

The Auto Show

Aug 3, 2012
huanleshalemei:

What about deal sourcing?

You need to hobnob with the local real estate professionals - brokers and investos/potential sellers. You need to also demonstrate that you are a serious buyer with knowledge of what you are doing.

Aug 3, 2012

^mingle with the locals

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Aug 3, 2012

The biggest challenge in investing in emering markets is navigating the regulatory and legal landscape of the country/region that you plan on investing in. India would be a good example of a bureaucratic nuisance. You mitigate that risk by consulting wih local law firms, meeting with government officials, and staffing local talent that has knowledge of the local RE investing business.

Sometimes it's not worth the effort. The emerging markest that everyone already knows about (China, India, South America, etc) have had the interest from institional and large REPE groups for some time now, which has driven yeilds down to the point where it makes just as much (sometimes more) sense to risk capital in established markets like the US, UK, etc.

Aug 3, 2012

Biggest challenge for US private equity funds investing in most of Asia is finding a competent, trustworthy partner.

Aug 3, 2012
re-ib-ny:

Biggest challenge for US private equity funds investing in most of Asia is finding a competent, trustworthy partner.

Which can also be an opportunity for those investors that are culturally aware or have staff with ethnic ties.

I totally agree, Asia is a tricky bitch for an RE investor.

Aug 3, 2012
RE Capital Markets:

Which can also be an opportunity for those investors that are culturally aware or have staff with ethnic ties.

I totally agree, Asia is a tricky bitch for an RE investor.

This is my favourite post from you :)

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Aug 3, 2012

I 110% agree. Try and focus on the larger trends and understand where the money will be coming from. In 2004 Dubai and the UAE changed the Visa requirements for international buyers, causing a large influx of cash to enter the system since non-residents could now purchase real assets. As always, you need local market knowledge on the ground. Brokers and debt players are good places to start.

Aug 3, 2012

Just my 2c on Real estate investments in India. Btw, I have my roots there.

Real estate in India is crazy. A 2 bedroom apartment in my home town in India in a good location costs close to 500K USD and in the expensive city in India (Mumbai), a 2 bedroom apartment in a good location would easily cost north of 1M USD. Single family houses are mostly not even an option with land scarcity, its all mostly only apartments.
In prime localities in the biggest cities in India, appreciation over the past few years have been >30% year over over.

NYC looks dirt cheap, compared to the expensive cities in India.

Sep 7, 2012
someusername:

Just my 2c on Real estate investments in India. Btw, I have my roots there.

Real estate in India is crazy. A 2 bedroom apartment in my home town in India in a good location costs close to 500K USD and in the expensive city in India (Mumbai), a 2 bedroom apartment in a good location would easily cost north of 1M USD. Single family houses are mostly not even an option with land scarcity, its all mostly only apartments.
In prime localities in the biggest cities in India, appreciation over the past few years have been >30% year over over.

NYC looks dirt cheap, compared to the expensive cities in India.

Is this a joke that I'm not getting. I manage several outsourced computer programmers from India and I know how much they make -- highly skilled workers that is.

Aug 3, 2012
econcomputingCRE:
someusername:

Just my 2c on Real estate investments in India. Btw, I have my roots there.

Real estate in India is crazy. A 2 bedroom apartment in my home town in India in a good location costs close to 500K USD and in the expensive city in India (Mumbai), a 2 bedroom apartment in a good location would easily cost north of 1M USD. Single family houses are mostly not even an option with land scarcity, its all mostly only apartments.
In prime localities in the biggest cities in India, appreciation over the past few years have been >30% year over over.

NYC looks dirt cheap, compared to the expensive cities in India.

Is this a joke that I'm not getting. I manage several outsourced computer programmers from India and I know how much they make -- highly skilled workers that is.

There is a huge disparity between income and real estate prices in India. Real estate is jacked up by high inflation, Indians living abroad who continuously take advantage of the ever weakening rupee against dollar, businessmen who want to "park" their black money and corrupt politicians. You can talk to anyone who invests in Indian RE to get a picture. There are tons of Ultra HNIs and land is a big scarcity in India. They are willing to pay whatever it costs to buy in a prime location. For eg: Ambani's home in Mumbai costs >1B USD - granted it's an exception, but just quoted to show that Mumbai is not cheap.

Aug 4, 2012

In China, you don't technically own the real estate.

In India, there's three 1000 year old claims against your real estate and nobody knows who the real owner is.

In Russia, there's a tank and 15 guys with machine guns parked on your real estate claiming someone else owns it.

Brazil is in pretty good shape.

Aug 3, 2012
IlliniProgrammer:

In India, there's three 1000 year old claims against your real estate and nobody knows who the real owner is.

Haha, thats not quite true. I owned(sold some) and still own land in India. It's not bad :) but granted there are legal claims against ownership of land, but that is more of one in ten thousand cases.

Aug 3, 2012
IlliniProgrammer:

In China, you don't technically own the real estate.

In India, there's three 1000 year old claims against your real estate and nobody knows who the real owner is.

In Russia, there's a tank and 15 guys with machine guns parked on your real estate claiming someone else owns it.

Brazil is in pretty good shape.

You forgot to mention the notorious "Bai Jiu" in China...it's the lubricant for every deal...

The Auto Show

Aug 4, 2012

When it comes to real estate investing, I think you should keep it close to home. Never invest to far from where you live. You will save yourself a lot of headaches. Particularly if investing in international real estate and in countries where the law can be "bought". I come from latin america and my grandma lost some land in shaddy ways. I don't see the allure to invest in property you only use 1 month a year. Or having to handle tenants. I'll stick to cash, stocks, commodities and bonds.

Aug 4, 2012
andres17:

. I don't see the allure to invest in property you only use 1 month a year. Or having to handle tenants. I'll stick to cash, stocks, commodities and bonds.

this is getting annoying. We're not talking about vacation houses or personal finance here.

Aug 4, 2012

prospie,

So what are you talking about? You either buy real estate for personal use or for renting it out. If there is a third option that I don't know about, expand my limited knowledge of the topic please.

Aug 8, 2012

I am very glad to see the posts since I see people in the US with capitals are looking for opportunities in the emerging market.

I am working the capital markets' side in a brokerage firm and have been sourcing real estate development deal in China for debt/equity financing opportunities. The local developer are interested in western funds for the sake of seeking a lower cost of capital compared to the overheated capital market there. I do find many deals there are providing high returns, like high 10% or lower 20% IRR. Basically the developers establish a shell company in Hong Kong in a structure such as WOFE, and direct the capital to the mainland. Usually if you are looking for passive investment ( preferred equity, Mezz loan) , there are a lot of opportunities. But if you really want to acquire the properties, you will meet a lot of restrictions from the government.
I would like to discuss more with you. Just give me a buzz, [email protected]

Aug 3, 2012
Riri83:

But if you really want to acquire the properties, you will meet a lot of restrictions from the government.

Glad to have you here, would you mind giving a few examples of such restrictions? I am sure a lot of people will be interested. Thank you!

The Auto Show

Aug 28, 2012
huanleshalemei:
Riri83:

But if you really want to acquire the properties, you will meet a lot of restrictions from the government.

Glad to have you here, would you mind giving a few examples of such restrictions? I am sure a lot of people will be interested. Thank you!

In China, land is owned by the state. My understanding is that they hold auctions to lease this land for development, but there is consequently a lot of governmental corruption; think about what would happen if elected officials in the US were suddenly given the power to delegate all US land.

In China you are also dealing with the hukou system, a system of two separate classes, urban citizens and rural citizens. Individuals are divided into these categories by the families to which they are born, and urban citizens actually have a lot more rights and opportunities. Therefore, I could see some headaches being created over the politics and legal consequences of leasing to different groups. It's a really complicated area and there are a lot of social differences that impact the real estate market.

Aug 27, 2012

In my experience (have worked in Asia RE PE for years), the main problem for institutional investors such as pension funds, insurance companies and endowments who want to get exposure to China and India is that there is a lack of quality real estate managers in the marketplace. What an institutional investor needs to find are quality GPs who have a local team with advanced local knowledge / proprietary deals coming in AND some well-trained (likely western) managers who can insure that everything is signed/sealed/delivered in a western-friendly / big 4 accounting firm DD type of way (i.e. the documents are indeed in line with the agreement and enforceable, entities don't have random past liabilities, developers can't cross-collateralize to hell and beyond, etc.). These types of managers are few and far between, those that exist, tend to be able to raise capital and I would assume they are now starting to make some nice money (china ex: Gaw Capital).

Aug 27, 2012

^These are some of the fears common among western investors in China's real estate market. The reality is that it's really not all as bad as it sounds - but there's certainly plenty of things for LPs to worry about if they want to worry. You're very right that it's all extremely complex and investing here requires and understanding of not just economic/political but also cultural/societal differences between the west and China.

Aug 8, 2012

There are three ways to achieve the ground leasehold rights from the government in China:
1. public auction
2. Request proposals by invitation
3. public listing

Commercial land leasehold period is 50 years, for residential is 70 years. You need to pay upfront fees as a total PV of grounds rights for all the whole holding period, to achieve the land.

Aug 3, 2012

Great discussion. Thank you for all your input! Can anyone throw a few names of leading RE investment companies (e.g. REPE) in emerging markets? I've heard Gaw Capital, LaSalle investment management, etc.

The Auto Show

Sep 6, 2012