In a stagnant economy with sluggish growth expected for years, real estate investors are looking international for opportunities.
A panel of real estate experts discussed the risks and rewards of doing business in overseas markets at the Kellogg Real Estate Conference 2010.
Current economic markets aside, exploring international opportunities makes sense. The United States only contains 5 percent of the world’s population, and while it has long been the dominant economic force, the current global business environment-with instant information and quick travel times-has somewhat leveled the playing field, allowing numerous nations to rise onto the global stage. Most of these nations have much larger populations than the United States, and are driven by intense demand for improved infrastructures and a desire among their residents for a higher standard of living. It is a high risk/high reward endeavor, but international real estate investment can be very lucrative. More importantly, emerging markets seem to have the one thing that established markets currently lack: demand.
“There is really no premium in established markets now,” said Chris Fiegen, chief portfolio officer of Equity International. “There is no competitive advantage to be in London or Sydney when compared to Chicago or New York. In emerging markets there is real demand. It is not contrived.”
Quintin Primo, chairman and CEO of Capri Capital, agrees with this sentiment, saying that the U.S. “lacks organic growth” and that there are not enough core properties in the country to satisfy investor appetite.
The world’s major emerging markets are often classified as BRIC, which stands for Brazil, Russia, India and China. Investor sentiment varies for each market, with Brazil and China typically drawing the most interest. China invites opportunity simply because of its size, but doing business in China has drawbacks, as the government has the final say in most transactions. Business can be booming one day, and completely shut off the next.
Brazil draws interest because the country has very little debt and there is a large demand for real estate expansion.
“Brazil only has about 400,000 mortgages in the entire country,” said Fiegen.
India is intriguing because of its stunning growth, but Fiegen said that it is difficult to conduct real estate transactions there because of the labyrinthine land laws. In many cases, the government does not even know who truly owns certain parcels of land.
The panel was decidedly negative on opportunities in Russia, mainly because of its political environment.
Capri Capital’s Primo has been exploring markets such as North Africa and the Middle East, where he believes there are opportunities for risk-takers.
He points to a country like Nigeria, which has only one luxury hotel. The hotel consistently maintains an occupancy rate above 90 percent. It would seem that there is room for competition.
Cultural trends dictate decisions as well. The Middle East is appealing because Islam continues to grow at a rapid pace, and, because of energy trends, “the largest transfer of wealth in the history of man is now taking place from the west to the Middle East.”
India has 100 million Muslims and the aforementioned Nigeria as 40 million. As part of the religious practice, all Muslims who are able aspire to make a spiritual homage to Mecca at one point in their life. Primo sees an opportunity for religious tourism.
“Ten years ago the U.S. was one-third of the world economy,” said Primo. “Now we are a quarter of it. It will continue to decline. There is increasing activity in the global market and you simply can’t ignore it.”
International investment is not for the faint of heart. It can takes years, if not decades, to see returns. The effort requires patience and hard work. Primo said that for this amount of risk, he often won’t go into a market without the possibility of 40-50 percent initial rate of return.
William Sullivan, CFO of ProLogis, said that the worst move an American company can make is to engage in an international project and then use a strictly American team. When doing business in another country, it is always best to use local professionals.
Equity International’s Fiegen shared a cautionary tale with potential investors regarding international partnerships. He reminded them that even if the marketplace seems right, cooperation with the nation’s leaders is essential.
“We were in Venezuela early,” said Equity International’s Fiegen. “We thought (Hugo) Chavez would be normal. When we first met him he was still wearing suits. Four years later he was in a beret and a jumpsuit and flaming balls of debris were crashing through our office building windows. We had invested $75 million in Venezuela. Finding the right partner is essential.” (credit m. thornton mrenews)