As published in Scotsman Guide's Commercial Edition, October 2007.
In late June, two national banking and financial-services firms announced they had raised more than $12 billion to create two of the largest funds investing in non-U.S. real estate. Not long afterward, the confidence of many U.S. investors plummeted, especially as debt and equity markets exhibited volatility amid the nonprime crisis.
Given the increasing risk in domestic assets, many U.S. property-investors wonder if they should look to international markets for higher returns. Research firm Private Equity Intelligence Ltd. projects that real estate funds may have a better year in 2007 after a record-setting year in 2006, during which they raised $68 billion. And with tepid year-to-date performance by U.S. real estate investment trusts (REITs), global real estate markets may indeed be where these funds end up flowing.
Two promising markets, China and India, serve as good examples of economies your investor clients may want to examine if they're considering international-property portfolios. Their economies can shine a light on the kinds of risk and opportunities involved in investing in developing countries.
The magnitude of China's recent ascent in terms of economic growth is difficult to overstate. By 2006, it had overtaken the United Kingdom and France in absolute gross domestic product, according to the World Bank. It now ranks as the fourth-largest economy in the world. Even with fears of a global slowdown, various sources estimate that in less than 10 years, China will overtake Japan to become the second-largest economy in the world -- behind only the United States.
Industrialization, openness to trade and sheer size have driven urbanization in China. The country has more than 1.3 billion residents. Its three largest cities have populations of more than 5 million.
The resulting spike in demand for multifamily and commercial real estate appears to meet a surge of supply. Vacancy rates and rent levels have stabilized. But with Beijing hosting the Olympic Games in 2008 and with many smaller cities growing at a rapid clip, the development trajectory appears far from its peak.
Capital markets have followed suit. A few international players led the launch of the first dollar-denominated commercial-mortgage-backed securities (CMBS) backed by Chinese properties in late 2006.
Further, liquidity is on the rise. According to Jones Lang LaSalle, investment activity in Shanghai and Beijing rose sevenfold between 2003 and 2005, reaching almost $6 billion.
Recent policy changes promise to spur more demand for commercial real estate. Domestic insurers may now have the opportunity to invest directly in real estate alongside more traditional asset classes such as bonds and stocks.
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