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China is the second-largest real estate market in Asia. As its capital markets mature, it won't be a surprise if the Chinese CMBS market becomes a formidable player.
India is second only to China in terms of overall population, but its economic growth has been slow. Until the early 1990s, the country's rigid policy environment hampered economic growth.
In 1991, however, as the country faced bankruptcy, the government implemented an economic reform and liberalization program. Since that time, the country has worked to promote foreign investment and trade, to reform capital markets and to deregulate domestic business. Subsequently, economic growth has been significant throughout the past decade.
The rise of the service sector and India's prominence in offshoring activities also support greater urbanization and higher demand for office space. This is particularly true in Mumbai, New Delhi and Bangalore.
Although retail activity from foreign companies is still in a nascent stage, policies protecting domestic retailers are being phased out. This is leveling the playing field for foreign companies. As a result, international retail chains may well drive India's demand for retail space to record levels for the next five to 10 years.
Risks in China's and India's real estate and capital markets call for caution and due diligence on the part of investors. On a macro scale, economic development is imbalanced and skewed toward urban and coastal areas. Investors therefore need to be aware of intraregional differences in growth potential. Are urban areas saturated to the point where returns may fall?
Further, what information is readily available for less-developed areas? There is still a lack of access to transparent, reliable information on property markets, especially in India. Individual investors will have to do much of their own legwork to get a handle on transaction opportunities.
One area that is already on the Chinese and Indian governments' agenda is policy reform. There must be transparent and consistent regulations in place to insure investors against any reversals that might affect their assets.
China tightened some policies regarding real estate investment and ownership in late 2006, with the intent of moderating growth that's too rapid. Although policy changes such as these might be warranted to sustain long-term growth, investor expectations must be managed effectively first. In addition, Indian policies restricting institutional investors (such as pension funds) from investing directly in real estate limit liquidity.
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Overall, the Chinese and Indian property markets have grown substantially in the past few years. Although there is room for policy changes to make the sector more attractive for foreign investors, the recent volatility in U.S. markets may well spur greater interest in such international alternative investment opportunities.
Smart foreign investors will discover which developing countries have the most growth potential, then tap them.
Victor Calanog is senior economist and director of empirical research at Reis Inc. He's responsible for hedonic estimation and forecasting models that measure U.S. commercial real estate performance.
Calanog has a doctorate in economics from the University of Pennsylvania's Wharton School. Chris McFall is engagement manager for commercial-mortgage-backed securities and portfolio analytics at Reis, responsible for CMBS-related products and analytics. McFall has a bachelor's degree in computer science from the University of Pennsylvania. Reach both at firstname.lastname@example.org.
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