Where’s the best place in the world to buy property? We asked frontier markets real estate investor, Lee Cashell of Asia Pacific Investment Partners, for his pick of the hotspots.
1. Shenzhen, China
In the early ’90s, when I first got to Asia, I went to Shenzhen. I didn’t have enough cash at that time to invest in real estate, which is quite frustrating because if you look at Shenzhen over the last 23 years, it’s been a fantastic market. In fact, it’s the strongest real estate market in China today.
Shenzhen is a city that just seems to attract an entrepreneurial spirit. They say Beijing is for Beijingers, Shanghai is for Shanghainese, and Shenzhen is for everybody else, and it seems to be the attitude that many people are taking from around the country. When I pack my bags and head to the US East Coast, people are heading to Shenzhen. It’s really pushing up property prices and the growth of that city.
At the moment China is on a bit of a down cycle. Its economic growth is moderating. But, within the various cities, there’s a great amount of deviation. Shenzhen is still booming. Unemployment there is very low, there’s quite a bit of tech industry, and there’s the co-habitation with Hong Kong just on the other side. There’s a lot going on, and it’s just got that entrepreneurial feel to it, having been christened the entrepreneurial city to go to by Deng Xiaoping many, many years ago.
There are opportunities for every kind of property buyer, including the really big real estate bond investors. A lot of the listed Chinese companies started defaulting on bonds or ran into difficulty making their payments, but things are slowly turning around and you’re able to differentiate now between which ones that are going to be the survivors and those who might not make it.
I used to travel a lot with a good friend of mine, and we’d pretty much been everywhere around Asia, but we kept trying to find more and more exotic places to go. So, when I said Ulaanbaatar, and he didn’t actually know where it was, we were destined to go check it out, which we did over a long weekend and really enjoyed the place. It wasn’t frenetic like it is these days. It was still kind of a socialist hangover, socialist architecture, not a high densely populated city; no overbearing traffic like you find in places like Bangkok or Manila.
But the thing that struck me from a business point of view was that property was actually trading below its replacement value. It was probably the least expensive real estate on a per square meter basis of any country that I’d ever been to. That’s really what enticed me. And, surprisingly, shockingly, the laws were actually really good. They were very well developed. So, foreigners can own property in Mongolia – you actually get a certificate – the currency is convertible and taxes are very low. It was a very interesting place to make a first investment, and it seems to have gone a long way.
It really was a special situation because there was over $1.3 trillion of mineral wealth in the ground and a lot of FDI moving in to try to extract it, and foreigners moving into the country as well, and that pushed the housing boom.
Like many commodity-based countries, Mongolia has suffered more recently with the fall in commodity prices, plus the previous government borrowed probably more than they should have, so the new government has set about repairing that issue. But this is also happening at a time when we have resurging prices for coal, and the gold price is quite strong, and Mongolia is producing an enormous amount of these two commodities at the moment, so I do see it as temporary. But they do need to get cracking on fixing these issues; they really just need to term out a lot of the debt that they currently have until about two years from now. This is when they’ll start producing an extraordinary amount of gold and copper from Oyu Tolgoi, which is one of the largest copper deposits in the world.
We’re very excited about Myanmar. It’s a big consumer play – 60 million people. It’s a naturally endowed country with a lot of agriculture, a lot of minerals. There’s oil there, although oil’s not that exciting to people at the moment. There’s an aspirational growing middle class, GDP is expanding at a reasonable clip, and Aung San Suu Kyi’s government is serious about reform. These are just the kind of changes we love to see: increasing foreign direct investment, laws that are being standardized to international best practices, and basically a consumer class that’s growing.
There’s some political risk in Myanmar, as there is everywhere. You have to gauge it and juxtapose that against the laws and the protections that you have for foreign investment. The condominium law that has recently been passed allows foreigners to invest into condominiums built by property developers in Myanmar. Without this, it’s quite difficult from a legal perspective for a foreigner to invest in real estate. In many of the surrounding countries, investors have done so, but through a nominee structure. For people who are used to institutionalized, professional real estate investment techniques in more developed countries, that’s not really a fantastic way to go. Thailand’s history of nominee structures or joint venture partnerships shows that this isn’t always the best way; there have been a lot of problems over the last 30 years.
In Yangon, they have an undersupply of office and business traveller-worthy hotels. On the other hand, condominiums and residential apartments may have been overbuilt for this point in time. So, the prices for residential apartments are not particularly high despite land prices being very high – but prices for hotel rooms are really expensive. A three-star hotel is now getting $200 or $250 a night, and the same goes for serviced office space – we’re up at $125 per square meter per month, which is incredibly high. We’re starting to approach Singapore and Hong Kong prices there. Over time, that will be relieved, but at the moment there are significant opportunities for investors in Myanmar.
You need to follow human movement. A lot of the time in frontier markets, it’s really all about urbanization. If you can make five times more money coming in from the farm to work in Yangon, then you’re going to do that. The same goes for clusters that you find in places like Silicon Valley, Stockholm or Boston, for example, just to bring it back home.
4. Sri Lanka
Sri Lanka is growing at a fast clip and the government is, again, very reform-minded and very open to foreign direct investment. You see a lot of active cranes nowadays in Colombo. In many of these countries, foreign direct investment is really primarily attracted to the main large cities, so, unfortunately, the northern part of the country is not getting the kind of FDI that it really needs right now to help rebuild after the civil war. Colombo is, and there are also a number of infrastructure projects. All of this is largely related to the geopolitical position of Sri Lanka and China’s national interest; we’re seeing a lot of infrastructure investment in places like Pakistan but also Sri Lanka with its ports.
We have to keep in mind that it’s kind of a volatile place, but there is an enormous amount of development happening right now in Lagos, despite the fact that oil prices are low. There’s a lot of infrastructure going on there, a lot of fundraising for very large power plants. This really isn’t stopping at all because of the oil price. If anything, it’s spurring them to build out their infrastructure for oil and gas to minimize the costs of production, and that’s having an effect on foreign direct investment, which in turn is driving housing markets.
To hear the full interview with Lee Cashell, the Founder and CEO of Asia Pacific Investment Partners, click below.