Five Reasons Why Your Investment Portfolio Needs to Include Emerging Markets Real Estate

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Real estate is increasingly becoming one of the preferred mediums for investment, both for Private Equity (PE) investors as well as individuals. Investors are proactively enhancing their exposure to real estate asset class as an objective to expand wealth and mitigate risk.

In a study conducted by International Property Consultant (IPC) Colliers in 2016- over an investor base of 600- 52% indicated an urge to increase their asset allocation in real estate. Among the real estate markets, emerging economies are becoming the new favorite for global investors.

Bearish sentiments in some of the major economies in the world along with unfolding of a series of unexpected geopolitical events has underscored the significance of real estate in emerging markets, as safe haven. High GDP growth, unprecedented expansion of the middle class & spurred urbanization are fueling the housing markets of the emerging economies. Emerging economies are also easing out the route to investment in their property markets, thereby expediting the capital inflow.

The given analysis will capture 5 major factors that will continue to drive investment into emerging residential real estate.

Bullish Economy Stimulates High Demand

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Even with the dawn of 2017, most of the major economies across the globe are yet to jump off completely from the shadows of the recent economic crisis. On the other hand, various emerging economies are clocking much higher growth than their developed counterparts. Emerging markets such as China, India, Myanmar, Vietnam, Kenya & much more- continues to showcase stable economic environment & higher growth numbers. A higher GDP growth naturally connotes to higher housing demand & bullish market sentiments.

Global economic outlook for 2015-18. Source: IMF

India has been demonstrating an over 7% growth rate, much higher than the global average that is in tune of 2-3%. Although Chinese economy has cooled down, when compared to the double digit growth rates that has been a norm over the last decade- the country is expected to grow at 6.5  & 6.0% respectively in 2017 & 2018. It is substantially higher than most if its counterparts in the developed world. Other emerging economic blocks such as ASEAN & emerging Europe are also significantly contributing to the global growth paradigm.

With bullish sentiments expected to prevail in emerging economies, the housing market is poised for a sharp growth in the near future, driven by surge in employment & income growth. For instance, take the case of India. If India continues with a GDP growth of 6.5% -7.5% annually in the coming time, Indian property sales could reach USD 462 billion in 2025, from USD 105 billion in 2015-as per the report published by Morgan Stanley.

Higher Capital Appreciation & Rental Yields

Higher economic growth trajectories are inducing increased demand for real estate properties in emerging markets, thereby ensuring better capital appreciation & rental yields. Notwithstanding a cooling economy, China’s real estate sector continues to outperform, with prices of new launches increasing by over 12%, Year on Year (Y-o-Y) in Jan 2017. The growth juggernaut has been driven by Beijing & Shanghai- registering a 24.7% & 23.8% growth respectively. In India, post demonetization, the price reduction has been largely restricted to only 3 out of 14 cities in the last quarter of 2016. With higher growth forecast & lowering of housing loan rates, markets are soon expected to pick up in India.

In Turkey, prices have appreciated by 13.98% in H1 2016, according to the data published by the Central Bank of the Republic of Turkey. Highest growth has been registered by Istanbul (17.68%) followed by Izmir (14.71%) & Ankara (9.16%). Despite a depreciating Lira & concerns over security, the underlying sentiments in Turkey remain bullish on the backdrop of high demand & low supply. Drawing on a higher GDP growth rate & an expanding middle class, Kenyan property prices continue to soar, with most of the cities demonstrating a double digit growth rate in 2016.

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The rental yields in most of the emerging markets are also in tune of 5-7% annually thereby further incentivizing investment.

Annual rental yields for city centre & outside city centre. (various sources)

Rise in Credit Growth

Expansion in the credit markets in the emerging economies will further accelerate the growth of the housing sectors. According to IMF report on credit growth, that has captured the annual credit growth in 45 major economies in Q3, 2016- emerging economies hold a dominating position. As seen below, 4 out of the top 5 countries are from the emerging world.

Top 10 countries in terms of annual credit growth. Source: IMF

Credit growth in countries such as Mexico, Philippines, and China hovers northwards of 10%. Higher liquidity in the market will naturally translate into a bullish housings sector.

Expanding Middle Class & Favorable Demographics

In conjunction with steady economic growth & expanding credit market, the rising middle class could be a perfect ingredient for an exponential rise in the housing industry. With more number of middle class populace reaching maturity, the demand for housing will remain high in the emerging economies. The growth will be seen not just in terms of volume but also vertically as the affluent class will look out for better places to live.

Size of middle class (In million) by 2020. Source: Oxford economics

It is estimated that by 2020, population in Mexico earning over USD 50,000 annually will reach over 7 million, whereas in Brazil it will be around 9 million. Chinese middle class will continue to showcase tremendous growth – with around 500 million Chinese expected to be classified as middle class by 2020. By 2030, around one billion Chinese are expected to enter the middle class. In India the total volume of Middle class stands at around 5% of the total population, but it is increasing steadily & is expected to reach 200 million by 2020.

Unfolding Reforms Will Ensure Safer & Fairer Practices

Till recently, real estate industry in most of the major emerging markets was unstructured with low levels of transparency. Investing in such markets was termed as a high return & high risk affair.  However, notable steps are being taken by the government to promote transparency, limit the role of speculators & ensure hassle free transactions. These initiatives-manifested through heightened digitization & wider policy level reforms will be a major game changer in the emerging real estate industry.

The present Indian government has taken a host of initiatives in 2015-17 encompassing- steps to implement  REITs, establishment of Real Estate Regulatory Act (RERA) to safeguard buyer’s investment and allowing 100% FDI in infrastructure & township projects. The recent demonetization drive by the government could be an icing on the cake, as it can significantly curb down the role of black money in Indian real estate. These steps in tandem can be a major pull for international investors looking for a safe & secured investment platform in the near future.

Emerging economies understand the significance of real estate as a growth enabler & hence are proactively rolling out steps to foster transparency and easing out foreign capital inflow.

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