Emerging Real Estate Markets

At our Lunch on 11^th September 2008 Mark Charlton, Director and Head of Research at Colliers International, gave us a fascinating insight into the course that many property markets follow as local economies mature towards the Western capitalist model. He used his personal experiences in the Balkans, Ukraine, Georgia and Kazakhstan to illustrate his points in a presentation entitled: "Emerging Real Estate Markets -- Obscurity to Maturity; Emergence to Convergence."

We talk of ‘globalisation’, but sophisticated property markets in the terms of long-term investors really only exist in North America, Western Europe and South-East Asia. As other countries seek to emulate the economic success of these areas, they must develop property markets to match. Most, at present, are moving from command (often communist) economies to free markets.

Mark identified a sort of typical evolutionary path. This starts with political instability and inherited low quality (but often highly priced) built stock. Governments kick-start the process by taking initiatives to enhance the investment quality, and thus the price, of their own debt to invest in infrastructure, and, by extension, the debt of international companies they seek to attract. Success in this vastly expands occupier demand and, with limited supply, rents soar to premium levels. Mortgage market principles will also be established. As a facet of this, nuclear families start to break and migration to cities accelerates, raising the demand for housing. This triggers a first response from local developers, often to low standards and, on their back, international developers follow. Over-supply commonly arises, and rents fall. The increasing presence of international companies forces improvements in building standards, and better space can be afforded as local wealth, often in limited hands, makes demands on retail and logistics for example. With such increases in building quality and robust renting arrangements international investors are attracted, albeit at yields higher than advanced economies. From this point on, convergence increases. Increased political and legal stability, greater transparency and increased data gradually reduce perceived business risk.

Not surprisingly, property market convergence runs in parallel with economic convergence, and also with social convergence. In the early phases, growing wealth will be in few hands, but the genesis of a burgeoning ‘middle class’, even if it is not as extensive as in the Western world, is a key component.

This ‘model’ is, in almost all cases, interrupted by over-ambition, and by political setbacks. It may also be retarded by local practices of ‘corruption’. This makes investment early in the cycle suitable only for those willing to accept high risk, but Mark sees the overall direction of progress as generally being strongly driven by local wishes, and eventual acceptance that the Western model will deliver. He gave as an example a 400 hectare site in Belgrade that is slowly emerging from political deadlock as realisation dawns of what must be done if its potential is to be delivered.

Mark emphasised that, whilst his model is robust, each country will have its own quirks. These may be quirks of history, or even quirks of ambition; not all countries wish to mimic the West entirely. Understanding how those quirks might distort the model, and particularly understanding where a country has got to on its journey requires extensive research and good local contacts if risk is to be managed.

As subsequent discussion brought out, the implication of Mark’s paper was that property markets presently off the radar of investors might merit consideration rather earlier. With care, and understanding of his model, rational investment was feasible. There would be risks, not least of liquidity and valuation, but higher returns and risk-spreading techniques are natural bed-fellows.

Michael Mallinson,  CBE FRICS (Scribe, London Chapter, LAI)