Another BRIC in the wall
Global property managers are scouring emerging markets for suitable local partners as they step up direct investments in the BRICs on the back of strong economic growth. Although it is possible to approach markets like Brazil or Turkey on a solo basis, some managers prefer to use local partners to reduce risk and maximise potential returns.
The local partner will tend to know the sites better and be able to answer crucial planning questions. Investors need to be confident that office blocks will have good commuter links. They need to know the catchment area for new shopping malls, if it will be for daily grocery shopping or a destination mall, and whether it will be well served by transport. And with residential properties, investors will want to know what sort of surrounding infrastructure is planned and the type of occupier targeted. A local partner will also tend to have a better understanding of the costs and timing of the project and will be able to assist with the land purchase.
“It only makes sense to invest directly [in emerging markets] if you are a very big investor – and it needs to be about obtaining good returns,” says Alessandro Bronda, head of asset allocation for Aberdeen Property Investors. “This year will be a bad year in terms of property performance in developed markets, but Asia and Latin America are still seeing increasing investment activity, and transparency has improved, which is very important for attracting more capital.”
In India, for example, the market is said to be becoming more professional quite quickly in terms of the quality of building materials used. “They can’t afford not to build at the best specification they can because of energy shortages, and if they are targeting MNCs for tenants they will need to meet certain standards and be energy efficient,” says one manager. “On smaller projects you can get some shoddy materials but in Brazil I have seen some very good quality, with far superior materials to those used in the West. That helps you save money on heating and cooling the building.”
Return I will, to old Brazil
Andrew Jackson, manager of Standard Life Investments’ Global Select Property Fund, is currently considering investments in Brazilian residential and offices, although he is avoiding retail because he is a bit concerned about the price. He says returns are better in emerging markets due to stronger economic growth, and property being a factor of production. “There are risks – a lot of these markets are immature and may suffer from a lack of transparency, but it offers diversification benefits through an exposure to different property cycles.”
Meanwhile, Aberdeen Property Investors recently launched a Russia fund targeting properties of between €25,000 and €200 million. “In Russia the projects are much larger in size on average as the Russians like big projects,” says Charles Voss, international director, Aberdeen Property Investors. His team looks for retail facilities where it can boost value via active management.
“We would look at new properties but the majority don’t meet our return expectations,” explains Voss. “Russian developers or owners tend to be over-optimistic in terms of what their property is worth.” The difficulty in Russia is that there is very little active product on the market as this is Russia’s first development cycle. It started about six years ago in Moscow, St Petersburg is about two years behind that, and the regional cities are about two to three years behind St Petersburg. “So there are limited opportunities in the regions and that’s why we prefer to work on a co-development basis.”
He says the outlook for new retail facilities in the bigger cities – those with 500,000 or more – is good, as they are rapidly accepted by the populace. “In the past there was poor planning and design of retail centres in the regions, but now there is proper planning on anchor tenants and customer flow so these projects will stand the test of time.”
If you want to read more about direct property investment in the BRICs and some of the risks to be aware of, please go to:
http://www.thomsonimnews.com/story.asp?storycode=40374
