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Beaverton, OR, United States, 2005/10/18 - Leading commercial real estate investment bank, Pacific Security Capital (“PSC”), identifies the risks and benefits that commercial real estate investors should consider when investing in emerging markets
Commercial real estate investors are facing the most competitive commercial real estate market environment in recent history. Improved market efficiencies coupled with today’s surplus of capital flow have created a reduction in the total investment returns that can be achieved on investments in the U.S. commercial real estate industry.
“Instead of disinvesting themselves from commercial real estate allocations, investment managers are now looking around for higher growth markets,” said Mike Myatt, Executive Managing Director, Pacific Security Capital. “Emerging Markets in Eastern Europe, India, Latin America, China, and the rest of Asia present scenarios for higher growth, even on a risk adjusted basis.”
The following factors will allow commercial real estate investors to achieve higher returns by investing in emerging markets as opposed to the U.S. market.
• Rising Economies: Over the past decade, the twin drivers of expanding world trade as well as a more globalized production system have permitted a number of Emerging Markets to experience the highest GDP rates in the world.
• Demographics: For the most part, Emerging Markets represent younger populations, growing numbers of well-educated professionals, an expanding middle class, growing consumer bases, urbanization, and rising incomes.
• Commercial Demand: The economic expansion as well as the presence of global companies that bring employment oriented around intellectual capital is creating demand for modern, western style, commercial real estate infrastructure.
• Residential Demand: One of the biggest exports the U.S. has had over the past twenty years has been culture and lifestyle. As the successful Emerging Market economies undergo the demographic shifts described above, demand for western style single family residences as well as modern multifamily is experiencing explosive growth.
• Closed Market Systems Opening Up: Most successful Emerging Markets have been engaged in systematic reform of basic societal values we take for granted in the developed world. These include property rights, legal process, published regulations etc.
“Despite the many benefits of investing in emerging markets, investors should do so with extreme caution,” said Jim Kean, Managing Director & Chief Investment Officer, Pacific Security Capital.
Some of the most common risks of investing in emerging markets include:
• Political risk: The process of modernizing the economies and systems of emerging markets does not represent a steady or predictable process, which has been influenced by political developments.
• Legal and regulatory transparency: It is important to properly understand a country’s system for governing property rights and development if significant investment returns are to be expected.
• Property rights: In the U.S., title companies provide a very systematic, quickly researched method for determining legal descriptions of property as well as what constitutes a claim on the subject property. Things are not nearly as straight-forward in an emerging market.
• Lack of professional commercial real estate skills: emerging markets are fragmented and lack the professional services a developed world investor may take for granted.
• Operational and logistical concerns: maintaining offshore investments in commercial real estate can add to the complexity of operational and logistical efficiencies.
• Liquidity concerns: Lack of central databases as well as public records of transactions means that there is a deficiency of market pricing information to make comparisons as well as drive transactions. Reduced market transparency also means that transactions take longer to close.
• Infrastructure: In the U.S., there is an assumption of basic infrastructure as structured and mandated by an organized governmental authority. In many cases, rules governing infrastructure and who is responsible for it barely exist in these emerging market countries
• Zoning and impairment: Every market has a different approach to what the owners of properties around your property may or may not do. In many of these environments, little or no zoning exists. The risk of someone engaging in development detrimental to the value of your property is very real.
• Capital Controls: When confronting the issue of repatriating capital from a successful commercial real estate investment, there is a real danger of not being able to extract capital and/or profits from the Emerging Market.
• Currency Risks: Let’s say U.S. investor is taking dollars and purchasing an Indian property denominated in rupees. Two years later the property sells and you record a big profit. However, if you did not hedge the currency, you risk recording a loss or at least a reduced profit because of exchange differences.
“While all of these risks (and more) can be present in emerging markets investments, these risk factors can be successfully managed by engaging the appropriate professional advisor,” said Kean. “A successful emerging markets investment strategy will involve selecting a set of advisors who can help a new investor navigate the maze of issues present in each geographic area.”
About Pacific Security Capital
Pacific Security Capital (pacificsecuritycapital.com) is a leading commercial real estate investment bank providing commercial real estate loans, structured finance, investment sales and corporate, professional and advisory services. PSC is headquartered in Beaverton, Oregon with other offices worldwide.