Determined to invest in real estate but unsure which markets will be the next big thing? Four real estate experts give their top five global regions which they believe are the best to invest in and can yield maximum returns
Craig Thomas, research head, Citi Property Investors.
At its core, real estate is an empty box in which all sorts of economic activity is housed. Whether it is inventory, retail goods, jobs or households, real estate provides the shelter for all this productive market activity. As such, it makes great sense to buy and develop real estate in those areas that are seeing the greatest increases in economic production and wealth. This brings us to the fast developing economies in Asia Pacific such as China, India, Korea, the Philippines and Vietnam.
Asia does not hold sole title to fast developing countries. As Eastern Europe integrates further with the wealthier western economies, a host of new industries and a burgeoning entrepreneurial class are emerging. Places such as Ukraine, Lithuania and Poland are becoming economic dynamos to rival their Asian counterparts.
While developing economies provide significant demand for space, they also hold within them greater risk from over-development and opaque legal systems, not to mention political risk.
Conversely, developed, mature countries largely shelter real estate investors from those types of risks. While slower growing, one can time investments to occur at the beginning of business cycles, such that real estate demand rises along with the corresponding economic tides. Two such awakening economies are Germany and Japan, which are much more supply constrained with liquid capital markets and improving economic fundamentals.
Some giants are not so slow growing, however. Economies such as the UK and the bi-coastal areas within the US are in many ways the best of both worlds. They are developed, liquid, productive and relatively fast-growing as a result. These markets are fully-priced, but for the opportunistic investor add value to distressed properties allowing for strong returns in these otherwise secure and liquid markets.
South of the (US) border
Finally, prosperity in North America is creating greater opportunities in Mexico and further south in Central and South America. Mexico's burgeoning middle class and its popularity among western travellers provide strong returns close to the US. Equally, Brazil's large, diverse economy increasingly requires high-quality real estate assets that provide investors and developers strong returns.
David Hutchings, head of European research, Cushman & Wakefield.
Brazil has been the last of the "BRIC" markets to really fire investors' enthusiasm in the real estate sector, but that is now changing – helped by new government policies to encourage inward foreign investment. Residential and hospitality have become very popular targets for foreign players from North America and Europe – usually in coastal areas – but other commercial segments, notably in Sao Paulo and Rio de Janeiro, are looking attractive, medium-term investment targets. Yields remain high by regional or global standards – at around 12% for residential or retail, rising to over 14% for offices and distribution – and with a marked improvement in macroeconomic stability that looks set to be sustained, we anticipate strong performance on the back of rental growth and further yield compression, favouring retail and residential for medium-term returns after a strong short-term run from offices.
With foreign investment regulations steadily being reduced, India is one of the markets being most avidly followed by international investors. Strengthening FDI inflows join a very strong domestic investment market in real estate from funds and private individuals, and liquidity is increasing rapidly. Tier 1 and 2 cities offer opportunities, with offices and hospitality the most accessible area of current potential. Rental growth will be slowed by new construction in some markets but development gains and yields of 10–11% promise excellent performance over the short and medium term.
Macau has enjoyed a major boom in investment since the former monopoly in the gaming industry ended in 2002 and this is set to continue – with an estimated $20 billion in hotel and casino investment now underway. The growth of the region is not just reliant on tourism, as increased integration with mainland China and Hong Kong opens up new areas for development.
Macau also provides financial, banking and other services support to Hong Kong and is increasingly targeted by Hong Kong-based occupiers looking for cost effective space. The best performance is currently anticipated in the retail and hospitality markets.
Singapore has been one of the hottest markets in the world over the past year or so, with prime office rents climbing 61% last year and other sectors seeing double digit increases. Singapore is recognised as an easy market to do business in and a broad mix of investors are targeting it, with investment volumes almost doubling last year and liquidity amongst the highest of any Asian market.
Low supply is underpinning growth but the market's positive outlook is also based on sustainable demand drivers in the shape of money and people: Singapore is gaining ground as a key regional hub market and the government has bold plans to boost the population very significantly over the next 2 years. In time new supply will emerge to meet the demand this is creating but for the next 2–3 years, very strong growth is forecast.
Turkey has faced a fresh bout of uncertainty and volatility in political and financial circles this year, but this does not detract from its long-term potential for real estate investment. There is a shortage of modern supply in all sectors and while retail, hospitality and residential are the strongest current areas of interest, other markets also offer scope for future growth. Risk and uncertainty will continue to go hand-in-hand with opportunity in the coming years, but the dynamic nature of the market and its excellent demographic profile make it stand out.
Jeremy Gates, managing director, Strategic Real Estate Advisors.
The country is emerging from a period of low growth following reunification and investors are betting on the future performance of the German economy which is still the 3rd largest in the world. Investors should consider modern, refurbished, multi-tenanted office buildings in key German cities – Berlin, Dusseldorf, Hamburg, Munich and Stuttgart, particularly those attractive to domestic companies. Office rents are set to rise from low bases and vacancy rates are falling as new jobs are created in the service sector after a period of high unemployment.
The fact that this is still the world's largest economy and set to remain that way for the foreseeable future means that there continues to be a steady flow of equity into the real estate market from foreign investors. Good investment opportunities can be found nationally in sectors that will perform even if the economy slows including university and retirement accommodation. The south and south-eastern states are also good investment bets; here the economy is growing at twice the average rate in the US and they accounted for 25% of the country's two million new jobs last year.
London prime residential market
Now considered one of the most popular cities in the world, London's prime residential market has experienced extraordinary growth in the first half of 2007 (9%) and is on track to be the best-performing property market in the UK for the second year in a row. It continues to attract wealth from foreign investors seeking homes or buy-to-let investments. The largest returns are seen in Chelsea, Mayfair and Belgravia, closely followed by Holland Park, Notting Hill and Kensington.
This market is extremely strong, fuelled by London's international billionaires and the recent spate of record city bonuses. There appears to be no sign of a slow down in the demand that significantly outweighs the supply. Prime locations that offer the potential to upgrade to a top quality specification are good opportunities.
Mexico is now the world's 13th largest economy, with a stable currency and a solid political and business climate. Investment in middle income, residential property and development is increasingly attractive to the foreign investor, but partnerships with local developers provide the most attractive option. The country has a young population and the number of households is expected to double as children leave the family home. President Caulderon has encouraged private mortgage lending and vowed to double the size of the housing sector where there is currently a shortfall of more than five million units. In addition, a significant number of Americans are buying holiday homes here.
The investment property market in Qatar has been strengthened by global confidence in Dubai's market and as a result investors believe it offers massive growth potential. In a relatively short space of time the country has enjoyed substantial economic growth, a boom in the size of its population and has a rapidly expanding infrastructure.
The government has encouraged outside investors by allowing for the foreign freehold ownership of real estate in certain parts of the country. Good long-term investment opportunities can be found in mixed-use development schemes with local partners in locations with good transport access by car.
Joe Simpson, associate, Knight Frank.
Much is made of the rapid growth of the Indian economy – and rightly so, as GDP growth has been rapid and sustained. The economy is now the third largest in the world, as measured by purchasing power parity, and the 12th largest when measured in US dollar terms.
Mumbai, the hub of mainstream commercial activity in India, offers varied investment opportunities. Also, regions such as Gugaon, Noida and Greater Noida, which have been the subject of sustained development, are witnessing a further boost with infrastructure trying to catch pace with rapid development.
The Polish market differs from the other accession countries of central and Eastern Europe. Although Warsaw is the dominant commercial and administrative centre, there are significant secondary markets. Much of Poland's industry is based in the south and west of the country, while the service remains largely concentrated in the capital.
Strong economic growth and declining vacancy rates in the office market – currently 3.5% in central Warsaw having stood at 20% in mid-2003 – are leading to improved rental levels. The nation's secondary cities are also performing well, with healthy demand for a variety of asset classes from both occupiers and investors.
Belgium and The Netherlands
A combination of improving conditions in the economies of both Belgium and the Netherlands, along with that of powerhouse neighbour Germany, and the strengthening market property market fundamentals bode well for the Benelux region. Having long been the gateway to continental Europe, the strengthening of consumer confidence in Germany should underpin growth in the logistics sector.
In addition, the occupier markets in the office sector have improved substantially over the last two years. Vacancy rates have declined, occupier demand has improved markedly and rents are starting to rise. Brussels, despite being well known as the bureaucratic hub of the EU has a diverse occupier base and, like Amsterdam, attracts major financial institutions.
Finally emerging from a prolonged period of economic stagnation, Germany's property markets are enjoying a much-needed shot in the arm. International investors have been targeting the market with the view that the forecast improvements in economic performance will be reflected in the property market. This has already begun to ring true. Many of the country's primary office markets are now returning to growth. Although pockets of oversupply do remain, the improved confidence in the consumer market should support growth in the retail sector.
Africa is still the continent least explored by international investors – understandable, given the myriad of political, economic and social problems that have dogged much of it in the past. While there remains difficulty investing in Africa, and existing stock is scarce in most countries, the potential creation of new investment vehicles to target the market could see the opening up of the market to international investors.