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Real estate remains hot in emerging economies

Sebastian Tong Reuters IHT
Real estate remains hot in emerging economies - London - Credit Crunch - Brazil - Russia - United States

LONDON: Western housing bust or not, real estate continues to be hot in countries with emerging economies.

The global credit crunch sent property prices reeling in developed markets from the United States to Spain, but it appears to have done little to slow the real estate sector in places like Brazil and Russia, countries still thriving on a commodities boom and increased access to mortgage financing.

The dire combination of slowing economic growth and rising inflation might be prompting some investors to shun emerging-market bonds and equities, but others are positioning themselves for property values to rise further.

"We're advising investors to own land, buy into real estate brokers, construction firms or suppliers of raw materials," said Jonathan Garner, head of emerging markets strategy at Morgan Stanley. "For purer property-related plays, we are recommending some property developers."

Growing urbanization and rising incomes are fueling property demand in the countries with the four largest emerging economies: Brazil, Russia, India and China, known as BRIC.

Low interest rates in countries whose currencies are pegged to the dollar, like the United Arab Emirates, and a shortage of homes and offices are keeping real estate values there at records, too.

Unlike their counterparts in developed economies, banks in most emerging markets are largely unaffected by the liquidity squeeze set off last year by huge subprime mortgage defaults in the United States.

In a report Thursday, the ratings agency Fitch said that home builders in the BRIC economies were supported by rising home affordability and economic growth, although they face risks like greater uncertainty in legal and regulatory environments.

"The credit crunch has very limited relevance to many emerging markets," Garner said. "Not only are the banks in good shape, you've also got households that are not overextended."

The ratio of household debt to gross domestic product in the BRIC countries ranges from 5 percent to 10 percent, compared to more than 100 percent in Britain and 90 percent in the United States, he said.

Soaring consumer prices, particularly vexing for emerging economies, where people typically spend more on food as a percentage of income than in developed countries, are also making inflation-linked rents an attractive hedge.

Fund managers say that the overall rise in asset values from inflation could make real estate more attractive, even though it raises borrowing costs for developers and buyers.

Paradoxically, the allure of brick-and-mortar assets might be further burnished as a result of weakening equity values, which were down nearly 6 percent in emerging markets since the start of 2008.

"When stock markets go down, some investors see physical assets such as property as 'safe haven,"' said Jeff Chowdhry, head of emerging equities at F&C Investments.

Chowdhry said he was upbeat on Mexico and Brazil, where mortgage growth is making middle-class home ownership more affordable, but cautious on India, where residential property appears overvalued, as well as on Turkey.

"We don't believe that a property rise is sustainable when stock prices continue to fall and interest rates rise," he said.

Since the start of the year, the Turkish stock market has lost 27 percent of its value, while its currency has waned 5 percent against the dollar.

Savills, the British property services company, is undeterred. Its property fund management unit, Cordea Savills, is raising €400 million, or $622 million, for a fund aimed at Turkish retail and residential real estate, with a targeted return on investment of 25 percent a year.

"This is a country of some 70 million people, with half of the population under 30 and with an average annual population growth of about 1 percent," said Ian Jones, director of investments at Cordea Savills. "The economy is slowing, but coming down from a high base."

The growing spending power of emerging-market consumers means that retail property in these economies is particularly promising, said Biljana Bozic, head of real estate at East Capital in Moscow.

"Thanks to oil prices, disposable income has increased almost 75 percent in the last five years," said Bozic, who is managing East Capital's €200 million property fund aimed at retail property in Russia, Ukraine and Kazakhstan.

"Retailers want to expand, but can't find available space," he said. "During the Soviet era, there was hardly any commercial real estate built."


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