Why Sam Zell and other big players are investing in emerging market RE

Over the last 18 months, investors like Sam Zell’s Equity International and Brookfield Property Partners have started inking deals in emerging markets at levels not seen since 2012.

Brookfield is on the cusp of finalizing a $1 billion deal to buy office and retail space in a suburb of Mumbai; Blackstone Group is reportedly keeping a lookout for investment opportunities in India; and Equity International bought a $154 million stake in a Brazilian company, according the Wall Street Journal.

“Our appetite has increased and our enthusiasm has increased,” said Sam Zell to the Journal.

The cause for investors’ interest can be attributed to growth forecasts for emerging markets, which the International Monetary Fund expects to increase from 4.1 percent in 2016 to 4.8 percent next year. Even though the IMF’s expected growth rate for these markets is the slowest on the books since 2009, it’s better than the expected growth rate of developed markets.

But the lay of the land in emerging real estate markets has changed since their peak years prior to the financial crisis when strong growth in “BRIC” economies — Brazil, Russia, India and China — attracted big investments.

Now, Russia is largely seen as a pariah due to its legal system and China’s homegrown players are “formidable competitors,” according to the Journal. What hasn’t changed is the high rate of return emerging markets can yield — in some cases returns can be more than 20 percent despite higher risk.

“If you were pricing ground up development risk in an emerging market, you would be entitled to earn at least 1,000 basis points more on a currency hedged basis return relative to a U.S. project of similar ground-up real estate risk,” said head of KKR Real Estate Ralph Rosenberg to the Journal.

[WSJ] — E.K. Hudson