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Global Conference 2008 | BRIC Real Estate: Investment Opportunities and Challenges
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Panel Detail:

Wednesday, April 30, 2008
10:50 AM - 12:05 PM

BRIC Real Estate: Investment Opportunities and Challenges

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Michael Golubic of The Townsend Group and his fellow panelists analyze the hottest global real estate markets.

Based on their experience investing billions throughout all four BRIC markets (Brazil, Russia, India and China), the five panelists provided a relatively objective breakdown of their rationale for investing in each country, along with some of the risks their firms are actively managing.

Linda Assante of Oak Hill Investment Management kicked off the panel by reminding the audience that although the Russian population is shrinking, China, India and Brazil will combine to add 360 million people to the global population within the next ten years. This statistic, combined with significant economic growth, will drive sustainable large-scale demand for all types of real estate in the BRIC markets.

At a macro level, Michael Golubic of the Townsend Group stated that the exploding demand for commercial and residential space has created an urgent, opportunistic investment atmosphere and returns between 20 and 30 percent. Golubic also mentioned that, in general, real estate makes a good inflation hedge due to the ability to pass on price increases through increased rents or CPI-adjusting contracts. However, Peter Madden of APG Investments US reminded the audience that the real estate boom has led to a significant shortage of human capital in all markets, and that no investor should move forward without qualified local personnel on the front lines.

As the discussion moved to India, Katherine Farley of Tishman Speyer and Rajesh Agarwal of AIG Investments described the factors currently attracting investment capital. Due to the fact that the Indian market only opened up to foreign direct investment in 2004, there are currently more hotel rooms in Orlando than there are on the entire Indian subcontinent. Similarly, India has only 1 square foot of retail real estate per capita, as compared to 20 square feet per capita in the United States. India is currently about 4 million housing units short, and demographic trends are exacerbating the problem, with a young population and increasing numbers of women choosing to live alone rather than with their parents. The government is trying to encourage development with tax incentives, but with India on track to have 70 cities of more than 1 million people each by 2020, the bureaucracy may not be moving fast enough.

India is not without its challenges. Many investors have been frustrated by the desperate lack of infrastructure; the slow, wasteful bureaucracy; the minimal access to local financing; and the recent poor performance of the Indian stock market.

The population growth issues in China are very similar to India, but the key difference is the role of government. Farley stated that if an investor's goals align with the goals of the Chinese government, things can happen very quickly. She argued that her firm looks for investments with strong fundamentals that have the potential for a "pop" from market developments such as high-speed rail and "green" incentives. Farley also stated that although China is full of flashy office buildings, once you peel back the exterior and look inside, many of them don't have the internal office layout to fit the needs of multinationals looking for true class-A commercial space.

Many investors are scared off by the fact that the Chinese government owns all the land in China, only providing 50-year commercial leases and 70-year residential leases to developers. Farley acknowledged this risk, but emphasized that working with the U.S. government can actually be more risky due to the higher potential for litigation.

As the conversation moved on to the Brazilian market, Joo Teixeira of GoldenTree InSite Partners provided some excellent insight into the root causes behind Brazil's real estate boom. The Brazilian government provided additional mortgage protection to the banking industry several years ago. Since 2005, mortgage interest rates have dropped from 14 to 10 percent, loan durations have grown from 15 years to 30 years, and loan volume has grown from $3 billion to more than $15 billion. This has increased the market for a $150,000 condo from 2.5 million potential buyers to 5.5 million potential buyers just based on affordability metrics. These banking changes, combined with more than 8 billion gallons of oil reserves found off the coast of Rio, controlled inflation for the last 15 years. An 18 million-unit housing shortage makes Brazil one of the hottest real estate markets in the world.

The challenge for this kind of market is rapid price appreciation for investors who aren't in the market yet. Urban property values are skyrocketing, cap rates have dropped from 13 to 9 percent, and the lack of consistent institutional control outside of the major urban centers all combine to increase risk.

Although all the panelists acknowledged the incredible potential of the Russian market, many of them were still in the "wait and see" mode when it came to capital allocation. Michael Golubic's clients had enjoyed some success partnering with the World Bank, but outside of international institutions, working with the oligarchy could produce results, but also plenty of negative media attention. The combination of language barriers, lack of transparency, corruption and a general lack of faith that investors would be able to get their money out of Russia has kept a lot of international capital on the sidelines.

When asked about what countries might appear on the global real estate radar screen next, Turkey and Vietnam topped the list, followed closely by Mexico, Colombia and Argentina.

As the conversation wrapped up, the panelists all emphasized the importance of having a qualified local team on the ground prior to investing and general optimism about the future of the BRIC markets.

Speakers:

Rajesh Agarwal, Managing Director, AIG Global Real Estate; Head of Global Real Estate Division, India, AIG Investments

Katherine Farley, Senior Managing Director, Emerging Markets and Global Corporate Marketing, Tishman Speyer

Michael Golubic, Consultant, The Townsend Group

Peter Madden, Executive Director and Co-Head of North American Real Estate Investments, APG Investments US Inc.

Joo Teixeira, Managing Director, GoldenTree InSite Partners LP

Moderator:

Linda Assante, Partner, Oak Hill Investment Management LP


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