Emerging Financial Markets 12: Real Estate Investment

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Emerging Financial Markets 12 Real Estate
Investment
Prof. J.P. Mei
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Long-term fundamentals

• Housing Crisis in Almost All of the Major Cities
  in Developing Nations
• Demographics Are Likely to Create a Strong Demand
  
• Massive Urbanization in Developing Countries
• Benefit From Rapidly Rising Real Wages

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But Still a lot of People
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Why Investing in Emerging Market Real Estate

• Generous Long-term Rates of Return
• Relatively Low Correlation With Other Assets,
  Such As Stocks
• Low Correlation Across Countries
• Fairly Dependable Hedge Against Inflation in
  Emerging Markets
• Prices are going through the Roof?

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Case, Goetzmann, and Rouwenhorst (1999)
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Case, Goetzmann, and Rouwenhorst (1999)
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Global Real Estate Speculation

• Real Estate Developers Are Prone to Excess
• easy credit
• liberal legal structure favor debtors
• Property over-supply and vacancy rates in
  Emerging Markets
• Business Risks and Political Risk
• Shorter Property Cycles in Emerging Markets
• Real Estate Valuation

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Land Prices in various cities, one square meter
in 1989
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Source GPR
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Source GPR
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Dynamic Model for real estate valuation

• Impact of Lower Interest Rates
• Increasing Investment and demand for space
• Reduce carrying cost
• Increasing portfolio allocation to RE
• Reduce discount rates
• R100m, g5,k15,VR/(k-g)1B
• R70m, g4,k10,VR/(k-g)1.17B
• A Simplified Geltner and Mei (1995) Model
• Dynamic model for real estate valuation
• Allows for time-varying discount rates
• Forecasting cash flow and risk premium

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