Emerging market real estate is a solid long-term investment for two reasons, says Jason Yablon, vice president and portfolio manager at Cohen and Steers in New York. He manages the Renaissance Global Real Estate Fund.
First, a large amount of real estate has moved from private to public hands due to REIT legislation in the U.S.
Typically, families who have owned buildings for decades then sell their interests to publicly traded real estate companies. Families then use their cost-of-capital to grow earnings and assets. They also expand efficiencies and gain scale.
Yablon says this dynamic has been playing out in the U.S. over the past twenty years, causing the REIT market to grow exponentially.
Further, this same securitization process is occurring within emerging markets, which creates pockets of opportunity for investors.
This is because public holders professionally manage property with more sophisticated operating systems, as well as scale, says Yablon.
He adds new management can also drastically boost the value of real estate. “People buy [property] at one price and then raise the rents…aggressively. [That] is ultimately good for equity investors.”
Yablon says the Mexican real estate sector is booming, with about five real estate companies having gone public over the last year and a half.
And accessing emerging markets through real estate is better than more traditional forms
of equity investment. “If people buy a Brazilian ETF, for example, [do clients] know what you’re getting?” says Yablon, explaining many buyers of Brazilian funds don’t realize they’re primarily buying into resources like oil and iron ore.
To diversify away from these assets, “half our investments in emerging markets are related to income-producing assets. This includes malls, supermarkets, industrial facilities, and residential housing developments.”
By tracking growing commercial and residential real estate, you’ll be tracking increases in consumer confidence and economic growth.
“When someone gets a job in Brazil, they’ll [likely] move out of their parent’s home and get their first apartment. They then fill it with stuff they bought at the mall.”
Yablon concedes emerging markets can be volatile, saying it’s crucial to research potential investments.
He adds, “Disclosure can be very poor. You need to make sure the management team is going to make the right decisions. They have the potential to create or destroy [property] values.”
When deciding where to invest, Yablon suggests clients weigh both economic and sociological factors. “You have to get where [the country] is in its economic cycle and interest rate cycle. You also need to have a view on the region’s [government] policy and on its level of crime,” he concludes.