Emerging markets ‘unstoppable’

Real estate will always be a local a business on the ground, but the fundamentals driving the industry have gone increasingly global, according to delegates at the North American Private Equity Real Estate Forum, which began today in Midtown Manhattan.

In an opening keynote address called, “Markets that Matter – Where is the money going today?” Morgan Stanley’s Jay Mantz, managing director and global co-head of real estate, said a significant share of “this weight of global capital flows” is aimed at emerging markets.

“A huge emphasis on emerging markets is a must,” said Mantz, who noted that real estate opportunities exist in what he termed “New Europe,” markets such as Poland and Turkey with strong demographic trends, as well as Asia’s two titan’s of economic growth, China and India, which are experiencing rapid urbanization.

“China is a little bit unstoppable,” said Mantz. However, he noted a sea change in doing business in emerging markets, particularly in Asia. Investors are no longer just hopping long haul flights to perform due diligence, but are increasingly setting up shop in target countries.

Across emerging markets, the real estate industry seems to be reaping the benefits of significant “tailwinds,” including the increase in liquidity, unprecedented synchronicity between major central banks with regard to interest rates, and arbitrage opportunities between public and private real estate markets.

“Global capital flows are homogenizing real estate,” Mantz said.

Mantz noted that REITs are on the rise internationally. In Asia, for example, real estate companies still strongly prefer to go public. This contrasts with North America, where roughly $50 billion has been taken out of the market as private equity real estate funds have taken increasing numbers of real estate companies private.

“Private investors still feel there is more value on a private basis than in a public format,” Mantz said of North America.

In a conversation between PERE editor Paul Fruchbom and Starwood Capital’s Barry Sternlicht, the hotel magnate revealed he is also bullish on both emerging markets and the commercial property market in general.

Sternlicht highlighted the early recovery of the hotel sector. “It’s the asset class that recovered first and strongest,” said Sternlicht. However, the US market presents an interesting situation not seen since the 1980s because “you are chasing a bull market in commercial property” coupled with a softening residential market.

In today’s market, fundraising doesn’t present a problem for larger funds. “There is a lot of money sloshing around,” said Sternlicht. However, spending that money can be challenging.

The yield-seeking capital has sloshed to the emerging markets, particularly Asia, Eastern Europe and parts of Latin America. However, those markets are often less transparent and present different challenges than investors face in Europe and North America, including entrenched political corruption, said Sternlicht.

However, having a local presence and a good partner in an emerging market cannot be overstated, he added.

Sternlicht is particularly bullish on India. He said his firm will likely have 100 people in India within two years.

And it is those fast-growing economies that will present opportunities for years to come. Likening the future of the West to the fate of the Roman Empire, he said the US and Europe will increasingly lose out to places where the new titans of industry are rising.

“We’re at the back end of our parabola,” Sternlicht said.