Enter the Frontier

A PERE staffer once overheard an instructive real estate truism that is equally helpful in framing any discussion of investment in “frontier” markets.

The scene: Manhattan, West Village, a young woman walking out of an apartment building with what are revealed to be her mother and an apartment rental broker. The young woman is in tears and being consoled by her mother. The broker is empathetic and frustrated. He slowly explains to his distraught client: “You're going to have to give up either location, size or price. You're not going to get all three.”

Having surveyed the developed world for interesting opportunities, and having found record-low cap rates, private equity real estate investors flocked to the emerging markets, particularly to China and India. You now can't swing a chopstick in the Peninsula Beijing without hitting some private equity guy in town to scout for deals, or to hire a local pro. This rush to the emerging markets has dismayed some investors, who see prices in downtown Moscow, Mumbai and Shanghai now rivaling anything seen in the West.

When an “emerging” city becomes a global capital, the prices follow. Private equity investors are now scouting for opportunities beyond the BRICs in search of real estate that will become more valuable as “frontier” economies become wealthier. When price becomes an issue, you have to consider a more remote location.

What is a frontier market? No one we spoke to had the same answer. We'd like to propose some definitions – a frontier real estate market is one that makes large, Western, institutional investors nervous if they hear it might appear in their emerging markets allocation; it's the market next door to the celebrated, up-and-coming economy that looks a poor relation; it's the place you say you've visited and a friend asks about safety issues.

Indeed, perception – as opposed to market fundamentals – have much to do with keeping investment capital out of Libya, Albania, Morocco, Vietnam, Kazakhstan, Colombia and Panama. All of these destinations have very different fundamentals, but they are similar to the extent that they have not been embraced by institutional capital as have India and China. Specialist private equity real estate professionals are hoping to change this.

Starting on p. 34, we report on developments in the seven frontier markets mentioned above. Robin Marriott paid a visit to Casablanca for his Morocco article and observed that there is indeed a shortage of quality real estate, as well as a shortage of private equity real estate firms stepping in to fill the void. This spells opportunity for the adventurous investor, and possibly high returns.

Enjoy the issue,

David Snow

David.S@peimedia.com