There has been an upsurge in interest in Iran since the conclusion of the deal with the P5+1 (the UN permanent Security Council members plus the EU) whereby Iran would accept proposals to police its nuclear industry to ensure that atomic weapons are not being developed. In return, all of the sanctions imposed on Iran by the US, the EU and the UN are to be removed within four months to 12 months of the final accord (when the Iranian implementation of the accord has been ratified by the International Atomic Energy Agency).
Although the deal has its opponents, it looks like it will be ratified by the US Congress. In one sense, this brings us back to 2006 when the most recent set of sanctions started to be imposed. But there is a sense that the deal may kick off a more fundamental change in Iran’s relationship with the west.
International peace is a worthy ambition but it is the economic potential of Iran which has interested many. Iran is a large country, with around 70 million people. But it is its potential rather than its current economic strength that is interesting.
To give an idea of what might be expected; Iran currently has a GDP per person which is little over 60 percent of Turkey’s. Iran shares many of the characteristics of Turkey; similar size population, similar location, similar degree of urbanization, similar provision of health, education and training, according to the Global Competitiveness Index.
The argument follows that, with the right changes to Iran’s institutions and competitive framework, including an economy that is more open to the rest of the world, there is no reason why Iran’s non-oil GDP should not be as high as Turkey’s. But that is not where the argument ends. Iran is sitting on 11 percent of the world’s oil reserves, and it also has the world’s second largest natural gas reserves after Russia.
Accordingly, the implications for commercial property are also sizeable. Iran has a number of 1 million people cities with Tehran heading the list with over 8 million people. Size does not necessarily mean prosperity or a major office market, but Tehran is already a major administrative centre and has the potential to be a major commercial centre too.
Although a lot of Iran’s potential is built around its oil and gas reserves it has a bigger population than any of the other Middle Eastern oil states and a much more diverse economy. This opens up opportunities for a mass consumer market and a large retail industry on a western scale – and retail development and investment opportunities to go with it. The market is large enough already to attract foreign retailers and it only stands to get bigger and, of course, where modern retail networks develop, modern logistics networks develop too.
The attraction of a newly opening up market is the potential for yield compression as investor interest and liquidity increase. The market is in such an early stage that it is hard to say what the yield is at present.
CBRE Research, however, has identified four factors that determine shopping center yields in emerging markets. Low yields depend on low long-term interest rates, good infrastructure quality and connectivity, strong and non-volatile consumer spending growth and investment market liquidity. Iran scores surprisingly highly on infrastructure already and, as we have argued, has the potential for rapid consumer spending growth.
Inflation and interest rates are high, but are falling. That just leaves investment market liquidity but that should follow as the economy opens up and develops. What applies to shopping centres should apply to other sectors too and the implication is that there will eventually be a potential for generalised yield compression.
All of this is conditional of course. Iran will not open up overnight and it might never open up if some of the old guard of Iranian politics get their way. Even if it does start to open up, it will be a tricky play for both investors and occupiers and working with local partners will be essential.
For all the caveats though, Iran has taken the first step and the potential is there.