Trekking to Mongolia

While groups like Apollo and New York-based property firm Tishman Speyer have focused time and resources on India, other funds are hedging their bets on China: buying up office buildings in Shanghai, investing in Chinese property companies or forming JVs with established mainland developers. But as the herds of investors continue to scour the globe for the next place to invest, it sometimes pays to look a bit further off the beaten path.

Russia, for example, is a market that is drawing interest from a number of firms. In 2005 and 2006, a reported 3 million square feet of housing has been built, as luxury communities spring up around Moscow for newly moneyed Russians and wealthy ex-pats. As one of the few cities in Russia with a growing population—not to mention a growing middle class—a bet on the Russian capital could turn out to be a smart one.

A recent Newsweek feature set forth the planet's 10 most dynamic cities. Of course, some of the usual suspects made the list—Moscow, London, Las Vegas—but so did a lot of cities most Westerners have never heard of. Ghaziabad? It's a suburb of Delhi that is home to a red-hot real estate market thanks to the city's growing economic fortunes. Others on the list include towns like Goyang, a suburb outside of Seoul, and Fukuoka, a major Japanese city on the island of Kyushu and a bustling manufacturing center for blue-chip firms like Sony, Toshiba and Canon.

Some adventurous investors are already moving further away from the pack. The suburbs of Delhi or the Southern tip of Japan may be exotic to someone in an office in London, but what if you traveled east out of the City, past the expanding economies and bustling property markets of Eastern Europe, over the growing promise of Moscow, beyond the Volga River, the great plains and steppes of Siberia and the Sayan Mountains?

You would be in Mongolia, somewhere between the hot markets of Russia and China. But even here savvy investors are finding big returns in real estate.

With just under a million inhabitants, the capital city Ulaanbaatar might not strike one as the sort of place that lends itself to real estate investing. But Baron Christopher de Gruben would probably beg to differ. His Asia Pacific Investment Partners, which focuses on the emerging markets of Asia, has found that Mongolia offers up some attractive opportunities.

Gruben says that, with the recent discovery of gold and large amounts of minerals, Mongolia's economy has grown. Expatriates working in the mining business are coming to the country in increasing numbers and the improving economy has created demand for better housing stock from locals. But, at this point, Gruben says, more than half of the population is still living in traditional nomadic dwellings known as “gers.”

“This situation is analogous to Hong Kong in the 1950s and 1960s, when a large percentage of residents actually lived on junk boats without any permanent housing,” he says. “As the economy in Hong Kong grew, interest rates came down and mortgage products entered the market place, the demand for housing became quite substantial. Subsequently, there was a movement from the junks into apartments.”

While Gruben says a similar shift is taking place in Ulaanbaatar—and therefore stimulating high demand—growth has been stymied by a construction industry that cannot keep up. He says, while there was demand for around 8,000 units in 2005, only 2,800 were able to be built.

In its first vehicle, Asia Pacific invested exclusively on Mongolia, but Gruben is currently looking to raise a second vehicle with a target of $30 million that will be more diverse in sector and geography. In addition to Mongolia, the vehicle will focus on retail, residential and office space in Siberia as well as the Inner Mongolia region of China.

It isn't just Central Asia. Small, focused vehicles are taking advantage of everything from resort opportunities on the Dalmatian Coast in Croatia to residential developments in India's secondary cities like Cochin, Pune and Chandigarh.

As more money is invested in opportunity funds, many market participants are going to keep moving into emerging—and sometimes untested— markets. While Europe was once the new and exotic flavor de jour, the continent has since become commonplace and the teeming economies of India and China are the current bastions of excitement. And as those emerging markets become more crowded, some investors will move on in search of more outsized returns.

Suddenly, Ulaanbaatar doesn't seem so far away.

H&Q sells Chinese residential community
Shanghai-based H&Q Asia Pacific has sold the Shanghai Links Executive Community, a luxury residential and executive development located in the Pudong district, to the government-owned Pudong Development Group for an undisclosed price. In a statement, H&Q managing director Chih Wang discussed the problems that plagued the projects since its inception: “H&Q Asia Pacific and our investment partner, Deutsche Bank, had to fight a multi-jurisdictional legal battle and overcome deeply entrenched administrative obstacles in China in order to recover our investment from a web of fraud, misrepresentation and political manipulations.” In 1997, H&Q and its investor group took a 40 percent position in the project for $50 million (€40 million); in 2000, the group sued its original partners for fraud.

Abu Dhabi launches $200m real estate fund
Abu Dhabi-based investment banking firm The National Investor (TNI) is reportedly launching an investment fund to take advantage of the hot property markets in the Gulf Cooperation Council countries, the Middle East and Northern Africa, India and Pakistan. The $200-million (€159 million) vehicle, called the TNI Real Estate Development Fund, will focus on the commercial, residential and mixed-use sectors. Discussing the fund's strategy, the firm's chief executive, Orhan Osmansoy, recently told the Middle East Economic Digest: “In Abu Dhabi, the Gulf and the region, real estate is buoyant. We'll seek to develop property, maybe buy land, and redevelop or refurbish property.”

Standard Chartered makes $50m Shimao investment
UK bank Standard Chartered has invested $50 million (€40 million) in Shimao Property Holdings, a Chinese real estate developer. The investment came via its private equity arm, and co-investors included Morgan Stanley's real estate investment fund. In late June, Shimao offered 595 million shares in an initial public offering, raising HK$3.7 billion ($476 million; €379 million). Shimao Property, controlled by businessman Hui Wing-mau, develops luxury properties across China, including residential, hotel and commercial projects.

Dubai contemplates REIT legislation
The Dubai Financial Services Authority, the regulating body for the Dubai International Financial Centre (DIFC), is planning to launch real estate investment trust legislation. The group has released two papers and invited public comment on the legislative changes. According to a government statement, Consultation Paper No. 33 discusses the proposals to introduce laws regulating the establishment and operation of REITs, while Consultation Paper No. 34 looks at the ways to expand how foreign funds can be marketed in and from the DIFC. The DIFC also plans to allow for the registration and listing of REITs on the Dubai International Financial Exchange.