Emerging Market Real Estate Investment: Investing in China, India, and Brazil

259 Pages·2010·4.58 MB·English

by  David J. Lynn

LYNN $60.00 USA/$72.00 CAN
THE FRANK J. FABOZZI SERIES
WANG
Praise for
In recent years, China, India, and Brazil have
DAVID J. LYNN, PHD, is an institutional real estate EMERGING MARKET received much attention, and rightfully so. They
investor, strategist, and portfolio manager with extensive
are among the biggest and fastest-growing
experience in national and international markets.
R E I E economies, encompassing a signifi cant percentage
EAL STATE NVESTMENT
Currently, he is Managing Director, Head of the Research
of the world’s land coverage, 30 percent of the world’s
M
and Investment Strategy Group, and Generalist Portfolio
population, and amounting to a combined gross
Manager at ING Clarion Partners. In this capacity, he E
domestic product (GDP) of more than twelve trillion
directs the fi rm’s strategic and tactical investment “An indispensible tool for executing successful international real estate investment R dollars. While there are ample real estate investment
decisions regarding investment portfolios. He is also a strategies with a focus on the biggest and fastest growing emerging markets. G opportunities available in these and other emerging
member of the Investment and Operating Committees, This is the only book of its kind. A must-have for serious investors.” IN markets, understanding the dynamics of this important
where he makes decisions on billions of dollars of new —STEPHEN M. RENNA asset class is essential if you intend on making prudent
G
investments, portfolios, fund strategies, and dispositions. President of the National Association of Real Estate Investment Managers I investments.
Lynn’s theoretical work has yielded new approaches and nM
v Focusing primarily on private equity real estate investment
analytical techniques in the areas of active portfolio “David Lynn and Tim Wang combine their extensive industry experience in real e
sA in China, India, and Brazil, this reliable resource details
management, market forecasting, fi nancial distress, and estate research and strategy into an insider’s look at how the professionals think t
iR an approach to commercial real estate investment in
emerging markets. He has published widely on the subjects about and act on international real estate opportunities. Reading this book is like n
gK emerging markets and illustrates several strategies and
olafn dre aul see.s tLatyen nin vheasst mwernittt, end evoerl ocpomauetnhto, reedco noovemr icses,v eanntdy hreaavli negst aat ep irnevfeersrtemde nset afit rmon.” the investment committee at a major international inE analytical methods crucial to successful investment.
Filled with in-depth insights and expert advice, Emerging
articles, internal investment and strategy papers, and —DR. DAVID FUNK CT Market Real Estate Investment focuses on investment
three major books, including Active Private Equity Real Director of the Cornell University Program in Real Estate hR themes and strategies as well as the economic, legal, and
Estate Strategy. He writes a highly regarded column i
nE institutional environment of each country.
called “Capital Trends” in National Real Estate Investor a
“For anyone considering investing or working in real estate in China, India, or A
magazine and is frequently cited in the media for his views , E Opening with two informative chapters that provide an
on the economy and the real estate industry. Lynn earned Brazil, this is the defi nitive starting point. David Lynn and Tim Wang provide a InL MERGING overview of the fundamentals of commercial and
his PhD in fi nancial economics from the London School timely and thorough introduction to each country’s economy and nascent real dE international real estate investment, this practical guide
estate markets.” i
of Economics, where he also earned a master of science aS also includes in-depth country-specifi c chapters on
specializing in fi nance. He holds an MBA from MIT’s —DR. PETER LINNEMAN , T China, India, and Brazil. These chapters contain:
Principal of Linneman Associates and the Albert a
Sloan School of Management. nA
Sussman Professor of Real Estate, The Wharton School M • An examination of the economic, institutional, and
dT ARKET
political environment of each country
TIM WANG, PHD, is Senior Vice-President and Senior BE
Investment Strategist with the Research and Investment “A compelling argument for investing in real estate opportunities in China, India, r • A discussion of the main features of each real
aI
Strategy Group at ING Clarion Partners. Dr. Wang and Brazil. This is the most comprehensive discussion of topics and investment zN estate market, including real estate foreign direct
joined ING Clarion Partners in 2006 and has authored strategies that real estate investors must consider when evaluating emerging markets.” ilV investment (FDI)
R E
more than fi fty internal and external real estate investment —ROBERT M. WHITE, JR., CRE E EAL STATE • A review of the major real estate markets and
strategy and market research articles and book chapters. He Founder and President of Real Capital Analytics Inc. S submarkets in each country
is a frequent speaker at industrial conferences. Tim holds T
• An analysis of the four or fi ve primary real estate
an MBA from New York University and a PhD from the “The best guide there is to real estate markets in the high economic growth countries M
sectors in each country: offi ce, retail, residential,
University of Georgia. of Brazil, India, and China. If you are a private equity investor contemplating E
I industrial, and hotel where applicable
emerging market real estate, read this book.” N NVESTMENT
• A discussion of real estate investment options
—JAMES FETGATTER T
Jacket Image: © iStockphoto Chief Executive Offi cer, Association of Foreign Investors in Real Estate (AFIRE) and strategies
Whether you’re an institutional or private investor, the
ability to achieve higher returns and portfolio
Investing in China, India, and Brazil diversifi cation—while accessing a larger investment
universe—is essential. Emerging Market Real Estate
Investment will show you what it really takes to make
this happen and put you in a better position to excel when
investing in real estate abroad.
DAVID J. LYNN, PHD with TIM WANG, P D
H
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Additional Praise for
Emerging Market Real Estate Investment
“David Lynn and Tim Wang have produced a real winner. Emerging mar-
kets real estate is an essential subject for any investor because of its high
returns,itscontributiontodiversificationinaglobalportfolio,anditsroleas
aninflationhedge.Thisbookfocusesonthethreemostimportantemerging
market real estate arenas: Brazil, China, and India. Their long experience
in real estate markets and the hundreds of interviews he has conducted
givesbookuniqueinsightsintoinvestinginthesemarketsaswellasemerg-
ing markets real estate generally. His analysis of property investment ap-
proachesandstylesisexcellent,andhisparadigmoflocation,competition,
andgrowthprovidesanappropriateframeworkforthebook.Thesections
onthepracticalaspectsofinvestinginemergingmarketrealestateprovide
thereaderwithadetailedguidethroughthecomplexrisk,regulatory,legal,
andcompetitivecharacteristicsofeachcountry.Thisisanotableandunique
contributiontoemergingmarketsinvestingknowledge.”
—Dr.MarkMobius
ExecutiveChairmanandPortfolioManager
FranklinTempletonInvestments
“David and Tim have written the ‘must read’ book for all real estate in-
vestors interested in Brazil, China and India. He comprehensively covers
thelandscapeofissues—economic,policy,legal,market,sector,entry,exit,
and strategy. Of noted value is their sanguine assessment of the risks and
opportunities of alternative strategies in each country. The first outlay for
allshouldbeDavidandTim’sbook.”
—Dr.RaymondTorto
ChiefEconomistofCBRichardEllisandtheCo-Founder
ofTorto-WheatonResearch
“Emerging Market Real Estate Investment is a powerful tool for those
engagedinforeigninvestmentgenerally,aswellasinChina,IndiaandBrazil
inparticular.Itcombinesabroadgeneralviewofcompetitivestrategywith
localdetailoncostsandlegalaspects.Thebookisanintelligentandpractical
guidetoforeignrealestateinvestment.”
—BowenH.McCoy,CRE
formerPartnerandManagingDirector,MorganStanley
“This book does for international real estate what Paul Samuelson’s Eco-
nomicsdidforeconomicsstudents—itfinallyprovidesanewdisciplinewith
its first Bible. Rich in content and filled with practical insights, this book
couldn’thavecomeatabettertimeinthemarketcycle.”
—KennethA.Munkacy
SeniorManagingDirector,GIDInternational
Group/GIDInvestmentAdvisers,LLC
i
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TheFrankJ.FabozziSeries
FixedIncomeSecurities,SecondEditionbyFrankJ.Fabozzi
FocusonValue:ACorporateandInvestorGuidetoWealthCreationbyJamesL.GrantandJamesA.Abate
HandbookofGlobalFixedIncomeCalculationsbyDragomirKrgin
ManagingaCorporateBondPortfoliobyLelandE.CrabbeandFrankJ.Fabozzi
RealOptionsandOption-EmbeddedSecuritiesbyWilliamT.Moore
CapitalBudgeting:TheoryandPracticebyPamelaP.PetersonandFrankJ.Fabozzi
TheExchange-TradedFundsManualbyGaryL.Gastineau
ProfessionalPerspectivesonFixedIncomePortfolioManagement,Volume3editedbyFrankJ.Fabozzi
InvestinginEmergingFixedIncomeMarketseditedbyFrankJ.FabozziandEfstathiaPilarinu
HandbookofAlternativeAssetsbyMarkJ.P.Anson
TheGlobalMoneyMarketsbyFrankJ.Fabozzi,StevenV.Mann,andMooradChoudhry
TheHandbookofFinancialInstrumentseditedbyFrankJ.Fabozzi
InterestRate,TermStructure,andValuationModelingeditedbyFrankJ.Fabozzi
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TheHandbookofEquityStyleManagementeditedbyT.DanielCogginandFrankJ.Fabozzi
TheTheoryandPracticeofInvestmentManagementeditedbyFrankJ.FabozziandHarryM.Markowitz
FoundationsofEconomicValueAdded,SecondEditionbyJamesL.Grant
FinancialManagementandAnalysis,SecondEditionbyFrankJ.FabozziandPamelaP.Peterson
MeasuringandControllingInterestRateandCreditRisk,SecondEditionbyFrankJ.Fabozzi,StevenV.Mann,
andMooradChoudhry
ProfessionalPerspectivesonFixedIncomePortfolioManagement,Volume4editedbyFrankJ.Fabozzi
TheHandbookofEuropeanFixedIncomeSecuritieseditedbyFrankJ.FabozziandMooradChoudhry
TheHandbookofEuropeanStructuredFinancialProductseditedbyFrankJ.FabozziandMooradChoudhry
TheMathematicsofFinancialModelingandInvestmentManagementbySergioM.FocardiandFrankJ.Fabozzi
ShortSelling:Strategies,Risks,andRewardseditedbyFrankJ.Fabozzi
TheRealEstateInvestmentHandbookbyG.TimothyHaightandDanielSinger
MarketNeutralStrategieseditedbyBruceI.JacobsandKennethN.Levy
SecuritiesFinance:SecuritiesLendingandRepurchaseAgreementseditedbyFrankJ.FabozziandStevenV.
Mann
Fat-TailedandSkewedAssetReturnDistributionsbySvetlozarT.Rachev,ChristianMenn,andFrankJ.Fabozzi
FinancialModelingoftheEquityMarket:FromCAPMtoCointegrationbyFrankJ.Fabozzi,SergioM.Focardi,
andPetterN.Kolm
AdvancedBondPortfolioManagement:BestPracticesinModelingandStrategieseditedbyFrankJ.Fabozzi,
LionelMartellini,andPhilippePriaulet
AnalysisofFinancialStatements,SecondEditionbyPamelaP.PetersonandFrankJ.Fabozzi
CollateralizedDebtObligations:StructuresandAnalysis,SecondEditionbyDouglasJ.Lucas,LaurieS.Good-
man,andFrankJ.Fabozzi
HandbookofAlternativeAssets,SecondEditionbyMarkJ.P.Anson
IntroductiontoStructuredFinancebyFrankJ.Fabozzi,HenryA.Davis,andMooradChoudhry
FinancialEconometricsbySvetlozarT.Rachev,StefanMittnik,FrankJ.Fabozzi,SergioM.Focardi,andTeo
Jasic
DevelopmentsinCollateralizedDebtObligations:NewProductsandInsightsbyDouglasJ.Lucas,LaurieS.
Goodman,FrankJ.Fabozzi,andRebeccaJ.Manning
Robust Portfolio Optimization and Management by Frank J. Fabozzi, Peter N. Kolm, Dessislava A.
Pachamanova,andSergioM.Focardi
AdvancedStochasticModels,RiskAssessment,andPortfolioOptimizationsbySvetlozarT.Rachev,StoganV.
Stoyanov,andFrankJ.Fabozzi
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GlennE.Ross
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merman,andFrankJ.Fabozzi
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HandbookofFinance:VolumeIII:Valuation,FinancialModeling,andQuantitativeToolseditedbyFrankJ.
Fabozzi
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andFrankJ.Fabozzi
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FocardiActivePrivateEquityRealEstateStrategybyDavidLynn
ii
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Emerging Market
Real Estate
Investment
Investing in China,
India, and Brazil
DAVID J. LYNN, PH.D.
with TIM WANG, PH.D.

John Wiley & Sons, Inc.
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Copyright(cid:1)C 2010byDavidJ.Lynn.Allrightsreserved.
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LibraryofCongressCataloging-in-PublicationData:
Lynn,DavidJ.
Emergingmarketrealestateinvestment:investinginChina,India,and
Brazil/DavidJ.Lynn.
p.cm.–(FrankJ.Fabozziseries;196)
Includesindex.
ISBN978-0-470-90109-0(cloth);978-0-470-91256-0(ebk);978-0-470-91257-7(ebk);
978-0-470-91258-4(ebk)
1.Realestate investment–China. 2.Realestateinvestment–India. 3.Realestate
investment–Brazil. I.Title.
HD926.L962010
332.63’24–dc22 2010026720
PrintedintheUnitedStatesofAmerica
10 9 8 7 6 5 4 3 2 1
iv
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Contents
Preface vii
CharacterizingEmergingMarketRealEstate x
China,IndiaandBrazil x
OutlineoftheBook xvi
Note xvi
Disclaimer xvii
Acknowledgments xix
CHAPTER1
FundamentalsofRealEstateInvestment 1
InvestingbyPropertySector 3
InvestingbyStyle 7
InvestingbyPhase 9
AssetAllocation 10
Notes 10
CHAPTER2
InvestinginInternationalRealEstate 13
WhyInvestinInternationalRealEstate? 13
RisksinInternationalRealEstate 22
MitigatingCountryRisks 23
Notes 26
CHAPTER3
China 27
Introduction 27
Overvie woftheMarketEnvironment 29
TheRealEstateMarket 48
PropertySectors 56
PrimaryMarkets 66
SecondaryMarkets 80
InvestmentStrategies 84
Notes 98
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vi CONTENTS
CHAPTER4
India 101
Introduction 101
OverviewoftheMarketEnvironment 102
TheRealEstateMarket 111
PropertySectors 115
PrimaryMarkets 128
SecondaryMarkets 136
InvestmentStrategies 140
Notes 152
CHAPTER5
Brazil 153
Introduction 153
OverviewoftheMarketEnvironment 153
TheRealEstateMarket 171
PropertySectors 174
PrimaryMarkets 200
InvestmentStrategies 203
Notes 209
APPENDIXA
CountryRisk 211
APPENDIXB
PropertyMarketPracticeinChina 213
Bibliography 217
AbouttheAuthors 219
Index 221
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Preface
T
his book focuses primarily on private equity real estate investment in
China, India, and Brazil. Much attention has been devoted in recent
years to the “BRIC” countries—that is, these three countries plus Russia.
SeveralanalystshavearguedthatChina,India,andBrazilwillbeamongthe
world’s largest economies by the year 2050.1 These countries encompass
a significant percentage of the world’s land coverage, 30% of the world’s
populationandamounttoacombinedGDP(PPP)ofUS$12.4trillion.They
areamongthebiggestandfastest-growingemergingmarkets.
We decided to exclude Russia in this analysis as China, India, and
Brazilfeaturemoreofthecharacteristicsoftypicalemergingmarkets—that
is,young,largepopulationswithsignificantlong-termgrowthandarguably
deeperandmorediversifiedeconomies.Russia’sdemographicprofile(older,
shrinkingpopulation),itslessdiversifiedeconomy,andissueswithendemic
corruptionledustoomititfromthisbook.
Anobjectiveofthisbookistodevelopageneralapproachtocommercial
realestateinvestmentinemergingmarkets.Webelievethatadiscussionof
the three largest emerging markets illustrates some common approaches,
strategies,andanalyticalmethodsthatcanbeusedinemergingmarketreal
estate.
This book isa departure from other studies of international real estate
investment in that it focuses on broad investment themes and strategies
as well as economic and legal/institutional factors, rather than the minute
details of local market analyses. An inherent thesis is that real estate is a
derivativeoftheoveralleconomyandinstitutionalframeworkandonecan
only understand real estate drivers of demand in this context. The analysis
andrecommendationsaredesignedtobepragmatic,pithy,andactionable.
We specifically do not delve into extensive detail about items such as
current capit al values and rental rates except for illustrative purposes in
certain areas of the text. Pricing of this nature is subject to changes in the
shortterm.Instead,wefocusontheforcesthatdeterminepricingandvalues.
Theprimaryaudienceforthisbookistheforeigncommercialrealestate
investor.Nevertheless,domesticinvestorsshouldfindthebookofinterestas
well, as it covers many of the same issues, opportunities, and impediments
foreigninvestorsface.
vii
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viii PREFACE
The research for this book was based on a combination of direct data
sources,third-partyreports,andon-the-groundresearch.Theon-the-ground
researchwasessentialindevelopingourpragmaticandstrategicapproach.
On-the-ground research consisted of collecting and organizing data and
informationavailableonlyinthelocalmarket.Wealsoconductedhundreds
of in-person and telephone interviews with local, regional, and national
realestateinvestors,developers,brokers,consultants,governmentofficials,
architects/planners,economists,andotheragentsinvolvedinthecommercial
realestatevaluecreationprocess.
We relied upon both top-down and bottom-up research in developing
the book. We believe this approach is intrinsic and essential in all rigorous
realestateanalysis(ExhibitP.1).Theeconomic,political,demographic,and
institutionalmacroeconomic forcesareofessentialimportance incommer-
cial real estate, particularly in emerging markets. A part of this top-down
analysis involves legal, institutional, and regulatory factors that are funda-
mental in investment structuring and economic returns expectations. For
example,legalrestrictionsoncommercialrealestateinvestmentcanrender
some sectors and strategies virtually off limits to foreign real estate invest-
ment.Thebottom-upanalysisincludessubmarketeconomicsandrealestate
fundamentalsaswellasproperty-specificfactorssuchascapitalvalues,op-
eratingincome,andotherlocalorpropertyleveldata.
Ourapproachishighlystrategicandpragmaticinnature,outliningop-
portunitiesforinvestinginthesemarkets.Ouranalysisisbaseduponwhat
Economic
Political Top Down
Legal
Institutional

Property Level
Market/Submarket
Supply/Demand
Bottom Up
Cash Flow
EXHIBIT P.1 TopDownand
BottomUpApproaches