Western investors look East to emerging real estate markets

Investors looking to park funds in commercial real estate are likely to increasing turn their attention to emerging economies in the Middle East, South East Asia and Asia-Pacific, according to an expert.

"Commercial real estate is completely and perfectly correlated one-to-one to the broader economy. The macro economic climate and the health of the financial system are the two driving forces that dominate real estate value," said Ethan Penner, the President of CB Richard Ellis (CBRE) Capital and Executive Managing Director of CBRE Investors. Asia and Asia Pacific.

Ethan Penner, who was speaking at the Cityscape Global Real Estate Investment and Development conference here on Monday, said many investors erroneously believe that real estate as asset an class offers diversification away from stocks and bonds.

The Cityscape Global conference, which is taking place at the Dubai World Trade Centre, has attracted some of the leading minds from the international and regional real estate industry.

Penner said that real estate professionals cannot and do not create tenants out of thin air and only a growing economy can generate sustainable demand for space.

To get ahead of the herd, an investor should understand and anticipate macro-economic change.

"Real estate, more than any other asset class, is dependent on debt. It would be unheard of for a corporation to have 60-80 per cent of its capital structure in debt, even 40 per cent debt would be considered high risk. In real estate, however, this is commonplace," Penner said.

"The average is 70 per cent and frequently, it can exceed 80 per cent or even 90 per cent, so when the debt capital markets catch a cold, real estate is invariably in trouble," he added.

This year, Cityscape has attracted over 180 exhibitors and participants from more than a 100 different countries and 30,000 visitors are expected at the four-day show.

Penner's forecast for growth in developed economies was equally sobering. "The best case scenario would be average growth of up to 1 per cent, reminiscent of the way the Japanese economy has performed over the last twenty years," he said.

Cityscape Global Group Director Chris Speller said: "Naturally, with emerging markets unhindered by unsustainable levels of debt and with healthy growing economies, the future of real estate looks bright. The obvious danger is that these markets once again become overheated, but Asian economies have learnt from previous economic crises, authorities are putting regulation in place to avoid future property bubbles," added Speller.