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Credit Crunch Killed the Emerging Market Star

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Credit Crunch Killed the Emerging Market Star

By - Tuesday 22 January 2013

During the boom it didn't take much for a property market to be given the title of "hot emerging market". In fact for a time it looked like all it took was a few beach resorts with celebrity endorsed golf courses, although a Trump tower thrown in certainly helped. But ever since the crash people have been a lot more cautious and you will hear very few people willing to call any emerging property market hot, and if they do they will likely have an equal amount of people reporting that the same market is not hot, but is overheating, and/or bubbling. But in all our caution we may be missing opportunities as there are certainly some hot emerging markets around.

Brazil Dropped Like a Hot BRIC

Few people can research overseas property and not have heard of the BRIC economies. Brazil, Russia, India and China. Of those markets, in private property investment circles only Brazil could be called hot since the property crash. But lately it has been dropped like a hot BRIC for fears over whether or not it has overheated.

The Brazilian economy suffered a recession as the American financial crisis went global, but it was short-lived and the economy bounced back strongly. Meanwhile the property market took on a new lease of life in private investment circles, because of a new product that began to come onto the mainstream market. During the boom overseas property investors only had access to holiday property in Brazil, and while tourism has shown strong growth, the prices made yields insufficient to offset the risk of emerging market investment.

But developers in Brazil began offering opportunities to buy into affordable housing developments in Brazil. Top quality residential apartments that foreigners could buy fairly cheap and, - with a drastic shortage of quality housing for the burgeoning Brazilian middle class - make a good yield renting out. These were mainly in Natal, where the growing economy and population combined with the shortage of quality housing made the investments very attractive indeed.

So the reports of the market overheating were harmful to Natal. But they were also unfair. While property prices in Sao Paulo and Rio de Janeiro grew by double digits year on year over the last 18 monthly measures, and one can only assume near-the-same in Natal, the prices of the apartments available to foreigners didn't go up by anywhere near as much. Developers did put up their prices at intervals, but investors can also raise rents in the still-growing economy and under the pro-landlord legal system. Thus yields on the apartments needn't have changed that much, so if investors are ignoring Brazil through fear of the overblown overheating reports they could be missing out on a good investment opportunity.

Everyone Deserves a Second Chance

The ironic thing about the crisis is that markets that were named hot emerging markets during the boom find it much harder to make a name for themselves now, no matter how good their fundamentals. You would think that, if there were hot emerging markets during the boom, then crashed, that when growth resumed they would regain their title, but this is not the case.

Mexico is a prime example of this. Towards the tail end of the boom Mexico hit the spotlight as a hot emerging property market, complete with the aforementioned beach resorts and celebrity endorsed golf courses. But, because it is heavily reliant on the US in many of its dominant economic sectors, when the US caught the cold Mexico got the flu. But Mexico has since enjoyed a strong recovery, with growth of 5.5% in 2010 and 4% in 2011, and the property market has also returned to growth. This has presented the opportunity for investors to buy cheaper and therefore make bigger yields following the price drop, but you won't find Mexico being called a hot emerging market.

Likewise for places like Tunisia, Morocco and the Philippines, who all have reason to feel even more aggrieved than Mexico, because where Mexico suffered a crash in 2009 those three have all seen continued strong economic growth throughout the global turmoil. Unfortunately almost all demand from foreign buyers, which was prominent in these markets dropped to a trickle and they lost their status through fear. Now the world is recovering and the fear has long subsided in investment circles, these markets still find it hard to regain their status as hot emerging markets – investors are undoubtedly missing opportunities in these markets.

It’s Hard for All, Even  CIVETS and MINTs

Replacing the BRIC grouping of world's leading prospects in emerging market growth, we have CIVETS which represents Columbia, Indonesia, Vietnam, Ecuador, Turkey and South Africa, and MINT Mexico, Indonesia, Nigeria and Turkey respectively. Even these markets find it difficult, indeed even though Indonesia and Turkey appear on both lists, and are experiencing very strong economic and property price and rent growth, still they have no widespread recognition as hot emerging property markets.

Well, that isn't fair to say. Turkey's Istanbul has topped the chart in the PriceWaterHouseCoopers Emerging Trends in European Real Estate report for the last 3 years running, and thanks to its incredible rise in stature from sick man of Europe to its fastest growing economy with incredible stability, low public debt, and all other metrics either good or going in the right direction, Turkey is attracting incredible FDI, and property investment is reportedly very strong indeed. So you could say it has recognition as a hot market, unfortunately as we see time and again in the post-crash world, the reports that it could be overheating are starting to circulate.

We all know now that most of the markets that saw incredible growth during the boom were overheating. But Turkey is nothing like them. After the Turkish economy crashed in 2002 the newly elected government took steps, including installing an office of the central bank in each major bank branch collecting daily reports. On top of that the banks don't lend against the requested amount, they lend against their own valuation. This means that the Central Bank is effectively regulating price growth, apart from on cash sales. This is at least partly why price growth is stable at a very sustainable 10-11 per cent per year and has been at that rate for at least 18 months.

What's more with such a strong stable and growing economy, rising employment and affluence, and massive population growth causing demand for quality property to grow far faster than developers can keep up with, at 10% price growth per year Turkey and its key cities are far from overheating and any investor put off by such reports could easily miss a golden opportunity.

Closing

Investors during the boom became almost reckless in their investments. This is not true, seasoned investors continued on as they had been, but as the world's population gets younger more and more investors are born, and the environment of the boom bred reckless new investors. But what we are seeing now is an environment of over-caution almost, and this could be costing investors' returns. There is a happy medium to be found here, and it lies in being as reckless in our searching but over-cautious in our buying by doing more than enough research and due-diligence.

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