The Not So Emerging Trends

By Jonathan D. Miller

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 So where should we look to invest in 2012? The 24-hour gateways appear “priced to disappoint” after a round of cap rate compression not supported by leasing demand. Secondary and tertiary markets seem like risky bets—they’ve stabilized, but show lackluster signs of rebounding with tepid jobs growth prospects in most places—except for a handful of university-government towns like Austin and Raleigh. And smaller markets can take just so much new investment anyway before you run through opportunities. Everyone touts medical office--but again this is a niche category that has become overpriced with slim pickings. Apartments are everyone’s favorites, but forget about any bargains.

 Europe looks like a basket case. Fund managers talk about all the looming opportunities coming out of the ongoing crisis. But the crisis and its impacts look like they will have lasting consequences that could dampen those markets for years to come without much quick upside.

What about Emerging Markets? High on everyone’s list is Brazil. And that’s the problem—prices for office and residences in Rio and Sao Paulo now look more expensive on per pound basis than even New York and Washington DC. What a few years ago was a high yielding opportunity has now matured into something quite different-- core investment markets with owners holding and not selling as the golden 2016 Olympics year approaches. You can find plenty of high risk plays in outlying cities—Brazil is severely under-retailed and needs more apartments, but foreign investors run into typical corruption and local crony capitalism, which sets up roadblocks to making any money without a savvy, well connected local partner.

Then there’s China. I mentioned on a speaking panel last week that I’ve never met anyone who has made money in China real estate, although I know a lot of folks who have lost quite a bit. I was corrected by one of my panel mates who pointed out that many people have made money in the Chinese property markets—the problem for outsiders is they are all Chinese. You have to wonder about China’s economic numbers too—the year after year 10% GDP growth resembles Bernie Madoff accounting. It’s just too pat. Only recently, the government has reduced next year’s outlook to still heady 8% growth, which somehow looks generous when you consider their biggest consumer markets—the U.S. and Europe are in the midst of major de-leveraging and austerity, not ingredients for buying lots of Chinese manufactured goods. We know the story—the growing Chinese middle class can pick up the slack. I wonder, especially when any visitor to China’s vast countryside sees farmers tilling the fields with 1850 technologies. The government there still has every reason to keep a lot of people busy down on the farm.

India is another one of the emerging BRIC countries, brimming with expanding numbers of middle class consumers and rampant development in urban areas. But graft and lack of transparency hobble offshore investors, who have trouble making any profitable inroads. And India seems unable to keep up with the tidal wave of population growth—mostly among the poorest of the poor. And how about Russia, especially now that Mr. Putin is headed back into top dog position as if he ever left? Don’t think so.  

Hey after this brief survey, no wonder everyone wants to be in DC, New York, San Francisco and the handful of other U.S. wealth islands. They look like pretty good places to park money and wait out this long, slow period that hardly resembles recovery. 

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