Old economies emerge as the new contenders

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Investors in property looking for the next exciting far-flung part of the world should perhaps search instead in more traditional markets.

Some are spotting value in Britain, following the torrid past few months.

“The best value is in the UK at the moment,” says Rob Randall, head of property at investment manager Matrix Group. “Of course, emerging markets have been doing well, but for real value you can’t argue with UK real estate investment trusts trading at 40 per cent discounts to net asset value.”

Mr Randall admits that it is impossible to say for certain that Reits have reached the bottom of their bear run, with many analysts saying there is further to go, but he says values will certainly improve in the longer term.

“The UK is quite interesting again. We’ve been disposing of UK property for the past 18 months, but now you can pick up some interesting yields from forced sellers.”

Mr Randall also sees opportunities elsewhere in developed markets: “The US has caught a massive cold and is looking so cheap, particularly if you buy in dollars with pounds.”

Mr Randall believes the more esoteric regions, which have seen the most growth over recent years, are now reaching full price. He says that eastern Europe, which has been one of the main areas of focus for many investors looking for cheap property and high returns, is now looking expensive.

“Yield compression in eastern Europe has gone to such an extent that there is no longer any premium payable for taking on the country risk,” Mr Randall says.

But others are not so sure, and tip growth in emerging markets to run for some time. The number of new companies and funds focused on commercial property in emerging markets in Asia, in particular, reflects its continued popularity.

Chris Allen, head of real estate fund management at HSBC Private Bank, says the bank’s view is that developed markets are either at full value, or overvalued. The view on the UK is neutral or negative, which is why he is focused on developing and emerging markets in Asia and Latin America.

The big theme to follow, Mr Allen says, is urbanisation: “There is the growth of the middle-classes in many countries, which is leading to the need for new towns and cities, with housing, offices, schools and infrastructure.”

Mr Allen points to Vietnam and South Korea as likely to follow China and India in attracting investor interest. Latin America should also be considered an area for investor interest, he says, particularly Brazil, where falling interest rates and inflation have coincided with political stability and growth in the owner-occupier property sector.

Mr Allen warns that it is important to work with local specialists if investors are planning to buy in emerging markets, otherwise there is the risk of buying something either “overpriced or a dog” because of the lack of local knowledge.

Mr Allen’s view on emerging markets is supported by the latest Royal Institution of Chartered Surveyors global property survey, published at the beginning of December.

This says that emerging commercial property markets will continue to attract healthy investment levels into 2008, in spite of tougher financing in the wake of the global credit squeeze.

The so-called “Bric” economies of Brazil, Russia, India and China are taking increasing proportions of global property transaction activity, it says, while the US credit crunch is adding to pressure on commercial investment in financial centres such as New York, London and Tokyo.

“We do not expect investors to flee emerging locations in response to current economic distress, as economic foundations have been much repaired over the last decade,” says Rics senior economist Oliver Gilmartin.

“Reduced reliance on capital markets across some emerging property markets has in fact offered insulation against ongoing volatility.”

Investment in residential property is following similar trends, according to the Savills global market review for 2007.

New markets have opened up in central and eastern Europe and Asia, it says, and supply in many places has failed to keep up with demand.

A recent study by research group Datamonitor predicted that property owned overseas by British citizens is set to almost double over the next five years.

However, some analysts are advising investors to remain cautious until the effects of the global credit squeeze are fully exposed, particularly in developed markets.

Simon Cooke, managing director of property at Close Brothers, warns investors not to hurry into property investment because of further potential damage from the US subprime mortgage-led debt crisis.

“Our view is that all real estate markets will see a reduced enthusiasm in the short term,” says Mr Cooke, “while lending rates settle down, and yields will drift out to reflect the uncertainty.”

But Mr Cooke expects it will be possible “to buy cheaper” in the next six months than in the past 12 months. At some stage towards the end of 2008, he says, even the UK commercial property market should offer real value.

With market conditions looking uncertain owing to the credit crunch, and analysts still unsure about the extent of the cyclical downturn in countries such as the UK, caution might be the most useful watchword for the property investor in the next few months.

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