The decline in valuations in developed markets is causing some investors to take another look at opportunities in the US and UK but not necessarily at the expense of emerging market allocations.
"If I had $100 to invest over the next two years I’d want to allocate a fairly big portion of it to the US and the UK, because there are going to be distressed buying opportunities," says Michael Pralle, president and chief executive of JE Robert Companies (JER). "I wouldn’t ignore the emerging markets, in fact in some respects we think the emerging markets will be better priced than they were a year ago."
The Virginia-based JER is a long-time investor in distressed real estate and emerging markets. Pralle points out that emerging markets are suffering along with their developed market peers, slowing at a similar rate. Their economies will, however, continue to grow at a faster rate, making for a good investment case.
"There’s a window of opportunity over the next year or two in emerging markets to buy real estate at more attractive prices," says Pralle. "Our concern a year ago was that even though macroeconomic fundamentals were great, everything was expensive. That’s changing. Emerging markets are going through the same repricing that’s happening in the US or the UK."
Brazil is an example of an emerging market that Pralle says is attractive. The economy is well diversified and positioned to perform well in the years ahead. There, JER is principally interested in multi-family, what the firm terms commercial residential and retail. It also seeks opportunities in the industrial and commercial sectors, but to a lesser extent.
Investors are returning to developed markets, especially the UK and the US, where values have dropped some 20%. As the global recession pinches, Pralle and others expect values to decline even further. So-called opportunity funds are poised to make investments once there are more signs of distressed assets coming online.
"Global opportunity funds are taking a greater interest in such places as the UK, but still are not happy with entry prices," says Tony Horrell, head of European capital markets at Jones Lang LaSalle in London. Horrell, too, says emerging markets offer good diversification as well as access to healthier GDP growth than in developed economies. These markets should not be abandoned in favour of developed market investments.
JER remains cautious about investing but hasn’t stopped completely. Pralle says it is looking at multi-family properties in Greenwich, Connecticut that have come on the market from distressed sellers. The southeast is another region of the US where JER is looking at multi-family properties.
"Multi-family is going to be a good sector, because as people can’t afford their homes or get foreclosed on, they will be renting," says Pralle.