Emerging International Real Estate Markets

This research was commissioned by the IPF Research Programme 2011–2015
DECEMBER 2015
Emerging International
Real Estate Markets
SHORT PAPER 28
2011–2015
Emerging International Real Estate Markets
This research was funded and commissioned through the IPF Research Programme 2011–2015.
This Programme supports the IPF’s wider goals of enhancing the understanding and effciency of
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gratefully acknowledges the support of these contributing organisations:
Emerging International Real Estate Markets
© 2015 – Investment Property Forum
IPF Research Programme Short Papers Series
Emerging International Real Estate Markets
IPF Research Programme 2011–2015
December 2015
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Emerging International Real Estate Markets
Author
Andrew Burrell, JLL
Project Steering Group
Ben Sanderson, Hermes Real Estate
Graham Parry, Grosvenor
Noel Manns, Europa Capital LLP
Pam Craddock, IPF
Disclaimer
This document is for information purposes only. The information herein is believed to be correct, but cannot be guaranteed,
and the opinions expressed in it constitute our judgement as of this date but are subject to change. Reliance should not
be placed on the information and opinions set out herein for the purposes of any particular transaction or advice. The IPF
cannot accept any liability arising from any use of this document.
CONTENTS
Emerging International Real Estate Markets
1. Executive Summary 1
2. Emerging Markets in Real Estate 2
3. Are Emerging Real Estate Markets Becoming More Important? 4
4. What Factors Drive Emerging Market Development? 13
5. Are Major Cities Driving Emerging Market Capital Flows? 18
5. Conclusions 23
Emerging International Real Estate Markets
Emerging International Real Estate Markets 1
1 By ‘investable’/’investability’, it is meant how institutional investors view the suitability of a market for investment purposes.
2 A market’s ‘investability’ may be measured by the level of investment activity, known as investment intensity. This is calculated by dividing the threeyear average of investment inflows into a country by its current real GDP.
1. EXECUTIVE SUMMARY
The term ‘emerging markets’ derived from the economic development debates of the 1970s and 1980s.
The world has changed much since then and perceptions of emerging markets have evolved too. This paper
explores the real estate context of this debate, assessing progress over the last decade against developed
world benchmarks to highlight key themes, notably:
• What is the scale and balance of investment between established and emerging markets?
• Are emerging markets now considered more ‘investable’1 than a decade ago?
• What are the main factors that determine the developmental status of markets?
Capital flows data indicate that the concentration of property investment in emerging markets remains
much lower than their (rapidly growing) economic size and importance. While the imbalance is striking, it is
shifting and evidence suggests that it is probably not mis-aligned when compared with other fnancial assets.
The growth of investment inflows to frontier and emerging markets has comfortably exceeded developed
world benchmarks over the last decade. Although not maintaining the peaks of the immediate post-GFC
period, the share of emerging market investment is much higher than in the mid-2000s.
Evidence is mixed for ‘investable’ markets. At a national level, the metrics show that developed markets
have seen a larger rise in real estate inflows relative to their market size, though there is much stronger
evidence of increased intensity2 in the emerging world’s major cities.
Other evidence from national investment flows suggests that neither the more open nor the domesticorientated approach have resulted in stronger inflows in the longer term. Sectoral development also does
not seem to follow a set pattern in the emerging world.
In looking for factors that drive development, economic influences were by far the most signifcant.
Correlations of GDP and population growth are high, explaining 90% of the movement in emerging
market inflows at both city and national level – much higher than for mature markets. This suggests that,
with economic and demographic growth continuing to outstrip the mature markets, investment will
continue to thrive in the emerging world.
Results from the non-economic indicators were generally inconclusive; notably, political and credit risk
showed limited statistical relationships. While this may reflect data limitations, it is a key area for further
exploration before development patterns can be assessed, as these ‘softer’ influences are seen as important
moderators in any discussion of immature real estate markets.
Narrowing the focus to major cities provided some counter-intuitive results: while inflows were more
concentrated in the major centres of each emerging country, these cities tended to show slightly lower
growth rates than their outlying economy. The trend in the developed world is the opposite, with the
top cities on average more dynamic. In both emerging and developed markets, the pattern reflects
economic trends.
In addition, emerging markets did not seem to provide signifcantly greater returns for investors to
compensate for the greater risk and volatility encountered there. Data quality is an issue at this level, but
these results suggest that, while cities are clearly central to real estate development, patterns may be more
nuanced than might have been expected.
2 Emerging International Real Estate Markets
3 See Financial Times survey, Redefning EM: Choosing the best matrix, James Kynge, FT, 18 August 2015 http://www.ft.com/indepth/redefningemerging-markets
4 http://lexicon.ft.com/Term?term=emerging-markets) (http://lexicon.ft.com/THYPERLINK http://lexicon.ft.com/Term?term=emerging-markets)
erm?term=emerging-markets)
5 “Market maturity and property market behaviour: A European comparison of mature and emergent markets”
6 Redefning Retail Investment (2012) for example; https://www.joneslanglasalle.com/ResearchLevel1/JLL_Redefning_Retail_Investment.pdf
The term ‘emerging market’ derives from economic policy debate of the 1970s and 1980s. These markets
were generally defned as nations with low to middle per capita income (1981, World Bank). This worked
well for economic analysis, though the world has changed signifcantly over the last 35 years and perceptions
of emerging markets have shifted markedly3. In addition, the focus of this research is real estate investment,
which, although linked, may occur at a very different pace to economic development. A more appropriate
description for the purposes of this paper is from the FT4:

A wealth of economic research on emerging markets has helped established benchmarks and development
models, but the literature is thinner for real estate. One important paper in the Journal of Property Research
(1994) by Keogh and D’Arcy5 looked at market maturity by a comparison of London with the then emerging
markets of Madrid and Milan. They highlighted the importance of institutions, professional standards,
information and transparency in determining potential, as well as traditional drivers such as economic and
political stability. Interestingly, they concluded that there is no clear evolutionary path for emerging markets to
follow and noted that the mature centres were not necessarily a model to be copied. This work highlights the
complexity of the development process and the importance of historic, culturally-specifc processes.
This short paper, rather than using specifc case studies or detailed micro-level analysis, takes a broader
approach, looking for trends across a range of markets to identify underlying drivers of real estate capital
flows. The results are used to assess which of the emerging markets may be best placed to progress over the
next decade. Key themes addressed by the research comprise:
The scale of international investment and balance between established and emerging markets;
Whether emerging markets are now considered more investable compared with a decade ago; and
The factors that determine the developmental status of markets.
If national income per head is not the sole differentiator of market maturity, this makes categorisation harder,
so it is important to be clear about terms of reference. Past property and equity classifcation surveys were
used as the starting point in this research. Around ffty global markets were then divided into developed,
emerging and frontier groups on the basis of an assessment of investment flows, market transparency and
GDP per head. For tractability, the smallest markets were excluded, but the fnal survey sample accounted for
99% of the investment universe according to JLL’s 2014 Global Capital Flows (GCF) data6.
2. EMERGING MARKETS IN REAL ESTATE
Emerging International Real Estate Markets 3

2. EMERGING MARKETS IN REAL ESTATE
4 Emerging International Real Estate Markets
This section focuses on national and regional trends in emerging markets and how these compare with
developed world benchmarks. This analysis is based primarily on aggregates from JLL’s Global Capital Flows
database, based on commercial property transactions and providing aggregate investment volumes over
the period since 2003. This covers roughly a single market cycle and is believed to be the longest consistent
historic series available globally. Data include commercial property deals, but exclude residential and land sales.
Ideally, in a quantitative survey, any analysis would be supported by other indicators, such as rents, yields
and returns. Unfortunately, the most comprehensive consistent global sources, such as the IPD multinational
index, covers only four of the 14 emerging markets identifed by the research and only South Africa in the
frontier grouping. Combining JLL’s city-based data into meaningful national aggregates across a wide range
of markets is problematic, even without the challenges of quality, coverage and consistency in less mature
economies. For these reasons, the research concentrates initially on the capital inflows for each country, with
other metrics revisited in the city-level analysis.
Comparing aggregates for groupings provides a clear indication that the concentration of investment
in developed markets is much higher than implied by their economic size and importance. Financial
development tends to lag behind economic advancement, though the imbalance in investment flows is
particularly striking. However, data from MSCI suggest that this gap is wide for equities as well, with the
market capitalisation in their defnition of emerging markets estimated at just 13% of the global total (up
from a mere 1% in the late 1980s). Although this comparison is not on a like-for-like basis with the real
estate capital flows, it highlights how far fnancial development lags economic and suggests that the property
share is not necessarily out of line with other asset classes.
Whereas advanced markets identifed in this study account for about 20% of global population and some
60% of GDP, they still received around 90% of all real estate investment flows in 2014 (see Figure 3.1). For
emerging markets, the balance is about 30% of world economic production and 40% of the people and just
under 10% of real estate investment on average over the last decade.
3. ARE EMERGING MARKETS BECOMING MORE IMPORTANT?
Emerging International Real Estate Markets 5

Concentration is a feature even in the developing world, with the fve largest markets alone accounting
for 70% of inflows. It is also clear that the biggest emerging markets are starting to move up the global
investment rankings previously dominated by mature economies. Figure 3.2 confrms China as a top-10
destination over the last decade, while a handful of other ‘emergers’ and even one frontier market (India)
appear in the locations that have seen over $1bn a year inflows on average. While still accounting for a small
market share, the scale of these markets is becoming too important to ignore.
Comparison over a decade also provides evidence that the balance is shifting towards emerging markets over
time. In terms of economic contribution, the change is consistently upwards. A decade ago, the advanced
markets accounted for over 70% of global output, with emerging markets under one ffth. Since then, the
latter group have increased their share of total GDP by 8 percentage points (to a 27% share), with frontier
markets up by 2% (to 11%). This drop in the relative contribution of the developed world marks a signifcant
change in the balance of economic power, related to the rise of the BRICs (Brazil, Russia, India and China) and
reinforced by the global fnancial crisis (GFC).
3. ARE EMERGING MARKETS BECOMING MORE IMPORTANT?
6 Emerging International Real Estate Markets

3. ARE EMERGING MARKETS BECOMING MORE IMPORTANT?
Emerging International Real Estate Markets 7
For real estate investment, the cyclicality of the data requires greater caution in its interpretation (see Figure
3.3). However, there has been a net increase in the importance of emerging markets, with the developed
world share declining about 7 percentage points since 2004. The emergers’ contribution rose steadily, to
a peak of 15% in 2011, during the weak revival following the fnancial crisis in the West. The subsequent
reversal largely reflects a recent US-led economic recovery and there has been a slight relative decline in
emerging market share.
While the trend has not been consistent over time or across economies, it suggests that real estate inflows
are following where economic development leads. Global investment levels reached over US$700bn in 2014,
with emerging and frontier markets contributing a record $70bn (see Figure 3.3). Unlike developed markets,
this is above the 2006-2007 recorded peaks.
In moving to a national focus, there are greater challenges in dealing with capital flows data, which even
in the most liquid markets can vary widely from year to year. To reduce this volatility, rather than standard
growth rates, the most recent three-year average for inflows is compared with the 10-year mean to provide a
growth benchmark. This shows emerging and frontier market investment was 40% higher during 2012-2014
than on average over the last decade, compared with an 18% rise in developed markets.

3. ARE EMERGING MARKETS BECOMING MORE IMPORTANT?
8 Emerging International Real Estate Markets
7 For Hungary, the weakness appears to reflect a combination of more disappointing economic performance than its neighbours, reinforced by political
concerns and property market factors. In the case of Malaysia, by contrast, the cause seems to be regulatory changes, which have relaxed the rules on
foreign ownership and diverted funds away from the domestic market.
8 See http://www.jll.co.uk/united-kingdom/en-gb/Documents/Investment_Intensity_Infographic%20Q2%202014.pdf. Investment intensity is calculated
by dividing the three-year average of investment inflows into a country by its current real GDP (expressed in US$). Figures are indexed, using US/New
York 10-year average = 1.00 for comparison.
The growth in emerging (and frontier) market flows has been signifcantly stronger proportionately than in
the developed group. Nonetheless, this picture is not homogeneous. Of the outperformers, Mexico is an
outlier, with a notably sharp acceleration in inflows over the last three years relative to the past. China too
is a major contributor, while South Korea and UAE also rate strongly. A casual observation from the data is
that the investment growth trend appears stronger in the ‘larger’ markets (in terms of economic importance,
population and investment share), although this is not a hard rule with Brazil as a counter-example.
In contrast, there are a number of countries where recent inflows are below their historic averages. These
are largely in Europe and the trend, in part, appears to relate to specifc economic diffculties in the Eurozone
fringe or CEE. Greece and Portugal are markets that were seen as close to mature in the mid-2000s, but
experienced regression post-GFC, while several eastern European markets also struggled, most notably
Hungary. Contraction is not confned to one continent, however, with Malaysian inflows also slipping over
recent years compared with past performance, despite a solid economic backdrop7.

Of the aims of this study is to establish whether emerging markets have become more investable over time.
This is not a straight-forward question, as there is no agreed defnition or measure for what investable means.
As previously noted, investment activity has been stronger across the emerging world, but is this also true in
relative terms? To understand this, a comparison with a standard of the potential for this growth is required.
3. ARE EMERGING MARKETS BECOMING MORE IMPORTANT?
Emerging International Real Estate Markets 9
Have emerging markets become more investable?
JLL Global Research calculates an investment intensity measure that compares the last three years’ average
capital inflows to current GDP levels8. This provides a gauge of how well markets capture inflows relative
to their size, with GDP a proxy for the property stock in each market and investment volumes smoothed to
provide a balanced comparison. This analysis is perhaps less appropriate as a national measure than for cities,
given disparities in national urbanisation rates, but it is a useful benchmark and proves more satisfactory than
other alternatives (for instance per head measures).
Even in the developed world, however, there is a wide disparity across countries on applying this measure
and there are no clear ranges that differentiate groupings. There is a wide contrast, for instance, between the
high intensity of the Anglophones and the Nordics and the much lower fgures of some Eurozone markets,
notably Italy and Spain, where levels are not dissimilar to many emerging markets. On average, though, there
is a substantial gap between emerging and established markets.
For comparability, the fgures are expressed relative to the US historic mean. In 2014, emerging market
intensity averaged only about one third of US levels. The measure varied widely from China and Brazil at one
end of the spectrum (close to frontier averages) to Taiwan and the Czech Republic at the other with intensity
approaching developed norms; see Figure 3.5. However, there appears to be a limited relationship between
intensity and investment performance, with strong inflows seen in both under-developed (China) and
established markets (South Korea) over the last decade.

3. ARE EMERGING MARKETS BECOMING MORE IMPORTANT?
10 Emerging International Real Estate Markets
The results for 2014 were also compared against historic averages over the whole period to assess changes.
These fgures suggest that intensity is generally higher on average globally over the last 10 years, though with
more modest gains in emerging markets (at about 9%) than in developed (11%), while the frontier grouping
outstripped both (17%). There were gains for Mexico, Taiwan, Russia and Korea, but these were offset by
weakness elsewhere. Intensity fell in many European markets, which is not unexpected given the pronounced
investment cycle, but results for Brazil and China were also subdued.
Any conclusions can only be tentative, given the relatively short horizon and the limitations of the approach.
The fact that many of these less mature markets experienced exceptional GDP growth over the period is
also clearly signifcant. It is interesting, however, that the intensity measure suggests that emerging markets,
while seeing volumes rise strongly, may not have become more investable relative to their economic scale,
suggesting that their real estate development may lag their economic progress. The research returns to this
issue in its city analysis in Section 5.
The investment data also allow an examination of shares of cross-border flows, based on offce and retail
investment within emerging markets at the national level. Cross-border shares, on average, are signifcantly
higher in the emerging and frontier economies than in mature markets (at around 40% compared with 30%
for the latter), which may appear surprising, given their risk and relative illiquidity, although this picture
varies widely.
Some markets, for example Korea and Taiwan, have developed their real estate using domestic savings
rather than foreign capital, although this has not been typical. Elsewhere, openness to foreign capital has
allowed inflows to flourish, most obviously in Poland, where cross-border is the majority of all investment. The
precise development model may be more by necessity than choice, depending on the strength of domestic
institutions, and both models have strengths and weaknesses. Overall, there is no compelling evidence that
either the more open or domestic approach has resulted in stronger inflows or that either acts as a barrier to
or promotes development.
In sector terms, retail and offce investment are the predominant asset types for investment transactions,
accounting for 75% of the measured global universe in this database. There appears to be no consistent
pattern of development, however. Differences between the developed and the emerging markets are modest,
with slightly higher concentration of offce investment in the latter. More interesting, totals for other types of
asset in the frontier markets indicate a signifcantly higher proportion of deals outside traditional offce and
retail, although data quality may be an issue here.
3. ARE EMERGING MARKETS BECOMING MORE IMPORTANT?
Emerging International Real Estate Markets 11

3. ARE EMERGING MARKETS BECOMING MORE IMPORTANT?
12 Emerging International Real Estate Markets
3. ARE EMERGING MARKETS BECOMING MORE IMPORTANT?

Emerging International Real Estate Markets 13
In this section, the research considers the macro factors that may underpin investment trends by examining
the strength of relationships with other indicators. As national level drivers remain the benchmark, the
analysis focuses primarily on capital flows.
Economic performance is the obvious starting point. Although economics is not the only aspect of
development, it is widely regarded as the most important influence and is a key driver for real estate.
There are many dimensions to economic statistics and an enormous range of possible options to test, only
constrained by the need for comparable fgures across the 50 or more economies that were considered.
Generally, it was found that the results for high-level macro measures were as good as more granular
alternatives and analysis is limited to these for the purpose of this paper.
Real GDP measures provided the strongest correlation with investment volumes in the survey, but there were
marked difference between market groupings. This is not surprising perhaps when the varying economic
fortunes over the period are considered. On an underlying basis, the emerging group experienced a 22%
uplift in real output compared with a 4% rise in the developed world, which was impacted by the fnancial
crisis, and a 19% increase in the frontier markets (see Figure 4.1).
Real GDP changes explain over 90% of movement in emerging market inflows and 79% in frontier, although
this correlation declines to 39% in the developed economies (see Table 4.1). China accounts for over half of
the growth in emerging market GDP, but even excluding this only reduces the correlation with capital inflows
to 87%. A scatterplot and basic regression analysis on the changes are shown in Figure 4.2, indicating that for
each additional 1% in output growth real estate investment rises by about 2%.

4. WHAT FACTORS DRIVE EMERGING MARKET DEVELOPMENT?
14 Emerging International Real Estate Markets
4. WHAT FACTORS DRIVE EMERGING MARKET DEVELOPMENT?
GDP growth trends also provide support for national level performance in emerging markets, with a few
exceptions, such Malaysia, where the correlation is negative. Although the relationships are slightly weaker on
average in Europe, economic diffculties clearly explain why Greece and Portugal have regressed as investment
destinations and why Poland has held up well in contrast. The strength of market performance in China,
South Korea and Taiwan is also supported by above-average economic growth rates.

Demographic change is part of the economic growth story in the emerging markets. On average, results for
population are slightly less satisfactory than for GDP in emerging and frontier markets and show almost no
relationship in the developed world (see Table 4.1). There is a preponderance of more populous emerging
markets at the top of the investment growth rankings, including Russia, China and Mexico. While this scale
may be an important influence, it appears not to be a barrier to relative success in smaller emerging real
estate markets, such as Macao, neither is it a guarantee, as shown in Brazil for instance.

Emerging International Real Estate Markets 15
One advantage quantitative macroeconomic variables gives is a forward-looking perspective, with forecasts
widely available. Over the next fve years, Oxford Economics forecast underlying global GDP will be slightly
stronger than over the last decade, with emerging markets gaining a ffth and developed rates recovering
too (Figure 4.3). Of the emerging and frontier markets considered in this research, China remains the frontrunner, followed by Malaysia, with notable expansion in India, Vietnam, Indonesia, Lithuania and Chile also.
Conclusions about potential winners and losers in real estate investment using these forecasts must necessarily
be highly cautious, especially at the national level but, in general, it appears likely that the strong growth
in overall inflows will continue against this strong economic background. In addition, while the relativities
between developed and emerging markets may narrow on the recent past (in line with GDP trends), estimates
from this research suggest that the latter will continue to see signifcantly faster growth of capital inflows.

Aside from macroeconomic fundamentals, relationships with a number of other indicators were also
investigated. After economic performance, other evidence was sought chiefly in qualitative measures
derived from the extensive range of global surveys and benchmarks, notably the World Bank’s development
Indicators. The advantage of these is that they can quantify the greater risks that investors face in emerging
markets. These measures also allow testing of the factors that influence market evolution by quantifying the
effect of such factors as political environment, legal system, infrastructure, taxation, fnancial development
and urbanisation.
4. WHAT FACTORS DRIVE EMERGING MARKET DEVELOPMENT?
16 Emerging International Real Estate Markets
7 http://info.worldbank.org/governance/wgi/index.aspx#doc
8 The Economist Intelligence Unit provides country, risk and industry analysis across 200 countries worldwide.
For this analysis, a wide range of options were reviewed but, as results were generally inconclusive, only two
areas are highlighted: political risk and credit rating. Emerging markets have, in general, medium levels of
political stability according to World Bank governance indicators7. The study group of ‘emergers’, as expected,
show signifcantly lower ratings on this composite metric, averaging a score of 4.8 against ratings averaging
around 6.0 for developed markets, out of a maximum of 7.0. The range of governance scores in the
emerging category is wide with some approaching developing levels, such as South Korea, Malaysia, Czech
Republic and Portugal, while others see much lower levels, notably China, Russia and Brazil (all below 4.0,
which is less than the frontier markets average).
For the purpose of this research, the impact of the change in political risk is perceived to be of the greatest
important. Net changes in this index are small for the emerging group (unlike frontier, where there was a
strong rise), but there are big differences nationally. Overall, there is no strong tendency for improvement
in political risk in stronger markets and vice versa. Several countries where capital flows have grown and
economic performance has been strong, for instance, saw a reversal in politics, including high-flyers China,
Russia and South Korea. Correlations for this index were poor, so it is diffcult to recognise this as a driver of
performance over the last decade at least (see Table 4.1).
The political risk measure covers a broad range of aspects, including corruption, regulation, rule of law and
accountability. Of these, legal systems gave the best correlation, which is encouraging as anecdotal comments
from investors highlighted this as important, but even these results were not especially strong statistically.
Finding any relationship of slowly-evolving structural factors with volatile investment data over a relatively
short time series will be challenging, so inconclusive results were not unexpected.
This evidence alone is not enough, however, to rule out political factors as an important moderator of
investor behaviour. In particular, while not determining growth, they could prevent market evolution beyond
a certain point to, say, achieving developed status. Four of the emerging markets identifed have governments
that are categorised as authoritarian on the EIU’s democracy index for example8. Given that all developed
markets are democratic, it may be that these ‘emergers’ will never be regarded as ‘developed’ by investors,
no matter how strong their economic performance.
One other qualitative measure examined was credit rating, which relates directly to investor perceptions,
albeit on a wider spectrum of assets than property. This measure is derived as a composite from Fitch,
Moody’s and S&P ratings, with AAA credit scoring 20. On average, the emerging group scores between 13
and 14 on this metric, compared with 18 to 19 for the advanced economies, although there have been some
important shifts in some markets over recent years and dispersions have widened markedly.
Overall, credit ratings have declined, which is not surprising given the upheavals of the period surveyed. More
unexpected is that trends in the emerging grouping are not signifcantly stronger than economies in the
developed world on average. Otherwise, the credit rating indicator provides some link with the investment
data, albeit far less robust than for economic output measures (see Table 4.1). Changes were dominated by a
slump in the ratings of three particular European emergers: Hungary, Greece and Portugal. These all lie at the
bottom of the investment volume growth ranking. Rises in credit ratings were seen in some of the stronger
nations for capital inflows, notably China and Russia.
4. WHAT FACTORS DRIVE EMERGING MARKET DEVELOPMENT?
Emerging International Real Estate Markets 17
Results from non-economic measures were generally disappointing. This is a key area for further research as
these influences are repeatedly raised in the discussion of immature real estate markets. Identifying the key
non-economic drivers of development will be essential to establish the evolutionary path for markets, even if
the statistical evidence is likely to remain patchy until a much longer historical base is established.
4. WHAT FACTORS DRIVE EMERGING MARKET DEVELOPMENT?
18 Emerging International Real Estate Markets
5. ARE MAJOR CITIES DRIVING EMERGING MARKET CAPITAL FLOWS?
In economic development there is an increasing focus on urbanisation in debates on the evolution of
emerging markets. The drift from rural to city living is creating new conurbations and there is evidence that
economic growth is becoming ever-more concentrated in urban clusters of high-value service industries. As the
developed world is relatively mature in this regard, the bulk of this change is occurring in emerging markets.
Even without these urbanisation trends, cities are fundamental to commercial real estate. Retail and offce
property is integral to urban areas and there is also a concentration of other property types within cities,
including hotels and apartments. Outside the developed world, major cities are seen as key to opening up
less transparent markets, with evidence that investors will seek a foothold in these centres before considering
other opportunities.
Given the perception that major cities play a special role as gateways for investors, in this section the most
important centre for each country was selected and analysed on this basis. This was generally the capital city,
but in some cases a centre was substituted due to its greater importance in commercial real estate terms (for
instance Shanghai in China or New York in the US).

Emerging International Real Estate Markets 19
5. ARE MAJOR CITIES DRIVING EMERGING MARKET CAPITAL FLOWS?
In terms of shares of capital flows, major cities surveyed contributed about one third to the overall
developed markets totals, but more than a half to the emerging and frontier markets. This concentration
fts well with the view that gateway cities are more important in these new investment destinations than in
traditional markets. But this alone does not guarantee these cities will grow faster. In fact, city investment
growth slightly lagged national trends in emerging and frontier markets over the period surveyed. This was
a slight surprise with about half the centres seeing slower growth than at the country level, albeit that the
aggregate difference is not wide (2 percentage points) and there is stronger growth in a number of major
cities (including Shanghai and Warsaw).
The trend in the developed world is the opposite, with major cities on average more dynamic. This is
consistent with a view that city economies will tend to be faster-growing because of their concentrations of
high-value-add service sectors. Conclusions must be tentative, however, given data quality issues at the city
level. There are also alternative investment destinations in certain markets that have outperformed the major
city, notably Mexico and Russia.
But these differences are also, in part, a reflection of the economic fundamentals. According to Oxford
Economics Global City database, the real GDP fgures show that emerging market major cities expanded
by 12% over the last decade (+9% excluding China). This is a more rapid increase than for the developed
group, which increased by 6% on an underlying basis. The key difference, however, is relative to national
performance, with emerging markets lagging the wider economy (at +22%) and developed world cities
holding up better (+4% nationwide).
It would be expected that urban markets grow much faster than their outlying national economies, thanks to
population migration and the contribution of dynamic sectors. The emerging group includes several European
cities that have suffered particularly badly since the GFC, including Athens and Lisbon (see Figure 5.1).
Patterns of strong GDP growth are generally consistent with buoyant city investment inflows and vice versa
(with odd exceptions like Kuala Lumpur and Budapest).On average, correlations of city economic performance
with investment inflows were similar to the national results (at just over 90%), as were the regression
statistics. As with the national trends, forecasts suggest that growth will be sustained at the city level.
20 Emerging International Real Estate Markets

One advantage with the urban focus is that it allows the analysis of new data series, notably returns.
Conclusions must be cautious as the fgures are only available for prime offces on a gross basis and are not
for all the locations covered in this research. After concentrating on investment, it is interesting to look at
how returns vary between market groupings. Emerging markets should provide greater returns to investors to
compensate for the greater risks compared with developed economies (and even more so for frontier markets).
Returns are higher in emerging markets, but the spread above developed markets is low, at less than 1
percentage point on average over the last 10 years. The premium also seems to be declining over time.
Moreover, offce returns in emerging and developed markets move closely in line. This suggests that there
is limited diversifcation beneft from these immature markets as they follow a similar cycle. Data caveats
notwithstanding, this may explain why property investment has remained concentrated in the advanced
economies and development elsewhere has been relatively slow.
5. ARE MAJOR CITIES DRIVING EMERGING MARKET CAPITAL FLOWS?
Emerging International Real Estate Markets 21

As a fnal step, the research repeated the investment intensity metrics for the emerging cities and compared
these with the other groupings. New York’s historic average is used as a comparison for the sample of
gateway centres, so that results are not directly comparable with the previous analysis. By city, results are
more widely dispersed than in the national analysis, but there has been a general increase in the aggregate
intensity. Some centres also show a higher intensity than the developed city average, including Shanghai
and Seoul.
Conclusions must be cautious, given the relatively short horizon and data quality, but the rise in intensity
on aggregate is higher than for the developed city grouping (at 19% compared with 14%). This provides
evidence that, for major cities at least, these markets are becoming more attractive to investors: a stronger
conclusion than for the national level data.
5. ARE MAJOR CITIES DRIVING EMERGING MARKET CAPITAL FLOWS?
22 Emerging International Real Estate Markets
5. ARE MAJOR CITIES DRIVING EMERGING MARKET CAPITAL FLOWS?

Overall, results from the city analysis are less decisive than expected. Although few would doubt the
importance of cities in market development, this high-level analysis of major city trends in emerging markets
adds only limited insight to the previous analysis. This is perhaps a result of the data quality at this more
granular level or because cities may present a degree of complexity missed at the macro-level. Nonetheless,
the analysis of city-level intensity provides more satisfactory results than at the national level, while the returns
perspective also adds to the picture.
Emerging International Real Estate Markets 23
6. CONCLUSIONS
In the last decade, growth in capital inflows to emerging and frontier economies have far outstripped those
to the developed world. This difference was most apparent during the severe post-GFC recession in the
advanced economies in the late 2000s, but the trend has continued since. Activity has been most marked in
the BRICs and Asian Tigers, while, in contrast, investment in some European emerging markets has declined.
A comparison of global capital flows indicates that property investment activity remains highly concentrated,
with the emerging world accounting for only around one tenth of the total. However, evidence suggests that
this is broadly in line with other assets.
The assessment of emerging market investability is not helped by a lack of standard terms of reference,
but measures adopted in this research indicate a gradual improvement over the last decade or so. National
results were inconclusive, but investment intensity in the major cities within emerging markets showed a clear
increase relative to movements in developed markets.
Economic drivers provide the clearest explanation for the development of emerging markets in real estate
over the last decade. Correlations with output are high at both national and city levels and signifcantly
stronger than seen in developed markets. With forecasters pointing to continued strong GDP growth in the
emerging world, this suggests that these markets will continue to increase their share of global activity.
Many other factors have been suggested for the development of emerging investment markets, including
rule of law, taxation, political freedom and infrastructure. Even where these influences could be quantifed,
however, the relationships with property investment were much weaker than with economics. As these
factors may be important modifers of development, this is an important area for further study.
Given that gateway cities are regarded as key channels of development in the emerging world, results from
the urban analysis were more mixed than expected. Economic growth was, again, a strong driver, but major
city growth did not always keep pace with national trends, while the pattern of returns in emerging markets
was surprisingly similar to the developed world.
A number of challenges arose in undertaking this research. While less transparent markets are expected to be
less ‘measureable’, data issues often limited the analysis, particularly working with a historic perspective of
less than one complete cycle. This aspect, at least, will improve over time.
A stronger framework for assessing the development of real estate markets would complement this
quantitative analysis – in particular, further work to identify which structures and institutions have been most
successful in promoting emerging market real estate development. Given the data issues highlighted, this is
likely to require further detailed case studies and international comparison.
Emerging International Real Estate Markets
Emerging International Real Estate Markets
2011–2015
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