Emerging Financial Markets 12 Real Estate Investment.ppt

Malkiel Mei Emerging Financial Markets 12: Real Estate Investment Long-term fundamentals Housing Crisis in Almost All of the Major Cities in Developing Nations Demographics Are Likely to Create a Strong Demand Massive Urbanization in Developing Countries Benefit From Rapidly Rising Real Wages Why Investing in Emerging Market Real Estate Generous Long-term Rates of Return Relatively Low Correlation With Other Assets, Such As Stocks Low Correlation Across Countries Fairly Dependable Hedge Against Inflation in Emerging Markets Prices are going through the Roof? Global Real Estate Speculation Real Estate Developers Are Prone to Excess easy credit liberal legal structure favor debtors Property over-supply and vacancy rates in Emerging Markets Business Risks and Political Risk Shorter Property Cycles in Emerging Markets Real Estate Valuation Land Prices in various cities, one square meter in 1989 Dynamic Model for real estate valuation Impact of Lower Interest Rates Increasing Investment and demand for space Reduce carrying cost Increasing portfolio allocation to RE Reduce discount rates R=100m, g=5%,k=15%,V=R/(k-g)=$1B R=70m, g=4%,k=10%,V=R/(k-g)=$1.17B A Simplified Geltner and Mei (1995) Model Dynamic model for real estate valuation Allows for time-varying discount rates Forecasting cash flow and risk premium Prof. J.P. Mei 1 But Still a lot of People 2 3 Case, Goetzmann, and Rouwenhorst (1999) Case, Goetzmann, and Rouwenhorst (1999) 4 5 Source: GPR Source: GPR 9 * *