By Andy Schofield*

Global megatrends are reshaping the world economic order. Rapid economic growth in emerging countries is leading to mass urbanisation in cities across Asia, Africa and South America. As these cities undergo a gradual transition from production to consumer industries, and increase their financial and business services, exciting opportunities will emerge for global real estate investors.

Shift in economic power from West to East

We often hear about the shift in economic power from West to East, or more specifically China’s ambition to displace the US as the world’s biggest economy. China’s rapid growth in recent decades has underpinned the development of much of emerging Asia. Between 2015 and 2030, Oxford Economics projects Asian cities will benefit from a 90% rise in GDP per head, compared to 35% in North American and European cities. However, the US is expected to maintain a comfortable lead in GDP levels over China well beyond 2030.

Mass urbanisation and the rise of the East

Rapid economic growth is focused on emerging cities, particularly in Asia and Africa, where urbanisation trends are leading to the enormous expansion of existing conurbations, alongside growth in new cities. For example, the population in Jakarta is expected to grow to close to 40 million, around five times greater than the size of Greater London today. The rates at which individual cities mature economically will vary and some emerging cities will outgrow their developed counterparts. A swatch of Chinese cities along with Bangkok in Thailand will outgrow Munich, Stockholm, Madrid, Milan and Rome in terms of economic size.

New office centres on the world map

Rapid urbanisation will be accompanied by major new job creation and rising prosperity, particularly for those cities that are able to make the transition to higher economic value services. Oxford Economics predicts that London and Istanbul will represent the only non-Asian cities among the world’s leading 25 cities for office job creation, by 2030. Most developed world cities are expected to lose relative ground while Mumbai and Delhi break into the top10, and no less than seven Chinese cities will rank in the top 25. However, this does not mean developed office centres are going to vanish from the list of the top office locations. Many have enormous scale and enjoy major competitive advantages. Thus, over the time span, London, Tokyo, New York and Paris will still appear in the ranking of the world’s top 10 markets in terms of the size of their office workforce.

Potential targets for institutional real estate investors

At present, the desire of institutional investors to access real estate opportunities in emerging world centres is curbed by the lack of transparency and other significant barriers to entry. There are three factors which are relevant when shortlisting emerging target office markets for potential future investment: scale, growth potential and transparency. Applying these criteria results in a shortlist of 20 potential targets, with the majority of qualifying office centres located in emerging Asia and Latin America alongside three Middle Eastern cities.

Based on the JLL’s Global Real Estate Transparency Index 2014, there are just five cities in the target list classed as “transparent”: Kuala Lumpur in Asia, Cape Town and Johannesburg in Africa, and Sao Paolo and Rio de Janeiro in Latin America.

But JLL acknowledge positive forces that are moving global real estate markets toward greater transparency. Theses should remain strong in coming years as governments in emerging countries pay greater attention to regulatory enforcement and anticorruption.

Transparency is just one of many relevant real estate risk factors that must be taken into consideration. Liquidity, income security, and cyclical volatility are pertinent considerations, as are wider economic, environmental and political factors at the national level, such as the general rule of law, incidence of corruption, sovereign credit-worthiness and climate change.

While future growth prospects might appear enticing, a reality check is required. Emerging cities are fraught with unpalatable risks for institutional investors. A realistic assessment of future market transparency is required. Extensive and ongoing country and real estate market due diligence is essential for all suggested long-run target markets. In the meantime, core investors will focus on traditional office centres in the developed world cities of North America, Europe and Oceania, especially those centres with high liquidity and where risk-adjusted returns are both easier to quantify and are better understood.

TH Real Estate’s THINK Global: Offices report discussed the growth of emerging world cities and potential target markets for institutional investors. To download a copy click here.

* Andy Schofield is Director of Research, TH Real Estate