Balancing the Global Property Development Equation

Transcription

Balancing the Global Property
Development Equation
The 2008 A.T. Kearney Real Estate Opportunity Index
I
n the United States and Western Europe, real estate has been making
headlines for the wrong reasons. Even casual followers of current
events are familiar with a new vocabulary: subprime disaster, liquidity crisis and foreclosure. The media provide constant coverage of the
damage to leading economies and financial institutions from collapsing
real estate values. But the global real estate industry offers far more
than negative headline stories.
The global real estate industry offers opportunities for expansion-minded developers, not in
the battered first-world economies but in select
emerging countries. Shanghai’s skyline, India’s
office parks and Dubai’s designer islands all attest
to burgeoning real estate markets. Indeed, for
the top 50 emerging markets represented in this
Index, the total 2007 construction spend was
$1.7 trillion, with a five-year compound annual
growth rate (CAGR) of up to 6 percent. More
than 4.5 billion people, representing 75 percent
of the world’s population, live in the top 50 countries. International property developers are finding these large and rapidly growing markets too
attractive to ignore.
Furthermore, an A.T. Kearney paper on
CHIMEA—a new economic region stretching
from China across India and the Middle East
to Africa—noted that investors from CHIMEA
have $4.1 trillion to invest, and real estate development remains an attractive destination for capital.1 Yet strong markets can turn sour quickly.
Property developers realize the need to diversify
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geographically through a carefully balanced portfolio, while at the same time managing the risk
of entering unknown markets. The question then
becomes, “How do we decide where to expand
outside familiar markets?”
The A.T. Kearney Real Estate Opportunity
Index was designed to help property developers
answer this question. Focusing on a short list of
emerging markets globally, the Index weighs real
estate development potential measured by opportunity (based on construction spend and growth)
and risk avoidance, which is a combination of
country risk and ease of doing business (see sidebar: Creating the Index on page 2).
Although the rankings provide an essential starting point, creating a balanced portfolio requires closer scrutiny of both the property
developer and the selected destination. Readers
should assess their own company characteristics
and preferences, and use these insights when
evaluating potential target regions and countries.
This paper provides only the market side of such
evaluations; the company fit with those markets,
1
the preferred risk profile, and the resulting internationalization strategy must be determined on
an individual basis.
Following an overview of the Index rankings, readers will find a discussion of trends and
activities by region. China and India—given their
overwhelming lead in the Index—are treated
separately, followed by the rest of Asia, Eastern
Europe, the Middle East and North Africa,
Latin America and sub-Saharan Africa. The paper
then provides sample portfolios to help readers further pinpoint international development
strategies.
Index Leaders:
China, India and Thailand
Topping the Index by a vast margin are China and
India (see figure 1). Showing unexpected strength,
Thailand captures third place with a score of 100.
Other countries in the top 10 include Taiwan,
with a score of 78, Russia (59), Saudi Arabia (57),
Turkey (55), South Korea (54), Poland (49) and
South Africa (44).
The risk-adjusted opportunity analysis provides a different perspective, illustrating the relationship between risk and reward (see figure 2 on
page 4). Apart from China and India, Thailand —
the risk-adjusted star of the analysis — dominates
the desirable high-opportunity, low-risk quadrant.
Taiwan offers a similar risk profile but less opportunity. Beyond the top right quadrant, the balancing act for companies is to select an appropriately
mixed portfolio of high-opportunity, high-risk
and low-opportunity, low-risk countries, depending on their own risk profile and cultural fit with
these countries.
Creating the Index
Spurred by a number of growth
strategy assignments with prominent
property developers, A.T. Kearney
realized the need for a robust Index
to help evaluate markets and prioritize plans for expanding in emerging
markets. The Index excludes developed markets in Western Europe,
North America, Australia and Japan.
The first step was to develop
a short list of countries for further
evaluation. To do so, the team
looked at the compound annual
growth rate (CAGR) of eligible
countries’ GDP between 2003 and
2007, using dollar values at constant prices. A cutoff point of 5
percent eliminated economies with
relatively slow economic growth
2
rates. In addition, short-listed
countries were required to have a
population of at least 2 million.
With the short list established,
the team assessed each country’s real
estate development potential using
current and five-year forecast spend
for the construction sector as published by leading industry analysts.
For each country, the team indexed
two figures: the 2007 construction
spend against the highest spend
figure on the list, and the 2008 to
2012 CAGR of construction spend
against the highest CAGR on the list.
The next analysis concerned
market entry risk, defined as a combination of overall country risk and
ease of doing business. To determine
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country risk, the team turned to
Euromoney’s country risk index,
which reports on political risk,
economic performance, debt indicators, debt in default and access
to bank financing, among other
factors. The World Bank’s ease of
doing business index, which captures the ease with which businesses
can be set up, run and closed
down, supplied the final metric.
The four components—construction spend, construction
growth, country risk and ease of
doing business—were analyzed
collectively to provide an overall Real Estate Opportunity
Index for the top 50 countries.
Figure 1
The 2008 A.T. Kearney Real Estate Opportunity Index
Rank Country
China
India
Thailand
Taiwan
Russia
Saudi Arabia
Turkey
South Korea
Poland
South Africa
Hong Kong
Malaysia
Argentina
Brazil
Pakistan
Indonesia
Chile
Romania
Vietnam
Colombia
Czech Republic
Kazakhstan
Singapore
Philippines
Peru
Bangladesh
Ukraine
Slovakia
Israel
Algeria
United Arab Emirates
Lithuania
Iran
Kuwait
Nigeria
Bulgaria
Tunisia
Latvia
Egypt
Sri Lanka
Slovenia
Azerbaijan
Oman
Belarus
Croatia
Ghana
Costa Rica
Uruguay
Armenia
Panama
Legend
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
Construction
spend
Construction
growth
Country
risk
Ease of doing
business
Indexed
total score*
100
47
7
8
10
4
7
7
6
7
3
3
7
20
5
11
2
2
3
4
2
2
2
6
2
4
4
2
2
3
1
1
4
1
2
1
1
0
4
1
1
0
1
1
1
1
1
1
0
0
38
36
31
20
32
26
28
16
21
16
20
26
37
9
27
22
20
25
32
21
19
38
13
24
22
26
39
13
14
33
26
38
29
24
32
23
26
33
19
27
17
45
13
31
23
24
27
17
40
22
70
66
66
91
67
81
59
80
77
70
94
73
45
61
48
52
77
64
54
57
80
63
100
54
56
42
53
100
79
53
89
72
46
89
44
66
65
73
59
49
92
52
74
40
67
48
59
52
45
59
48
26
90
74
37
81
63
85
62
79
98
88
43
37
59
25
84
69
47
53
66
60
99
27
69
43
22
83
85
30
61
87
26
78
39
70
48
89
15
44
70
46
76
31
33
39
34
50
74
64
968
215
100
78
59
57
55
54
49
44
44
39
36
31
28
25
23
20
19
19
18
18
16
15
14
14
14
13
13
12
12
11
10
8
7
7
6
6
6
5
5
3
3
3
3
2
2
2
2
2
0 = low spend
100 = high spend
0 = low growth
100 = high growth
0 = high risk
100 = low risk
0 = low ease
100 = high ease
Note: Index scores are rounded.
*Because India and China skew the results for the other countries, total scores have been indexed on the basis of Thailand at 100.
Sources: International Monetary Fund; ICON Construction reports; World Bank ease of doing business index; Euromoney country risk index; A.T. Kearney analysis
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3
The Regions: Asia Dominates
Real estate cycles typically do not start and stop
within a single country, but create ripple effects
across a region. China and India, however, are for
all practical purposes regions of their own.
China: the largest and hottest of all. China’s
economic boom has created a heated real estate
market, driven not only by office, residential and
retail demand, but also by the 2008 Olympics
and the 2010 World Expo. The opportunity is
High
Figure 2
Risk-adjusted opportunity analysis
China
Opportunity
Low = 0, High = 4,000
Risk avoidance
Low = 0, High = 10,000
India
Asia
Eastern Europe
Middle East and North Africa
Latin America
Russia
Sub-Saharan Africa
Opportunity
Indonesia
Argentina
Thailand
Turkey
Brazil
Ukraine
Taiwan
Philippines
Iran
Egypt
Poland
Pakistan
Bangladesh
Algeria
Nigeria
Belarus
Sri
Lanka
Vietnam
Colombia
Kazakhstan
Low
Malaysia
Peru
Czech
Chile
Republic
Lithuania
UAE
Israel
Bulgaria
Kuwait
Latvia
Oman
Slovenia
Risk avoidance
Note: Opportunity is assessed by multiplying a country’s scores for construction spend and growth.
Risk avoidance is assessed by multiplying scores for risk and ease of doing business.
4
Hong
Kong
Romania
Croatia AzerbaijanTunisia
Ghana
Armenia
Panama
Costa Rica Uruguay
Low
Saudi Arabia
South Korea
South Africa
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Slovakia
Singapore
High
Source: A.T. Kearney analysis
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substantial indeed: China’s estimated construction spend for 2007 totals more than $500 billion. The CAGR for residential real estate growth
between 2005 and 2011 is expected to be 13.3
percent, with office and retail both predicted at
10.7 percent. Demand should remain strong even
as the government acts to curb speculation and
calm the frenzy.
In Beijing’s robust office market,
Grade A supply is still catching up to
demand in spite of a steady influx of
prime new office space. In fact, in the
third quarter of 2007, the supply of
Grade A office space reached its highest level since 2000. At the same time,
vacancies declined to 10.6 percent, the
lowest since 2001. Chinese government
offices and global financial institutions in particular are driving demand.
Among glossy office projects completed in 2007 such as China Central
Place and the Excel Centre, the Prosper
Centre is the first Leadership in Energy
and Environmental Design (LEED)
certified office building in Beijing.2 In Shanghai,
the Grade A office vacancy rate is at a record low
of 2.1 percent.3
As the government relocates heavy industry
away from concentrated urban areas, it is encouraging research and development, modern manufacturing and pharmaceutical industries, and
third-party logistics firms to populate industrial zones. Major players such as ProLogis have
invested in warehouses in the Beijing Airport
Logistics Park, which will serve as the Beijing
Olympic Logistics Center during the games.4
With the influx of 15 million people per
year into urban areas, city and suburban residential development is a necessity. High returns and
strong market momentum have prompted over-
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seas Chinese and foreign investors to buy residential properties as investments. The premium
segment consists of luxury condominiums for
expatriates, often located near the central business district. Examples in Beijing include the
Marriott Executive Apartments, Fortune Plaza
and Central Park. These properties are leased to
major companies upon completion of the project.
Despite the appeal of Beijing
and Shanghai, many of the
best real estate opportunities in
China may be in second- and
third-tier cities.
For mid- to low-level developments, investors
buy developed property from the developer and
resell it to occupants.
On the cautionary side, the Chinese government announced in January 2007 that it will
enforce a tax law that is expected to absorb 30 to
60 percent of property developers’ profits. Also,
in 2008 the Ministry of Land and Resources is
expected to announce new guidelines and set
minimum prices for acquiring industrial land.5
In one major difference from India, all land in
China is owned by the state, which grants land
user rights (LURs) for development. Foreigners
may own such grants.
In addition, government regulations are
dampening the residential market. Companies
5
located within residential properties are no longer
granted state registration certificates, an act that
cuts demand. Furthermore, property developers must devote 70 percent of new developments
to small units of 90 square meters or less.
Housing under construction cannot be transferred. Accordingly, vacancies are rising in both
Beijing and Shanghai. Indeed, in those cities
industry observers foresee saturation, predicting that a balance of supply and demand can be
reached within two years.
The beneficiary of restrictions on residential
development is the retail segment. The strong economy, combined with interest from major brands
such as Louis Vuitton, Hermès and Burberry, is further driving growth. New retail projects in Beijing’s
central business district include LG Shopping
Mall, Wanda Plaza, Shin Kong Mitsukoshi and
Yintai Park Life. Shanghai’s affluent local and
foreign residents appear to be world-class shoppers, attracting international retailers and creating
the most important retail market in China.
Foreign property developers are active in
all facets of Chinese real estate. Middle Eastern
developer Emaar Properties opened an office in
Shanghai in 2006 to steer its residential development projects in Beijing and Shanghai. In
2008, Emaar signed a memorandum of understanding with a Chinese government agency to
explore urban mixed-use property and infrastructure development projects. As Emaar chairman
H. E. Mohamed Bin Ali Alabbar said, “China’s
impressive economic growth has also propelled
demand for property to meet the requirements
of an estimated 400 million urban population.”6
In addition, Integrated Leisure, Entertainment
and Conventions (ILEC), a unit of Singapore’s
CapitaLand, has a 20 percent stake in Macao
Studio City, a full-scale leisure resort property.
Despite the appealing stories of Beijing
6
and Shanghai, the best opportunities for real
estate development in China may well be tiertwo and -three cities. With substantial populations but less saturated real estate markets, such
cities as Wuhan, Tianjin, Chongqing, Shenyang,
Guangzhou and others are potential destinations
for the smart money.
India: on the rise, but barriers remain.
With an opportunity rating between those of
China and Thailand, India is held back by a low
score in “ease of doing business,” which is one
component of risk avoidance. Even though its
country risk is only slightly less favorable than
China’s and virtually the same as Thailand’s,
India does not make the top 50 list for ease
of doing business. Poor infrastructure, lack of
transparency and archaic laws plague the industry. Government action and economic reforms
could reduce or eliminate these obstacles if the
political will exists.
Nevertheless, the real estate market is growing fast, coming from a comparatively low base.
The expected CAGR from 2005 to 2011 is 12.6
percent for office development, 12.2 percent
for residential and 14.1 percent for retail. This
growth reflects India’s increasing GDP — at 8.5
percent, the second-fastest among the world’s
20 largest economies in the 2005 to 2006 timeframe — and substantial foreign direct investment (FDI) inflows. India holds the number two
spot in the 2007 A.T. Kearney FDI Confidence
Index® and is number one in the 2007 Global
Retail Development IndexTM. Economic expansion has led to the rise of young urban professionals and a strong middle class, which in turn is
stimulating residential and retail growth. Another
important contributor to growth is the ability to
purchase land free-hold — though foreign property developers cannot sell or trade undeveloped
plots, in order to discourage speculation.
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India’s tier-one cities of Delhi, Mumbai
and Bangalore still show potential for growth.
Saturation points for office and retail space could
be around six years away, and residential saturation is well into the future. Office markets in
all three cities can be described the same way:
vacancies down, rents up. In New Delhi, with
new supply scarce and vacancy extremely low
in the central business district, “transactions are
occurring only when tenants
vacate space.”7 Accordingly, secondary markets and the suburbs of Gurgaon and Noida are
increasingly popular office destinations. Current projects in the
National Capital Region (NCR),
which encompasses the suburbs,
include the Shastri IT Park,
Vatika Towers and Express Trade
Towers.
In Mumbai, which is a preferred destination for financial
institutions’ back office functions, the introduction of a 12.36 percent service
tax on commercial rentals has made it one of the
world’s costliest office markets. Municipal property taxes are also rising. Demand may thus ease as
supply increases and tenants take a second look at
the total cost of occupancy.8
Turning to the residential market, analysts see a current shortfall of 30 million housing
units. Spurred by urbanization, the government
is targeting 700,000 units per year to be built
in urban areas, and mixed-purpose townships
of around 100 acres are rising near major cities.
Developments include The Nile and UnitechUniworld City complexes in the NCR; Park View
City by Jaipuria Developers and Greenville by
Parsvnath in Gurgaon; and the luxury complex
Evita in Powai (a suburb of Mumbai).
Local and foreign property developers are
partnering in a variety of projects. To give only
a few examples, Emaar Properties and MGF
Developments Ltd. of India are putting $4 billion
into planned, mixed-use communities in Delhi,
Andhra Pradesh, Karnataka, Tamil Nadu and
Maharashtra. Limitless, the master development
arm of Dubai World, and DLF, one of India’s largest property developers, are investing $12 billion in
Saturation points for office and
retail space in India could be
six years away, and residential saturation is well into the future.
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a mixed-use project near Bangalore.Keppel Land
of Singapore and Puravankara Projects are developing the Elita Promenade condos in Bangalore.
Retail markets in Delhi and Mumbai have
experienced increasing rents, but abundant new
supply is on the way. Major new malls in both
cities have pushed up vacancy rates, and there is
concern that the conversion rate from browsers to
purchasers (estimated at 10 to 15 percent) is not
high enough to sustain all the malls.
Other rising stars in Asia: focus on Thailand.
Even without China and India, Asian countries
offer safe opportunities (see figure 3 on page 8).
Thailand has always been highly regarded as one
of the best places to invest given its relatively
low property prices across all sectors — except
the in hospitality sector in Phuket, where prices
7
are now much closer to the international level.
In December 2007, Thailand voted to return to
democratic rule after the military coup in 2006.
This move has encouraged consumption and
restored investors’ confidence.
Therefore, industrial land sales were higher
in 2007 than in any year since 1997.9 In another
positive sign for demand, reduced taxes and fees
will cut residential developers’ expenses by 4.2
percent and home buyers’ expenses by 2 percent.10
Industry observers expect growth in townhouse
and condo projects as well as single detached
houses to rise in line with GDP growth, predicted
at around 5 percent.11
Office space is not performing as well.
Demand for Grade A office space declined after
the coup. But new supply (such as the Athenee
Tower) entering the market in the fourth quarter
of 2007 and 2008 offers opportunities to tenants
looking to secure space before the economic resurgence hits its full stride.12 A less sanguine view is
that multinationals are the key to office demand
in 2008, and they are holding back on expansion
due to concerns about recession in other parts of
the world. Net office take-up in Bangkok dropped
approximately 23 percent from 2006 to 2007, and
rents are flat.13 Among outside investors, Keppel
Land has majority control of Five Star Property.
Figure 3
Risk-adjusted opportunity analysis for Asia (excluding China and India)
High
Indonesia
Opportunity
Low = 0, High = 260
Risk avoidance
Low = 0, High = 10,000
Thailand
Turkey
Opportunity
Taiwan
Philippines
Pakistan
Bangladesh
South Korea
Vietnam
Malaysia
Hong
Kong
Kazakhstan
Sri
Lanka
Low
Azerbaijan
Low
Singapore
Armenia
Risk avoidance
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High
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Taiwan and South Korea also offer opportunities. Taiwan in particular expects growing
interest from foreign property developers seeking alternatives to the mainland’s regulated real
estate environment. Such projects are expected to
pump $6.15 billion into Taiwan’s commercial real
estate market in 2008, double the total in 2007.
Grade A office vacancy levels are likely to drop to
5 percent from 9.4 percent in the fourth quarter
of 2007, and rents should increase 5 to 10 percent.14 Government incentives are fueling other
activity. Incentives include preferential land rent rates to industry for 10
years, lease fee exemptions and reductions, and urban renewal plans.15
In South Korea, observers expect
Grade A office space in Seoul to be
leased within six weeks of coming
onto the market. Vacancies in the
central business district are at 0.84
percent. Foreign investors, notably
GIC, Morgan Stanley and Deutsche
Bank, own about 9 percent of Seoul
office space.16 On the other hand, the
residential market is at a standstill,
owing to new taxes and restrictions designed to
halt an overheated market. Apartment prices rose
approximately 2 percent in 2007 after increasing
93 percent during the preceding five years.17
Turkey is moving up the opportunity grid,
though political volatility remains troubling.
Office vacancy rates in Istanbul’s central business district dropped throughout 2007 as no new
Grade A office stock entered the market. As a
result, rents have increased and tenants have had
to locate in Grade B buildings. Looking ahead,
demand should continue to rise even as older
buildings are replaced, due to tight land availability in the most popular business locations.
Growing interest in logistics facilities is straining
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supply and boosting rents for top-quality industrial and warehouse space. Retail projects are
concentrating in the central business districts of
Istanbul, Ankara and Izmir. In 2008, four new
shopping centers, including Astoria Shopping
Center, Sapphire, Levent Mall and Tat Towers,
should open in Istanbul. Market saturation and
increasing land prices are sending retail developers and investors to smaller cities.
Tourism in Turkey is attracting foreign investors, particularly to golf projects. In the golf
The UAE is experiencing both
the advantages and disadvantages of being in the forefront
of the real estate boom.
center of Belek, the number of visitors increased
nearly 80 percent from November 2006 to
November 2007. Among other properties, the
Rixos Bernhard Langer Golf Hotel is planned to
open in November 2008. In the residential sector,
urban residential development is pushing industrial uses out of the city.18 Emaar Properties and
Atasay, Turkey’s largest gold jewelry exporter, are
developing the Tuscan Valley project in the western part of Istanbul. The 1.7 million square meter
project will include more than 500 luxury villas,
recreational and social spaces, and numerous
amenities. The initial investment of $700 million
will be followed by an additional $5 billion to $10
billion over the next few years.
9
The established markets of Hong Kong
and Singapore are settling into maturity. For
those with riskier appetites, Indonesia has ample
opportunity but significant risk. The Philippines,
Pakistan, Bangladesh and Vietnam are on the cusp
of emerging as high-opportunity locations.
Eastern Europe: difficult to find an appealing mix. Poland is the only country in the region
with a healthy balance of risk and opportunity
(see figure 4). In preparation for the Euro 2012
football championships, infrastructure improvements such as more than 600 kilometers of new
motorway and new airports should boost the economy and property prices.19 Strong demand, spurred
by the growth of outsourcing and offshoring services as well as finance firms and consultancies,
has kept office vacancies low even as projects come
onto the market. In Warsaw, for example, about
412,000 square meters of office space was taken
up in 2006, with a fourth-quarter 2006 vacancy rate
of 5.4 percent. Large-scale retail projects have saturated the market in Warsaw, Wrocław and Poznan,
encouraging property developers to consider alternative retail concepts such as neighborhood centers,
restored historic properties, city center redevelopment and factory outlet centers. Most foreign investors in Polish real estate are Austrian and German
funds such as the Akron Group, although GE
Figure 4
Risk-adjusted opportunity analysis for Eastern Europe
High
Russia
Opportunity
Low = 0, High = 320
Opportunity
Risk avoidance
Low = 0, High = 10,000
Ukraine
Poland
Romania
Belarus
Low
Croatia
Low
Czech
Republic
Lithuania
Latvia
Slovenia
Bulgaria
Risk avoidance
10
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Slovakia
High
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Capital Real Estate from the United States acquired
Géant hypermarket-anchored shopping centers
for $695 million in 2006.20
For those in search of safety, Slovakia,
Slovenia, Lithuania, the Czech Republic and
Latvia have only small-scale opportunities. On
the other hand, while Russia offers opportunity,
it is not an easy market for outsiders. Even so,
Limitless of Dubai and Russia’s RDI Group have
signed a joint venture agreement to create a new
town near Moscow for around 12,000 residents.
The Middle East and North Africa: demand
is key. In the Middle East and North Africa, Saudi
Arabia leads with a growing population expected
to generate high future demand (see figure 5). As
the region’s real estate opportunity leader, Saudi
Arabia also displays improving scores in country risk and ease of doing business. Large-scale
activity in the kingdom is driven by increasing
funds for mega-scale developments, stemming
from its petroleum-based economy. One of the
most ambitious is King Abdullah Economic City
(KAEC), under construction by a consortium
led by Emaar. The city will be a mixed-use development north of Jeddah, comprising a seaport,
industrial district, financial island, education
zone, resorts and residences. In another venture,
Keppel Land and SEDCO, the Saudi Economic
High
Figure 5
Risk-adjusted opportunity analysis for the Middle East and North Africa
Saudi Arabia
Opportunity
Low = 0, High = 120
Iran
Risk avoidance
Low = 0, High = 7,000
Algeria
Opportunity
Egypt
Tunisia
UAE
Israel
Kuwait
Low
Oman
Low
Risk avoidance
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High
11
and Development Company, are jointly developing luxury residences along Jeddah’s waterfront. The three-tower project will open in phases
according to demand.
In addition, public funds are financing
schools, hospitals and low-cost housing, among
other infrastructure and social sector projects.
A recent increase in private sector investment has
spurred the development of premium office, residential and retail space.
going international, such as issues on planning
laws, currencies and taxes, means we have to have
those well thought through before we push forward with any developments.”
Dubai, where the real estate boom originated,
is a market waiting for the impact of oversupply.
Yet construction delays may create a soft landing.
Abu Dhabi has also been a real estate star, and
now needs to modernize its superstructures and
office space. The other emirates are limited by
small populations, despite differentiated offerings such as
sustainable housing, low-density development and affordable housing.
Iran, Algeria and Egypt are
potentially attractive but difficult. Iran is under sanction by
the United Nations and Egypt
is famous for its nightmare
bureaucracy.
However, investors are
becoming more attracted to
international real estate opportunities, particularly in the Middle East and Asia,
according to Goodman Chief Executive Gregory
Goodman, whose company has undertaken an
international joint venture with Abu Dhabi’s
property development giant Sorouh.21
Latin America: room to improve. Only Latin
America is without a country in the most desirable
quadrant (see figure 6). Argentina and Brazil have
significant potential opportunity, but political
and economic volatility is too great to make them
truly attractive development destinations.
South Africa: the continent’s best development venue. South Africa, ranked 10th in the
Index, offers a growing economy, a rising middle
class and increasing industrialization. Although
it is the strongest destination in Africa, risks of
The Index rankings confirm a new
economic region that stretches
from China across India and the
Middle East to Africa
The United Arab Emirates (UAE), one of
the most affluent economies in the region and
home of its real estate boom, is experiencing both
the advantages and disadvantages of being in the
forefront. The local opportunity depends on the
strength of future demand against ample planned
supply. Emaar, one of the largest publicly held real
estate development companies globally, is focusing on growing its international portfolio, which is
now larger than the UAE portfolio. Other regional
giants, including Nakheel, Dubai Properties and
Sorouh, are in various stages of their regional and
international expansion strategies.
Nakheel CEO Chris O’Donnell explained
how the company views expansion in an interview with Gulf News: “The risk associated in
12
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A.T. Kearney
crime and inflation remain. Residential property
demand comes from the white and black middle
class, tourists and business people in search of
rentals, second-home buyers and retirees, and
the need for basic housing. Commercial demand
is affected by the rising cost of land due to its
scarcity in the most desirable commercial areas.
In addition, the government is rezoning or reclassifying land, which will reduce supply as well.22
One major project is the joint venture of Dubai
World’s investment arm Istithmar and its U.K.based partner London & Regional Properties to
buy the Victoria & Alfred Waterfront Company
in Cape Town. The $1 billion deal involves
$300 million in cash and a $700 million loan
from South Africa’s Investec Bank. There are also
investors from South Africa’s Black Economic
Empowerment Council. The waterfront attracts
22 million visitors a year, even though only 55
percent of the area is developed. The partners
plan to add new hotels, leisure facilities and residential areas.
Diversification goes in many directions.
Sol Kerzner, the force behind South African
hotel group Sun International, is now chairman
of the board of Kerzner International, based in
the Bahamas. He is the developer of Atlantis in
the Bahamas and Atlantis, The Palm in Dubai,
Figure 6
Risk-adjusted opportunity analysis for Latin America
High
Argentina
Opportunity
Low = 0, High = 250
Risk avoidance
Low = 0, High = 7,000
Opportunity
Brazil
Colombia
Peru
Uruguay
Low
Costa Rica
Panama
Low
Risk avoidance
A.T. Kearney
Chile
|
High
13
scheduled to open in late 2008. Another Kerzner
brand, One&Only Resorts, is developing a project in South Africa in partnership with Nakheel.
Brand strength is a strong attraction for
potential partners. Chris O’Donnell of Nakheel
told Gulf News, “Associating yourself with major
brands makes a difference. Dubai World has
relationships with MGM in the United States
as well as Kerzner and Trump.”
Property developers from the UAE are also
flocking to Nigeria, a major trading partner of
Dubai. Visiting in April 2008, Dubai World
Chairman Sultan Ahmed Bin Sulayem discussed a
range of opportunities including the development
of new cities, ports and logistics facilities, downtown hotels and resorts with Nigerian President
Umaru Yar’Adua. “Nigeria is a major destination
for Dubai World and a key country in our overall
plans for the African continent,” said Bin Sulayem.
In addition, Limitless has plans under way for
real estate developments including a new main
district in the Nigerian capital and specialized
business cities.23
Beyond the Regions: New Portfolios
Not by chance, 10 countries are the stars in the
Index. This portfolio represents all geographies
except Latin America, which had no risk-adjusted
High
Figure 7
Risk-adjusted opportunity analysis for star performers on the Index
China
India
Russia
Opportunity
Low = 0, High = 4,000
Risk avoidance
Low = 0, High = 7,000
Thailand
Opportunity
Turkey
Taiwan
Poland
South
Korea
Low
South Africa
Saudi
Arabia
Low
Risk avoidance
14
|
High
A.T. Kearney
leader (see figure 7). The target countries are China,
Thailand, South Korea, Taiwan, Poland, Saudi
Arabia, Turkey and South Africa. For property
developers trying to escape the top right quadrant, Russia and India could serve as wild cards.
CHIMEA is a new region for investor scrutiny. A.T. Kearney’s vision of a new, emerging
region that ranges from China across India to the
Middle East and Africa is confirmed by the Index
analysis (see figure 8). China, Saudi Arabia and
South Africa are its target markets.
Taking the First Step
The natural question arising from this paper is,
“How can my company use this information?”
Our work with international property developers and construction contractors has highlighted
the importance of diversification to overcome
the cyclical nature of the real estate business.
Typically, property developers grow within their
local geography until they run out of opportunities or need to diversify their risk profile. Local
property markets go through non-transparent
cycles, and today’s strong performance is only
the precursor to tomorrow’s collapse. Companies
that retain a 100 percent local focus will eventually get caught in a down cycle and fail. For a
sustainable business strategy, companies have to
High
Figure 8
Risk-adjusted opportunity analysis for CHIMEA
Opportunity
Low = 0, High = 4,000
China
India
Risk avoidance
Low = 0, High = 7,000
Saudi
Arabia
South Africa
Iran
Opportunity
Algeria
Egypt
Nigeria
Tunisia
UAE
Ghana
Israel
Kuwait
Low
Oman
Low
Risk avoidance
A.T. Kearney
|
High
15
expand internationally during the good times to
be prepared for the bad.
When selecting countries for expansion, there
is no one-size-fits-all answer. Companies need to
verify a market’s attractiveness and their fit with
that geography to prioritize their expansion plans.
Market attractiveness can be ascertained by the
results of this study. For individual fit, companies should undertake a thorough internal analysis based on the following steps:
• Determine company’s risk versus return profile
• Define cultural fit with certain geographies
• Match existing capabilities with country demand
• Determine impact on operational performance
• Review impact on organizational structure
• Calculate impact on strategic business plan
• Analyze opportunity to competitively differentiate
Authors
Robert Ziegler is a vice president in A.T. Kearney’s Dubai office. He can be reached at [email protected].
Dirk Buchta is managing director of A.T. Kearney Middle East. Based in the Dubai office, he can be reached
at [email protected].
The authors wish to acknowledge the contributions of their former A.T. Kearney colleague Hady Khayrat in writing
this paper.
Endnotes
A.T. Kearney, CHIMEA: An Emerging Hub of the Global Economy, 2008.
Savills Research, Office Sector Briefing, Beijing, China, third quarter 2007.
3
CB Richard Ellis, Asian Office Market Flash, third quarter 2007.
4
“Logistics and Storage Businesses Seek More Industrial Land in Beijing,” Business Beijing, February 2008.
5
Ibid.
6
“Emaar to Explore Mixed-Use Realty Deals,” Gulf News, 3 April 2008.
7
CB Richard Ellis, Asian Office Market Flash, third quarter 2007.
8
Ibid.
9
CB Richard Ellis, Bangkok Overall Market View, fourth quarter 2007.
10
KELIVE Research, March 5, 2008.
11
Ayudhya Securities, “G-Spending to Drive SET,” March 2008.
12
CB Richard Ellis, Asian Office Market Flash, fourth quarter 2007.
13
CB Richard Ellis, Bangkok Overall Market View, fourth quarter 2007.
14
“LaSalle Upbeat on Taiwan’s Commercial Real Estate,” Reuters, 9 January 2008.
15
Colliers International Taipei Office, Market Snapshot, 5 October 2007.
16
Colliers International, Korea General Market Overview, November 2007.
17
“Home Prices in South Korea Stalling at a High Point,” New York Times, 18 December 2007.
18
Colliers International, Turkey Real Estate Market Review, first half 2008.
19
Polish Property and Real Estate Prices, fourth quarter 2007. “Buying Property in Poland,” on www.buzzle.com.
20
Colliers International, Poland Real Estate Review, 2007.
21
Reuters, 4 March 2008.
22
“Property News for South Africa,” www.amberlamb.com, 20 September 2006.
23
“Dubai World Plans to Invest Dh5.5 billion in Africa,” Gulf News, 13 April 2008.
1
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A.T. Kearney
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helping clients gain lasting results through a unique combination of strategic
insight and collaborative working style. The firm was established in 1926 to
provide management advice concerning issues on the CEO’s agenda. Today,
we serve the largest global clients in all major industries. A.T. Kearney’s
offices are located in major business centers in 34 countries.
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and all other correspondence,
please contact:
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Balancing the Global Property Development Equation

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