Professor Robert Edelstein, California University Berkeley - real estate investment in southeast Europe

(Robert Edelstein)

Serbia is becoming increasingly interesting as an investment destination for the Real Estate investors looking at Emerging Markets. Although differenf in many aspects, from other countries in the region, Serbia will also go through typical transitional phases as any other Emerging Market country. Professor Robert Edelstein, from California University at Berkeley is one of the world leading experts in the Real Estate investments in the Emerging Markets. SECCF and DBF invited Prof. Edelstein at Kolocep (July 04-06, 2008) to present a very interesting topic: International Real Estate Investment: An Emerging Market Focus. eKapija took an opportunity to ask Prof. Edelstein few questions.

eKapija: Prof. Edelstein, what are the most important characteristics of the emerging markets from the property investment perspective? Could you please explain most important considerations that property investor should take care of when investing in property in the emerging markets?

Real estate investment management is, after all is said and done, risk management. In brief, one needs to identify risks; and for a “foreign” investor, identification of risks require understanding the local real estate customs, lending policies, taxation, land use practices, legal ramifications of property ownership rights, as well as the real estate economic local dynamics. Once the risks have been identified, one must assess them in an appropriate way, including creating options to mitigate risks. Finally, one needs to structure transactions (frequently with “local” investors-operators), which provide appropriate risk- reward profiles for the investor.

The internationalization and globalization of real estate investment has emerged as an important phenomenon, worldwide. Investors in all parts of the world are seeking high-quality, high-yield investments outside of their own countries. Part of this is driven by the enormous growth of wealth in the developed world as well as the emerging world, as a desire to enhance yield and diversity simultaneously.. Today, the most significant “new” real estate investors are the sovereign wealth funds; they are the single most important source of growing investable funds in real estate. Real estate investors, examining real estate investments outside their own country, must carefully understand the differences in local practices, legal constraints, as well as added concerns about currency risk. In a phrase, inter-country investment requires an expanded level of due diligence, emphasizing an understanding of the ”foreign” local markets.

The key analytic tool for conducting real estate investment analysis for assessing risks is the same worldwide, the application of various forms of discounted cash flow analyses. For those who would need a high-level, quality introduction to these concepts and an understanding about how they can be applied by sophisticated international investors, I highly recommend our upcoming course, entitled, “International Real Estate Investments: An Emerging Economy Focus, “July 4-6, 2008 (offered in Dubrovnik, Croatia). This course is part of the Dubrovnik Lecture Series in Banking and Finance. The course will be taught by Professor Robert H. Edelstein and Dr. Ashok Deo Bardhan, both University of California at Berkeley scholars with wide-ranging international practical experience.

eKapija: When looking at SEE (South East Europe) we have countries at different points in the transition process. Some countries like Slovenia, Romania and Bulgaria are already in EU. Others are 1-2 years away but some are only taking that path and require 5-6 years to get there. What would, in your opinion, be the best timing for investing in SEE property market?

When investing in economic merging countries that are at varied stages of “transition,” such as those in South Eastern Europe, the tradeoff frequently is the sooner you enter the marketplace, the “cheaper” the real estate will be, but the risks can be significantly higher. Hence, one needs to analyze one's own risk taking capability and comfort levels.

In the short-run, there are significant international macro-risks caused the real possibility of a worldwide economic slow down. I would, therefore, at this juncture, recommend investors to be extraordinarily careful about investing in emerging economies; and would tend to recommend investments in countries and markets that are “further along” the transition process of being brought into the European-wide economy. In the longer-run, judging from the experience in Southern Europe in the last decade, the joining of the EU brings new attention to a country’s real estate market, usually causing a serge in value growth. The experiences of Portugal and Spain, where CAP rates moved in a two or three year period from 10% to 5% represent a set of examples that may be repeated in the SEE.

However, because the country-city markets in South East Europe tend to be small, the real estate scope and opportunities will be limited; there are risks that these small markets will suffer a short-term “bubbles (caused by a surge in new investors).” In such markets, with limited supply and demand, development often is a preferred investment strategy with its own special risks (because of the existing shortage of high-quality real estate).

eKapija: How important is yield, when considering investment in property in the Emerging Markets, having in mind that sometimes buying power in Emerging Markets is low and the rents are not necessarily following the same trend as property prices?

As I have indicated, one might expect both a compression of CAP rates and an increase in net operating income (rents) in the “take-off” phase of emerging countries. Usually this is true for the high end of the real estate market more than the low-end. The possibility of real estate investments with 50% rates of return (un-leveraged) is feasible. One must, of course, practice thoughtful due diligence and careful economic financial analysis in order to make sure the rewards are commensurate with the risk; I suggest that investors should undertake a complete set of discounted cash flow analyses.

eKapija: Serbia is now at the point when we have some changes in the government. It is good moment to think what the governments of the emerging market countries could do to attract foreign investors and increase investments into real estate in their countries?

The most important “governmental function” for attracting outside investment funds (i.e., Foreign Direct Investment) is convincing investors there will be a stable political and economic environment, and that legal property rights are transparent and will be enforceable; and that the government will assure that the legal system treats outside investors with an even hand. “Outside” investors often are concerned that the government can stabilize and maintain currency exchange rates. Other types of incentives, such as temporary tax reductions and so forth for foreign investors, can be used to attract outside investors. However, these tax policies succeed in attracting foreign direct investment once there is the perception that the political economic environment is stable.

You can see the CV of professor Robert Edelstein by clicking on PDF file