1. Emerging Financial Markets 12: Real Estate Investment
Prof. J.P. Mei

2. 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 1

3. But Still a lot of People

4. 2

6. 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? 3

7. Case, Goetzmann, and Rouwenhorst (1999)

9. Case, Goetzmann, and Rouwenhorst (1999)

10. 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 4

11. Land Prices in various cities, one square meter in 19895

12. Source: GPR

13. Source: GPR

14. 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 9