The term BRIC originated back in 2003 and was coined by Goldman Sachs economist Jim O’Neill. It was O’Neill’s opinion that since the US economy took a nose dive it allowed the BRIC countries Brazil, Russia, India and China to take a bigger slice of the world’s gross domestic product.
We would be taking a quick peek into the property markets of these four countries, to gain a better overview of what exactly is going on.
The Brazilian economy is the world’s 10th largest and now has the largest emerging market equity market. With China’s demand for Brazilian metal and minerals and the recent rise in oil prices, the Brazilian economy gained around 14.7 per cent on the international portfolio for the second quarter this year.
Back in 2002, this figure was barely above 5 percent. This puts Brazil in the leading group of emerging nations. This whole demand is reflected in the new property boom that is happening in the country.
Brazil’s residential property market comes in two flavours; the hotel resort sector and the urban city centre properties.
For investors looking at the holiday resort market, the North-East coast offers a plethora of developments attracting huge demand from international investors, despite the lack of Brazil based loans to international buyers’. Areas like Natal offer beautiful beaches, rain forest, endless reefs and plenty of sunshine, and is no wonder many have fallen in love with the idea of an investment property in Brazil.
On the urban-front be on the look out for city centre condominium apartment developments in Sao Paulo & Rio de Janeiro with prices between $200-$300 per SQ. FT offering rental yields as much as 9%.
Despite the fact that wealthy buyers from Russia invest their monies in various economies worldwide (mainly the UK, UAE and Eastern Europe), Russia’s own market is currently going through some roller coaster motions.
After a massive stock market decline only days ago (the worst in a decade), Russians are waiting with bated breath to see what happens next. Many companies lost a lot of money and individuals who had strong stock portfolios saw huge chunks of money wiped out.
Of course such actions will influence the Russian property market which has been topsy-turfy to say the least. While some areas of Russia have reported good growth in the last few years, others are still stuck in the past and struggle to move into the 21st Century..
Property prices in Moscow rose from US$700 per SQ. FT in 2000 to US$ 5,000 per SQ. FT in 2008. Most of this growth happened back in 2006 and after a period of stagnancy in 2007, the market has slightly picked up again in the city.
Another stronghold in Russia is St. Petersburg.
All in all, there is money in Russia but according to many news sources, many wealthy Russians would rather invest this money overseas.
When India relaxed the investment rules back in 2005, many investors from overseas jumped on board. This resulted into an estimated influx of construction dollars of US$ 20 billion. A building boom was born and land prices all over the country quadrupled.
Looking at the current market today it seems clear that many developers have simply artificially inflated their land value since government figures for the last three years only account for a total of $ 2 billion spent. What happened to the other $ 18 billion?
The big funding companies such as Citigroup, Morgan Stanley and Merrill Lynch speculate that many local developers have tried to cash in on the imminent boom which was responsible for those price hikes.
Now that the stock market is on a roller coaster ride, many Indian banks curb their lending budgets in order to keep finances in control. Therefore many developers have come to realize they would be better off offering investors some worthy deals instead.
With the central bank’s cash reserve ratio raised already several times this year and Indian banks banned from lending any funds for land purchases, loans could certainly become even more sparse and expensive. Currently they sit around 12%-13%.
Many exciting sounding projects have been put on hold for now leaving even more room for speculation. Some influential backed developers had to put their big plans on hold because they couldn’t be pushed through. This is certainly an important moment for many developers and some think they are entering an era in which it is a good time to buy Indian property as they fall.
They also speculate that eventually, the demand for shopping centers, new apartments and offices will pick up again as the economy is growing at around 8 percent annually.
When China opened her floodgates a few years back to international developers, nobody knew what frenzied action would result in this decision. But it did, and so much so that average property prices doubled in 6 short years since 2002 causing a massive flood of new development leading up the Olympic Games 2008.
Once the Chinese government realized there was no stopping the growing market, they changed tactics once again and started to curb the action in order to cool the market. Now we are seeing finally some signs that the market has indeed slowed down which isn’t a pretty sign for thousands of small time developers. These guys will be the first casualties in the cool down with only the big players strong enough to survive.
With new capital gains and land appreciation taxes introduced and the rise of interest rates this year, Chinese investors and developers are starting to see a change. Banks were ordered to curb developer loan lending and land speculation was undermined buy ‘the use it or lose it’ policy of the government.
The governments actions are believed to have slowed property price rises. Compared to a year ago they are down in numbers as well as home sales in many cities around the country. Shenzhen’s property sales ground to a near halt last year.
About the Author: David Garner is Managing Partner of David Garner Consulting and also hold a position with BRIC Group as a Senior Portfolio Manager. David advises a broad range of private investors, groups and industry professionals on a diverse selection of real estate related solutions, from land acquistion, portfolio management and fixed return investment vehicles. David is available for consultation and advice on firstname.lastname@example.org