Understanding the Barriers to Real Estate Investment in Developing Economies

The investor's appetite for global investment has accelerated since the mid 1990s. International or cross- border property investment has boomed, and indirect property investment (investing through securities such as REITs, and through unlisted funds) has become commonplace. International real estate investment through unlisted funds has become the approach of choice, and has included 'core' strategies, through which capital has been allocated largely to developed markets, and 'opportunity funds', which have also allocated capital to developing and emerging markets.In a previous paper presented at IRERS 2008, Baum (2008a) related the number of unlisted real estate funds investing in developing economies to simple economic and demographic variables. Using all markets outside north America and Europe as an imperfect proxy for the developing world, we showed that the popularity of markets was explained largely by population and GDP per capita, but that there were interesting outlier observations - countries receiving much more, or much less, investment than the model predicted.In this second paper in a series of three, we show that academic literature suggests that distortions in international capital flows may be explained by a combination of formal and informal barriers. Through a limited survey of investors, we have further refined our understanding of these barriers in the real estate context. This is the first such examination of the inhibitions to a free flow of cross-border real estate capital.In a third paper we will use a more extensive survey of investors and fund managers to examine how these theories explain current practice, and will suggest specific reasons for certain countries receiving more, or less, investment than their fair share. The implications of this third paper will be relevant for investors in their choice of target markets and for governments wishing to attract more cross-border capital.