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Globalisation affects almost all aspects of human life and real estate is no exception. Just look at the people buying prime real estate in London or New York — almost every nationality is represented, from Chinese millionaires to Russian oligarchs to Indian magnates.
It is not only the world’s top real estate markets that are attracting such a diverse clientele. In recent decades, a growing number of other global cities are finding themselves targets of international investment, such as Bangalore, Mumbai, Shenzen, Shanghai and Chengdu. There is also growing international interest in so called second-tier cities in the US and Europe. Albert Saiz, a professor at the Massachusetts Institute of Technology (MIT), calls these globally attractive cities gateways that are key real estate markets for investors to study.
Real estate development
As increasing urbanisation pushes more people to live in cities, and capital flows become more glo-balised, the sensitivity of these real estate markets to global capital inflows and outflows will increase. More cities will have to cope with the ebb and flow of foreign money, as global economic events cause prices to rise and fall. Does this process sound familiar? “In a way, there’s a convergence. New York, Boston and San Francisco, even Los Angeles and Miami — they’re becoming more like Dubai.”
Saiz was visiting the UAE to talk about his research into gateway cities and to promote the course he runs at MIT, the Master of Science in Real Estate Development (MSRED) degree programme. Launched in 1983, the course is unlike other graduate degrees in real estate in that it takes eleven months rather than two years. It is a short time frame to cover a wide subject matter. Students learn about development and land use, pick up basic design skills, get a grasp of the built environment from a design perspective, and gain experience of financial markets, investments, asset management and mortgages. It is an experience he unapologetically describes as super intense.
Typically, about half of the thirty students in the cohort are from the US while the rest come from around the world. The typical student has roughly five years experience in the real estate industry, be it in asset management, sales, leasing or banking.
Once they graduate, students have a comprehensive view of the real estate world and a range of employment options before them. Some years ago, careers in the growing mortgage-backed securities market attracted many, but Saiz says property development is now a more popular choice. Some graduates take a more entrepreneurial route.
He says each year up to five students go into internet-based real estate ventures, for instance web services that link buyers and sellers. The course is constantly evolving, with the knowledge generated by one cohort becoming a case study for the next. “The MIT culture is very horizontal,” he says. “It’s not like other places where the professors are up high and the students are below them. Everyone learns from everyone else.”
Formula and data model
One option for graduates is to go into academia and produce the research that investors and developers put into practice, like Saiz does. He says his most recent research project seeks to develop a formula and data model to identify bubbles in the residential property market. The findings could help prevent banks from underwriting mortgages at excessive valuations, and so avoid adding to market frenzies.
Another study he worked on surveyed 2,500 municipalities in the US, asking about land use and approval practices. It found that some municipalities granted approval for new projects with no questions asked, while in others, construction firms had to wait four years before getting projects under way.
The research Saiz has conducted can also help determine the best investment opportunities in the gateway cities he has identified. For instance, in many of the major Chinese cities, rapid development in the past twenty years means there are few opportunities left for new developers coming to the market. A better strategy, he says, would be private equity investment, in which existing assets are bought and then sold on to institutional investors, such as pension funds, which are looking for a stable, long-term yield.
The key is to stabilise yields on the properties, so that the buyers are confident their returns will be steady in the years ahead. “A lot of the action is in that arbitrage,” he says, adding that “global gateway cities have the IT and intellect to help these kinds of deals work better in terms of transparency, measurement and underwriting”.
There are certainly plenty of opportunities in the gateway cities. And when it comes to the Gulf region, Saiz says Dubai’s position as the leading regional gateway is safe for the foreseeable future. He says Dubai scores well on several measures, among them its open attitude to trade and capital, and its ability to attracted talented people.
Source: George Mitton, Special to Property Weekly