Investors See Safety in Russia, Brazil

LONDON -- Western housing bust or not, emerging market real estate continues to be hot property.

The global credit crunch sent property prices skidding in developed markets from the United States to Spain, but it appears to have done little to slow the real estate sector in emerging economies such as Russia and Brazil, which are still thriving on a commodities boom and increased access to mortgages.

The dire combination of slowing economic growth and rising inflation may be prompting some investors to shun emerging market bonds and equities, but others are positioning themselves for property values to rise further.

"We're advising investors to own land, buy into real estate brokers, construction firms or suppliers of raw materials. For purer property-related plays, we are recommending some property developers," said Jonathan Garner, head of emerging markets strategy at Morgan Stanley.

Growing urbanization and rising incomes are fueling property demand in developing giants Brazil, Russia, India and China, or BRICs.

And unlike their counterparts in developed economies, banks in most emerging markets are largely unaffected by the liquidity squeeze sparked last year by subprime mortgage defaults in the United States.

Ratings agency Fitch said last week that builders in the BRIC economies were supported by rising home affordability and economic growth, though they face risks such as less predictable legal and regulatory environments.

"The credit crunch has very limited relevance to many emerging markets. Not only are the banks in good shape, you've also got households that are not overextended," Garner said. The ratio of household debt to GDP in the BRIC countries ranges from 5 to 10 percent, compared with more than 100 percent in Britain and 90 percent in the United States, he said.

The growing spending power of emerging-market consumers means retail property there is particularly promising, argues Biljana Bozic, head of real estate at East Capital.

"Thanks to oil prices, disposable income has increased almost 75 percent in the last five years," said Moscow-based Bozic, who is managing East Capital's 200 million euro property fund aimed at Russian, Ukrainian and Kazakh retail property.

"Retailers want to expand but can't find available space. During the Soviet era, there was hardly any commercial real estate built."