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April 13, 2016
Many real estate investors tend to shy away from the unstable Latin American economies especially if they are unfamiliar with emerging countries and their secondary cities. When looking for a healthy investment opportunity, real estate investors tend to prefer to play it safe and stay in the largest and more established markets particularly if they know very little about the country. However, those investors that begin to skim beneath the surface and discover the secondary markets of Latin America find ample opportunities while the megacities become increasingly expensive and saturated.
As the most urbanised continent in the world nearly 80% of the population live in the urban areas of Latin America, which equates to over 260 million people. The reason for such high population densities in the urban areas is in general due to better public services, healthcare and more importantly job prospects. This effect can be seen clearly when comparing the often modern high-rise urban centres and the many impoverished surrounding areas. However, in the last two decades Latin America has witnessed some important shifts in relation to urban migration in Latin America’s largest cities where they congregated in Sao Paulo, Rio de Janeiro, Mexico City, Bogota and Buenos Aires. Nowadays as noted by the McKinsey Global Institute and the UN, migration to these larger cities is slowing and instead an increase in the migration to secondary cities can be seen. The extent of this migration can be seen, with McKinsey estimating that approximately 40% of Latin America’s GDP by the year 2025 will come from its secondary or mid-sized cities. Sao Paulo and Rio have been following this trend and in recent years their GDP has in fact fallen below the national average whilst Mexico City has been outpaced by 45 mid-sized cities in Mexico.
The megacities have been faced with an inability to accommodate the rapidly growing populations which in turn has led to growing congestion, air pollution and a rise in crime and violence due to the stretched resources of the police force. With the megacities of Latin America often being the centre of foreign investment, the often innovative or grassroots businesses fail to expand whilst the monopolies state their claim and become established. This has caused an issue whereby the largest cities of Latin America are in fact failing to provide meaningful employment for their expanding populations. As these cities continue to grow and swallow up the surrounding suburban municipalities, a number of problems occur such as bureaucratic ambiguity. The municipalities often fail to resolve who is in fact responsible for providing utilities to the surrounding shantytowns or who will clean up the river or finance an improved transport link to the airport results in a pausing or degrading of public goods.
Although many of the megacities are improving and facing these problems, the secondary cities are either replicating these ideas and in many cases improving on them and implementing them quicker as they are smaller and therefore face less bureaucratic issues. As many of these cities are not the first choice for investment, they have to try harder to attract interest and therefore many off pro-investment schemes. These can range from assisting new companies through the administrative process to helping in the hiring of workers. The lower operating costs can help companies looking to establish themselves in a new emerging market and in secondary cities, the services are often less strained and therefore improved. Utilities are lower as providers don’t have as many people to provide a service, the traffic is more manageable in secondary cities and buying or leasing a property can be anywhere from 15% to 50% cheaper in secondary markets. Medellin in Colombia for example, has earned worldwide respects due to its approach to urban redevelopment. The city has seen the creation of new lower-middle income housing, downtown redevelopment, elevators serving the hilly shantytowns, a network of libraries and parks and a cluster of businesses near to the University. Being named the 2013 Most Innovative City in the World has certainly proved this growing trend in secondary market development, interest and investment.
Of course, care needs to be taken when investing in secondary markets as there remains some risk as they are not as established meaning a business will need to be more diligent. Finding local providers can be trickier and a suitable office space and location can be more difficult as a result of lower availability and development. However, developers, investors and those interesting in investing or establishing their business in an emerging market should remember that the megacities and more established markets of today represented a similar risk and those who got in early were able to reap the rewards and opportunities.