Emerging markets vs. established areas: Where to make your real estate investments

When it comes to real estate investment, one of the biggest questions you’ll have to answer is whether to invest in an established neighborhood with a track record or to head into an up-and-coming area with potential yet to be tapped. Both can be profitable, but they carry substantially different risks, rewards, and investment strategies.

This choice involves more than surface-level thinking. You must think in terms of market stability, potential for appreciation, cash flow, and where both kinds of markets do or don’t fit within your overall financial aspirations. As you sort out the intricacies of each, you can decide on a direction that is consistent with your individual risk tolerance and time frame for investing.

The case for established areas

Established real estate markets are found in major metropolitan cities or regions with a long history of strong property performance. New York City, London, Los Angeles, and Sydney are some of the locations. They have strong demand for housing, highly evolved infrastructure, and solid local economies that attract domestic and international purchasers.

The advantages of investing in established areas include:

Proven track record. Most established cities have stable appreciation in property values regardless of national or global economic downturn, according to the National Association of Realtors.
Reduced investment risk. The maturity of the markets means that there are no surprises in terms of infrastructure, zoning, or abrupt changes in demand.
Greater accessibility to financing. Lenders feel more at ease granting mortgages in established markets, and they usually provide more favorable rates and terms.
Strong rental demand. There is less vacancy risk for landlords with a steady supply of renters, from professionals to students and families.

Yet all these benefits come at a price. Entry points in more developed areas will usually be considerably higher, and it will be harder for investors with smaller amounts of capital to get in. In addition, because the purchase prices are higher, rental yields will be lower compared to less developed markets.

The appeal of emerging markets

Emerging real estate markets are areas or neighborhoods that are undergoing considerable population growth, infrastructure development, or economic activity. These may be cities in developing nations or underappreciated sectors within major metropolitan areas.

For instance, places such as Austin in the early 2000s or Lisbon prior to its tourism surge provided initial investors with high returns. Even lesser known places like Chatham County, North Carolina, which is experiencing a rise in land values due to local economic development, may be worth considering.

Potential advantages of emerging market investments include:

Higher potential for appreciation in property prices. Early investment allows investors to benefit as the area develops and becomes more desirable. The World Bank further states that emerging markets have higher GDP growth, which can be mirrored in better demand for property.
Less upfront investment expense. Properties tend to be less expensive, so you can buy more units or bigger properties for the same amount of money as in established areas.
Scope for increased rental yields. As new residents move into the area, demand for rentals can pick up fast, enhancing cash flow prospects.
Portfolio diversification. Investing in emerging market properties can offset holdings in mature, slower-growth regions.

Naturally, the risk is greater too. The growth in the market might not materialize as soon as anticipated, government policies can unexpectedly shift, and infrastructure projects that draw in investment might be delayed or terminated. Careful timing and due research are necessary to avoid overpaying in a market that still has years to go before its peak.

Considerations when making a decision

If you are choosing between emerging and established markets, it is useful to consider the following:

How much risk am I willing to take? Established markets are safer, while emerging markets carry greater volatility.
What is my investment time frame? Longer time horizons can make it easier to ride out the uncertainty of emerging markets.
Am I prepared to do the research? It is important to comprehend local policies, intended developments, and demographic trends prior to purchasing in an up-and-coming region.
Would a combination be best? Some investors divide their portfolios between stable and growth markets to balance income and appreciation potential.

Both emerging and mature markets can deliver great real estate returns, but each serves a different role in an investment portfolio. Established markets offer stability, predictability, and long-term security. Emerging markets offer a potential for higher upside, but require more research, patience, and an acceptance of uncertainty.

The correct option is based on your objectives, financial condition, and risk tolerance. For most people, a diversified strategy, blending the predictability of established regions with the growth prospects of new markets, delivers the best of both worlds.