The plateau in global market transparency teaches us that progress is not inevitable, as Shayla Walmsley reports

The news that global improvements in real estate transparency have "slowed to a crawl" over the past two years should come as a disappointment to pension funds but it is unlikely to come as a surprise. What is surprising though is that markets perceived by pension funds to be relatively investible score so low on the Jones Lang LaSalle Global Real Estate Transparency Index 2010 report, and vice versa.

The CA$129.7bn (€96.5bn) Canada Pension Plan Investment Board (CPPIB) denied that it was rethinking its investments in Turkey - which shows the strongest improvement - but was unwilling to talk about the market, for instance.

Poland, which JLL claims has overtaken Western European markets such as Italy in the transparency stakes, is suffering significantly from a lack of liquidity. Ben Habib, CEO of First Property, says: "Transparency goes hand in hand with liquidity. The greater liquidity in the market, the more likely it is to be transparent, with greater visibility of yields. Liquidity is important for institutional investors.

"Without transparency it's difficult to see where pricing is. We're getting mixed feedback. Recently, one Polish shopping centre delivered a 10% yield, another a 6.75% yield. That kind of anecdotal lack of consistency makes investors nervous. Whether the property is prime or secondary makes a difference but in the same category it needs to be definable."

Yet pension funds do not appear to be fleeing Poland as a result. First Property, which recently appointed former Universities Superannuation Scheme (USS) chief investment officer Peter Moon as a non-executive director, also manages a third-party property fund for the £28bn (€33bn) scheme. USS is First Property's third largest shareholder, with 8.7%.

What does this tell us? That transparency matters - but that returns matter more. Where transparency matters most, it does so because it stands as a proxy for risk. The more cautious the investor, the more transparency matters.

Peter Olsson, head of property at AP Pension, the DKK30bn (€4bn) Danish pension scheme, has been considering global real estate exposure in recent years, but currently favours the UK because he says investment opportunities are easier to judge when the market is transparent.

"It is difficult to evaluate risk if you don't have it," he says. "Which markets we invest in depends on our risk assessment, and it's difficult to evaluate unless the market is transparent."

He adds: "That isn't to say that we necessarily avoid investing in markets that are less transparent [such as emerging markets] but it's a challenge to find investment opportunities we're comfortable with in those markets. We are looking at Asia but it's more challenging. If you have the data, you have a historical, reliable outlook. You also need a transparent legal framework and a transparent business framework."

According to Olsson, the financial crisis has made it more obvious to investors that markets don't always rise. That has moved transparency up the agenda.

But for whom? Although he wholeheartedly supports transparency, Mats Hederos, property managing director of the €27.3bn Swedish pensions provider AMF, points out that a major player in an opaque market is at a significant advantage. "You can gain advantage as a major player even in a non-transparent market. But with transparency everyone gains," he says.

"If you're a major player in a closed market, what you have more or less is an oligopoly. In that case only a few can have the right kind of input into the market and they can take advantage of it."

Pari passu, overseas investors would be at a disadvantage compared with domestic investors, whether the market is transparent or not. "If you take Stockholm, transparency is less important for us than for foreigners," says Hederos. "If I were to go to London, it's easier than to go to Milan. London is more transparent. But in Stockholm we're part of a small community."

In Stockholm, you can find out who owns, buys and sells which assets, but you will not be able to find out who rents them from whom. In an otherwise transparent market, rental agreements are confidential.

"Otherwise, you can find everything - price, history, and information on the buyer, seller and owner. You want to be sure you're buying a certain property and to be sure you've really bought it. That kind of uncertainty kills interest in the market," says Hederos.
The situation in Sweden highlights another issue: that what transparency there is is moot.

Rita Ling, client portfolio manager at Invesco Real Estate with responsibility for Asia, points to China - "not the best but not the worst" in the region - where efforts to improve transparency include the development of a listed market. Legislators approved one in March, though they are still hammering out the detail.

In the private market, the Asian Association for Investors in Non-listed Real Estate Vehicles (ANREV - Asia's INREV counterpart) is encouraging markets to adopt INREV standards but that takes time, too. She cites as "very helpful" the fact that the Chinese government, which controls land, is now recording land sales using the internet.

Despite imperfect transparency, international investors continue to pour into the market.
In the meantime, there is a fair risk that, while overseas investors are transparent, their Chinese counterparts are not - at least not in their domestic market. As a consequence, you see a two-tier market developing, with better transparency in first-tier cities compared with the second- and third-tier cities.

If a single, albeit a large, market cannot meet a single standard, what are the odds for global transparency?

Ling believes it will be difficult to create a global transparency standard, pointing out that in Europe the only country with the same level of transparency as the US is the UK.
"It will be hard to develop a global standard because you have to take into account regional circumstances," she says. "What's applicable in the UK or the US is not applicable in France, Germany or Japan. A basic standard is achievable in all markets, but the degree will be different in each region."