Improvements in real estate disclosure and regulatory consistency have slowed to a crawl over the past two years, says Jeremy Kelly
Improving real estate transparency is closely linked to rising investment volumes, higher cross-border activity and greater operational efficiency for investors, developers and corporate occupiers. However, after 10 years of remarkable gains around the world, improvements in real estate disclosure and regulatory consistency have slowed to a crawl over the past two years. In Jones Lang LaSalle's latest Global Real Estate Transparency Index 2010, we have revealed a notable slowdown in the progress of the industry as measured through five different dimensions: performance measurement; market fundamentals reporting; reporting on listed real estate companies and REITs; legal and regulatory fairness, consistency and efficiency; and transaction process efficiency and consistency.
Recent turmoil in the global financial and real estate markets has affected transparency, with many participants across the industry focusing on survival, rather than adherence to ‘best practice' guidelines, full disclosure and consistent application of government regulations. Of the key components of real estate transparency, the transaction process appears to have been compromised most by the more challenging real estate market conditions of the past two years. More surprising, is the evidence of a slowdown of progress in the transparency of real estate regulatory and legal environments. Nonetheless, the quality and depth of information on market fundamentals continues to improve, helping to boost this dimension of transparency in most markets across the globe.
Australia - the world's most transparent real estate market
JJL's latest Index ranks Australia as the world's most transparent market, pushing Canada into second place, while the UK is in third position. The traditional leading pack - Australia, New Zealand, the UK, the US and Canada - have now been caught up by a number of European markets such as Sweden, Ireland and France. However, even among these highly transparent markets, levels of ‘debt transparency' are low, a new category introduced into the JJL 2010 Index.
Measured in terms of the breadth and depth of data available on commercial real estate (CRE) debt as well as how thoroughly real estate debt is monitored on banks' balance sheets, levels of debt transparency vary greatly between developed and developing countries. In many developed countries, the regulatory oversight process is relatively well developed, but the availability of information on CRE debt markets is not. The countries that score the highest for consistent and thorough CRE debt regulation are Australia, Ireland and Canada.
Turkey shows strongest improvement
The JJL 2010 Transparency Index does reveal some bright spots, and transparency continues to improve, albeit moderately, in the majority of markets. Turkey tops the table of transparency improvers, making up for lost ground over the past two years, following its poor performance in 2008. Turkey, within the framework of the EU accession process, has been working hard to align its legal and regulatory systems with developed countries. A number of private initiatives to improve the quality of real estate data have also boosted transparency levels, particularly in the retail sector.Improving transparency in China and India ripples into secondary and tertiary cities. The Asia Pacific region has shown the most broadly-based improvements in transparency over the past two years, but it is in India and China where the region's greatest advances have been made, a trend that has now filtered across their secondary and tertiary cities.
The big improvement for China and India has been mainly due to increased market data availability, as well as ongoing regulatory changes. The upward movement in the index of Chinese secondary cities has been in a good part due to progress made on the consistency of implementation of income tax, stamp duty and land value appreciation tax, and likewise the Indian tertiary cities are benefiting from improvements in the availability of title records and moves such as the consistent application of building codes.
Within the Asia Pacific region, an interesting anomaly is provided by Japan and South Korea. Despite their relatively high levels of economic development, both countries present surprisingly low levels of real estate transparency. Japan ranks 26th globally and significantly it scores well below other major advanced economies. South Korea ranks 42nd globally, and sits close to the Chinese and Indian primary cities within the semi-transparent level. Both countries share a relative lack of information on market fundamentals and have low transparency in regard to occupier service charges.
Differences in transparency levels blur between western and central Europe
Europe is a mixed picture of transparency. A number of Central and Eastern European countries, such as Poland, Romania and Hungary, have shown good progress as their markets become more internationally traded and their regulatory and legal environments become aligned with core EU economies. In fact, the more advanced CEE countries, such as Poland, have now caught up with the laggards in Western Europe, such as Italy, which has struggled to improve real estate transparency. The differences between Western Europe and CEE are becoming increasingly blurred, but not all CEE markets are making progress.
In Russia and the Ukraine, transparency improvements have stalled, a reflection of the severity of the 2008-09 real estate downturn, and a sharp contrast to the strong improvements registered in previous surveys. Bulgaria continues to struggle to maintain transparency levels, and many transparency issues remain to be effectively addressed. Croatia also has low transparency, which is unlikely to improve significantly until the country enters the EU.
Paradoxically, two European markets that have recently faced significant economic difficulties - Portugal and Greece - have shown good progress in real estate transparency. In Portugal, the improvement reflects a growing professionalism and greater adherence by the real estate industry to legal and regulatory frameworks.
Both the quality of and access to real estate data have also improved in Portugal with the growing role of organisations such as IPD and the Lisbon Prime Index. Greece has made advances in many categories since 2008, particularly in terms of the depth and quality of market information. Planning is the exception, whereby a widely publicised case that involved a large shopping centre development continues to cast a shadow over the reliability and consistency of the country's planning processes.
Improving business environments to boost real estate transparency across Latin America
The Americas markets have shown modest changes in transparency. Improvements have been static in the region's two most transparent markets, the US and Canada. Chile stands out for its high transparency score, particularly in the regulatory and legal, and transaction process categories.
Brazil continues its longer-term improvement in transparency, although its rate of improvement has slowed over the past two years. In particular, Brazil has progressed in the performance measurement category due to the recent introduction of real estate securities indices. Also, all Brazilian municipalities must now adopt an approved urban master plan, which is helping to provide solid context for land use futures.
Mexico has experienced very little change in overall transparency since 2008, although there was a significant improvement in domestic private equity regulations in 2009 that has enabled institutional investors, and in particular local pension funds, to invest in domestic private equity, including real estate, for the first time.
The outlook for real estate transparency in the Americas is likely to be boosted by the continuing underlying improvement in the economic and business environments of some of the larger Latin American economies. In particular, some of the first forays into private and public indices to benchmark investment performance should lay the foundations for future improvements in transparency. Transparency of market fundamentals is another area in which there is significant scope for improvement in the region. As in other continental regions, a key item to watch over the near term, in the wake of the global financial crisis, is for any potential impact on transparency through major regulatory change.
Dubai recognising role of real estate transparency in enhancing its competitiveness
In the Middle East and North Africa (MENA) region, markets such as Dubai which were
highlighted in the JJL 2008 Index for their strong advance in transparency have experienced a setback in 2010. Dubai epitomises the region's struggle to achieve furtherimprovement in transparency levels during a period of exceptional real estate challenge.
Nonetheless, Dubai authorities recognise that real estate transparency will help to enhance its attractiveness as an investment or corporate location, and has taken the lead in introducing important regulatory reforms that have the potential to improve market transparency over the next few years.
Similarly, neighbouring Abu Dhabi has announced various laws and other reforms covering the real estate sector, and plans to establish a regulator for the real estate market similar to RERA in Dubai.
There has certainly been a greater recognition in the MENA region over the past few years of the importance of real estate transparency, but many of the measures required to enhance transparency have not yet been fully implemented. The MENA real estate industry is currently going through a process of redefining its business model and, as the markets evolve from a ‘development' to an ‘asset management' phase, the industry will once again refocus on longer-term structural improvements such as transparency.
High transparency is speeding up the restructuring process.
The last two years certainly demonstrate how high levels of transparency do not eliminate risks for investors or corporate occupiers. Free flows of information and consistent enforcement of local property laws did not prevent values falling or produce better access to credit at a time when liquidity dried up. The real value of transparency should become evident when comparing how quickly markets are able to open up again after the financial crisis. The recapitalisation of real estate in many countries is being helped by the free flow of information and the protection of property rights. Occupiers benefit when landlord defaults are resolved quickly and efficiently. Investors benefit when bankruptcy laws are administered fairly and efficiently.
It is apparent that markets with high or rising levels of transparency are going through the restructuring process faster than those with falling levels of transparency. Whether rising transparency might have contributed to higher levels of volatility is an open question. Debt and equity capital clearly flowed into both emerging and developed markets in an undisciplined fashion during the 2006-08 timeframe.
As the world stock markets illustrate, growing access to data does not eliminate volatility or prevent investors from making errors of judgement. In the future, regulators will rightfully emphasise the importance of greater disclosure in order to gauge the creditworthiness of commercial real estate and to evaluate the sector's ability to carry debt. As these steps are put in place, we expect the transparency of real estate debt, and hence all real estate capital markets, to rise. However, we do not expect the inherent cyclicality of real estate to ever be eliminated. Higher transparency moves real estate from the world of uncertainty (unknown hazards and outcomes) closer to the world of risk (known hazards, probabilistic outcomes).
Jeremy Kelly is national director, global research at Jones Lang LaSalle