Global Overview: Key Findings in 2012
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Jones Lang LaSalle,
LaSalle Investment Management,
Renewed impetus in transparency improvements
In 2010, when we last reported on real estate transparency in the immediate aftermath of the Global Financial Crisis, we highlighted a slowdown in transparency improvements in several markets as the real estate industry focused on survival rather than market advancement. Two years later, most developed markets have begun to recover from the recession of 2008 and 2009 and, while downside risks remain, the global real estate industry is in better shape than it has been for several years, reflected in renewed impetus to transparency improvements across the world's real estate markets.
Our latest 2012 Global Real Estate Transparency Index highlights steady progress in the majority of markets during the past two years. Nearly 90% of markets have registered an improvement in their transparency score since 2010, as the movement of capital and corporations around the world creates an even greater need for high-quality market information and performance benchmarks. This need, combined with the fight for inward investment, is encouraging governments to streamline bureaucratic processes and improve regulatory enforcement.
Top positions dominated by the more liquid Anglophone markets
The world's most transparent markets continue to be dominated by the more liquid Anglophone countries. The United States ranks as the world's most transparent real estate market in 2012, followed closely by the United Kingdom and Australia; New Zealand sits in fifth position and Canada is in sixth place. They are joined by several European markets - Netherlands (4th), France (7th), Finland (8th), Sweden (9th) and Switzerland (10th), which together constitute the world's 'Highly Transparent' markets. A re-ordering of these 'Highly Transparent' markets, relative to earlier editions, is largely due to our more detailed approach to tracking market fundamentals and performance data series. However, the differences within this category are modest when compared to the large differences seen between this and the next tier of markets.
MIST markets take centre stage
Real estate investors and corporate occupiers are widening their activity across a broader range of markets, which is encouraging faster rates of transparency improvement in 'growth' and 'emerging' economies as their markets open up further to international competition and their real estate sectors embrace international best practice. Top improvers in 2012 are dominated by markets in Latin America, South East Asia and South East Europe. The 2012 Index puts the MIST markets (Mexico, Indonesia, South Korea and Turkey) among the leading improvers. Turkey once again heads the global league table of transparency improvement; Mexico sits in third place and Indonesia in sixth.
BRIC Tier 1 cities move towards transparency
The BRIC markets (Brazil, Russia, India and China) which featured heavily among the top improvers in the 2010 survey, have continued to show improvement, particularly in their primary markets. Brazil has seen its Tier 1 cities emerge as the world's second fastest-improving market over the past two years – these cities are now the first representative 'Transparent' market in Latin America, with levels of transparency comparable to Hungary and Portugal. China and Russia's Tier 1 cities are not far behind at the top end of the 'Semi-Transparent' category. Progress has also been made in India's Tier 1 cities, although they lag the other BRIC primary markets.
Rising transparency associated with higher investment
The 2012 results reaffirm the relationship between real estate investment volumes and transparency. Rising levels of transparency are associated with higher levels of foreign direct real estate investment - a powerful incentive for encouraging the free flow of information as well as the fair and consistent application of local property laws. The world's fastest-growing direct commercial real estate investment markets over the past two years – such as Brazil, Turkey, Indonesia and Vietnam – are all among the world's top 10 transparency improvers.
Improving market fundamentals data
We have continued to witness steady progress in the overall quality and depth of information on real estate market fundamentals, as real estate service providers, specialist data vendors and professional bodies extend their reach. At the head of the 2012 Market Fundamentals Sub-Index are the United States and Australia, characterised by long historic time-series data and extensive database coverage across multiple sectors. The Netherlands, Hong Kong, Canada, New Zealand and the UK also score well on market fundamentals. More significantly, however, is the strong showing of several CEE markets (such as Poland and the Czech Republic), which are setting new standards by establishing a collaborative approach to data collation. South East Asian markets and BRIC Tier 1 cities (with the exception of India) are also marked highly on market fundamentals, where a concentrated presence of international service providers, investors and corporate occupiers is boosting the quality of real estate information. Nonetheless, across most of the emerging world, market fundamentals data remains poor. It is in this category of transparency where there is greatest scope for progress, with its Sub-Index showing the weakest average score of the five Transparency components.
Enhanced performance benchmarks
The United Kingdom, Australia and the United States, which have the world's best investment performance data, lead the ranking on the Performance Measurement Sub-Index. Major improvements in real estate performance data have taken place over the last two years in a number of countries; regional real estate industry associations and global index providers, such as the Asian Association for Investors in Non-Listed Real Estate Vehicles (ANREV) and Investment Property Databank (IPD), have been very active. New direct property returns indices have been launched in CEE, Emerging Asia and Brazil. While progress in public (listed) real estate securities and unlisted fund return indices has been more modest, improvements have been made; for example, a new Pan-Asia Fund Index was launched and Mexico saw the appearance of its first true commercial real estate focused REIT.
Debt transparency – still a critical component
In the 2010 Transparency Index we added a new component covering the availability of data on commercial real estate debt, and the extent to which national regulators monitor that debt. The heightened euro crisis has continued to make the issue of real estate debt transparency highly relevant to international investors. Data on the amount of outstanding real estate debt by market, and knowledge about whether local regulators can prevent the overextension of credit in the future, helps investors and corporate occupiers better assess risks in markets where they operate.
The 2012 Index shows that debt transparency has improved modestly since 2010. Data on outstanding debt and capital flows increased in 11 markets and regulators improved their oversight of commercial real estate lending in 15 markets. Canada, Australia, the United States, the United Kingdom and France continue to lead in data availability and regulatory oversight. Germany and Japan, however, still lack a detailed debt data series that extends over five years.
Environmental sustainability emerges as a transparency factor
As the issue of environmental sustainability comes to the forefront of real estate investor and corporate occupier concerns, we have created a separate Real Estate Sustainability Transparency Index for a sub-set of 28 countries. Transparency levels relating to sustainability are generally lower than those for the overall real estate market, given that environmental sustainability is still an evolving issue. The United Kingdom, Australia and France are the top scoring countries in this Index.
Looking ahead ... still much to achieve
The past two years have seen steady progress in real estate transparency in many markets across the globe with the biggest strides made in Latin America, South East Asia and 'Growth Europe'. Data availability is improving in most markets and performance indices are gradually being extended across a broader set of geographies, which is helping to boost overall transparency levels. However, much still needs to be done. At the lower end of the transparency spectrum there continues to be major gaps in market information, with serious deficiencies in many African, Middle Eastern and Latin American markets. Almost half of the markets covered by the Index still have little or no performance data.
While there is increasing recognition by governments of the importance of improving real estate transparency, there remains a sense that it is still not a major issue for policy makers and the pace of improvement in regulatory and legal reforms has been slow. Meanwhile a series of corruption scandals across the globe, that have ensnared the real estate industry, have drawn attention to the need for robust regulatory and legal frameworks and fair real estate transaction processes. These factors are harder to change than improving market fundamentals and performance benchmarking.
Nonetheless, the forces moving the markets towards greater real estate transparency are compelling:
- The growing recognition in many emerging economies that the current lack of performance indicators and accurate market information has not only hindered inward investment but is also putting domestic sectors at a competitive disadvantage, will continue to force the pace of change.
- The ongoing credit and sovereign wealth crises, particularly in Europe, will motivate regulators, central banks, foreign investors and other real estate professionals towards better transparency, in the process offering more public data on real debt and monitoring lenders more closely.
- As recent corruption scandals come to light (often involving the permit process for commercial real estate development), governments will pay closer attention to the circumstances that engender under-the-table payments.
- The role of properties' sustainability characteristics will play an increasing role in leasing and investment decisions, growing from a marginal criterion to a critical decision-making input. Such concerns will force greater transparency of energy efficiency and Green Building benchmarking.
We expect these factors to have a positive impact over the next few years and to drive improvements in transparency through to our next update in 2014.