Emerging markets have significantly improved their levels of real estate transparency, according to the latest Global Real Estate Transparency Index ('Index') from Jones Lang LaSalle, a professional services firm specialising in real estate, and LaSalle Investment Management, its global real estate investment management subsidiary.
In some countries, particularly in emerging markets, notable differences can be observed in transparency not only between cities, but within cities as well.
Anuj Puri, Chairman and Country Head India, Jones Lang LaSalle Meghraj says,, "In India, the issue of real estate transparency at a sub-national city level is gaining importance as real estate investors and corporate occupiers extend into new regions in their search for higher returns or cost-effective locations. International investors and occupiers are moving into secondary and tertiary cities that have not been traditional targets of the real estate community."
The Index, which provides a rigorous framework for comparing the level of real estate transparency in 82 markets around the world, shows that nearly half of the countries surveyed in 2006 demonstrated a significant improvement in their transparency score two years later. Transparency levels globally are improving as governments seek to streamline regulatory and legal hurdles to aid cross-border movement of capital and corporate facilities. Only Venezuela posted a lower transparency score this year compared with 2006, principally due to changes in government regulations and new taxation policies targeting foreign investors.
In keeping with historical results, the Australian and US real estate markets remain among the most transparent in the world. With the addition of new variables relating to the quality and frequency of valuations, service charge transparency and financing transparency, Canada now ranks as the world's most transparent commercial real estate market (see Table 1).
Jacques Gordon, Global Strategist at LaSalle Investment Management says, "The steady improvement in transparency, particularly over the last four years, is closely linked to the forces of globalisation that drive investors to move across borders in search of higher risk-adjusted returns. This movement of both capital and corporations around the world has created an even greater need for information about markets. It has also created an incentive for governments to streamline bureaucratic practices which prevent the free flow of capital into and out of global markets."
"Many cross-border investors focus on more mature, open and transparent real estate markets such as the UK, Canada, Netherlands and Hong Kong. However, opportunistic investors will consider the emerging, less mature, less open and semi-transparent markets, but will require higher returns to compensate for the higher risks associated with lower transparency. Only the most opportunistic investors will consider semi-transparent markets found in Eastern Europe, Latin America and Southeast Asia. Opaque markets, such as Algeria, Belarus and Cambodia, are still very problematic, from the perspective of both investors and corporate occupiers."
"Overall, increases in the free flow of capital, tenants, management and market information are closely coupled with the rising productivity of real estate in countries with improving transparency. This productivity can be measured by investment returns and in terms of corporations' ability to provide efficient workspaces, logistics facilities, retail environments, and business and leisure centres for travellers and domestic markets alike. While many emerging markets have made improvements to their real estate transparency, our index shows that not all governments and market participants have embraced the necessary changes."
The Index shows that 28 countries posted transparency scores that were within 10 basis points of their scores in 2006. Jones Lang LaSalle researchers say that consistency in transparency scores over the years is expected in real estate markets such as Australia, the UK, the US, Singapore and Hong Kong where a high degree of transparency already exists.
However, countries such as Argentina, Greece, Indonesia, and Peru have consistently scored in the low transparency range over the last few years despite an increase in cross-border trade, finance and commerce over the same time period.
A number of countries in the 'frontier markets' have been included in the Index for the first time, with Belarus, Sudan, Algeria, Cambodia and Syria scored as 'opaque'. Other new entrants into the Index, Bahrain, Bulgaria, Estonia, Latvia, Croatia, Abu Dhabi, and Lithuania, scored in the 'semi-transparent' range, while Oman, Qatar, Morocco, Kuwait, Pakistan and Kazakhstan all scored in the 'low transparency' range.
Asia Pacific Transparency
In Asia Pacific, transparency has improved across most of the region since 2006; however, the gains are relatively modest for most countries, particularly when compared with the larger improvements between 2004 and 2006, and the more recent gains in Europe and Middle East and North Africa.
The biggest improvers in Asia Pacific are India, China and Vietnam, all of which have received considerably greater attention from investors and corporate occupiers in recent years. China exhibited the greatest improvement, moving up to the semi-transparent tier (Tier 3) and is now considered more transparent than India. Notwithstanding this, the two emerging giants of the region remain very close in terms of overall real estate transparency.
Dr Jane Murray, Head of Research, Asia Pacific at Jones Lang LaSalle says, "Where improvements are observed, a key reason has been the increased availability of data on major market fundamentals, particularly for the office sector. The growth of the REIT sector has also had a further positive impact on improving financial disclosures across the region, building on gains observed between 2004 and 2006. In relation to the impact of government, the processes surrounding compulsory acquisition of real estate by the public sector have also become more transparent over the two years."
"At the other end of the spectrum, there is room for improvement in the availability of indices relating to the investment performance of real estate assets, and those based on unlisted real estate vehicles. As Pan Asian real estate funds become more prominent within global investment portfolios and institutional ownership increases in developing markets, more indices should become available.
Some regulatory factors, such as the consistent application of taxes, building and planning codes, and enforceability of contracts, remain areas of concern in a number of markets. Aspects of the real estate transaction process also remain wanting in some countries," adds Dr Murray.
"It is important to note that transparency enhancements should not be viewed as the sole determinant of regional capital flows, instead market fundamentals appear to be the main driving force behind transaction volumes, as we can see from the solid increases in cross-border transaction volumes in Japan and Korea over the past two years, though the two countries recorded minimal improvements in transparency. Nevertheless, higher transparency is resulting in a more dispersed flow of capital between countries across the region. It is therefore noteworthy that most of the countries surveyed are continuing to improve on the transparency measures, and as a result, enhancing the attractiveness of these markets for real estate investors and occupiers," concludes Dr Murray.
The impact of the additional criteria included in the 2008 Transparency Index is typically a minor fall in the score for the more transparent markets and a minor improvement in the score for the less transparent markets. For the composite score, which includes the additional criteria, Hong Kong and Singapore moved slightly down to the top of the transparent tier. However, the overall ranking for countries is not impacted when the additional measures are included in the Index.
Jones Lang LaSalle warns that a high level of transparency does not eliminate risk or guarantee a strong investment return or efficient corporate transaction. High transparency does not prevent market swings as the most transparent commercial real estate investment vehicles - listed real estate securities - can also exhibit volatility.
The 2008 Real Estate Transparency Index added several new dimensions and the addition of 26 new countries. New transaction process measurements were included for debt financing commitment terms and fees, occupier service charges, and facilities and project management services and fees. The outcome of the transaction process measures may be helpful for corporations who need to understand total occupancy and transactions costs or institutional investors seeking to analyse broad market statistics and historical performance benchmarks.