Arthur de Haast at Jones Lang LaSalle highlights some of the key findings from GRETI 2010.
FIG 1: LARGEST IMPROVEMENTS 2008 - 2010
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FIG 2: LARGEST DECLINES 2008 - 2010
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Key Findings from the
2010 Transparency Index
Rankings:
- 9 out of 15 fastest improvers are in Europe and 6 are in Asia Pacific
- Turkey is the best improver
- Australia is the most transparent real estate market
- A third of countries are static or declining
- 89% of countries received a score of “semi-transparent” or below in relation to the transparency of their real estate debt market data
The 2010 Global Real Estate Transparency Index (GRETI) reveals a notable slowdown in the progress of real estate transparency over the past two years. It suggests that the recent turmoil in global financial, economic and real estate markets has impacted on market behaviour, with real estate players focusing on survival rather than market advancement. Over the past two years, the average improvement in real estate transparency across the 81 markets covered by GRETI has halved, when compared to both the 2006-2008 and 2004-2006 periods.
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.
In contrast to previous Indices, a number of markets have seen declining or static levels of transparency with one-third (27 markets out of 81) recording either deterioration or no improvement between 2008 and 2010. Deterioration has been registered in markets such as Pakistan, Kuwait, Venezuela, Dubai and Bahrain. Although the levels of decline have been modest, the reversal of their past gains is notable.
However, there are a number of bright spots, and transparency continues to improve, albeit moderately, in the majority of markets. Of the top 15 improvers, nine are in Europe and six are in Asia Pacific. Turkey tops the league table of transparency improvers, and progress has been made in China, India, Poland, Portugal, Romania, Greece and Hungary. A number of more advanced markets, such as Germany, Ireland and Denmark, have also moved up the transparency league.
Australia now ranks as the world’s most transparent market, pushing Canada into second place, while the United Kingdom is in third position. The traditional leading pack—Australia, New Zealand, the United Kingdom, the United States and Canada—have now been caught up by a number of European markets. Sweden, Ireland and France now sit among the world’s most transparent markets.
The Asia Pacific region has shown the most broadly-based improvements in transparency over the past two years. Australia and New Zealand are the region’s most transparent markets, closely followed by Singapore and Hong Kong. However, it is in India and China where the region’s greatest advances have been recorded, a trend that has now filtered across each of their secondary and tertiary cities. Asia Pacific also continues to show some of the biggest anomalies, with both Japan and South Korea showing low levels of real estate transparency relative to their economic maturity.
Europe is a mixed picture of transparency. Turkey and some CEE countries 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 (i.e. Poland, the Czech Republic and Hungary) have now caught up with the laggards in Western Europe, such as Italy, who have struggled to improve real estate transparency. However in Russia and the Ukraine, transparency improvements have stalled in 2010, a reflection of the severity of the real estate downturn in both markets and a sharp contrast to the strong improvements registered in 2008.
The Americas markets have shown more modest changes in transparency. Improvements have been static in the region’s two most transparent markets, the United States and Canada, as well as in most of the Latin American markets. Of the major economies, only Brazil has registered notable progress, while Venezuela—which showed a sharp deterioration between 2006 and 2008—has seen a further weakening in 2010.
Some of the markets in the Middle East and North Africa (MENA) region, which were highlighted in our 2008 Index for their strong advance in transparency, have experienced a setback in 2010. A number of MENA markets have registered a minor deterioration in transparency, including Pakistan, Kuwait, Dubai and Bahrain. Dubai epitomises the region’s struggle to achieve further improvement in transparency levels. Dubai has however, also taken the lead in introducing important regulatory reforms that have the potential to improve market transparency over the next few years.
Elsewhere in the MENA region, transparency is improving in some North African markets reflecting the growing international interest in North African real estate. The countries in the Levant region (i.e. Lebanon, Jordan and Syria) are appearing on the international real estate radar and are gradually moving up the transparency curve.
In light of the financial crisis that has swept the world over the last two years, the 2010 Index has specifically assessed the transparency of real estate debt markets, in terms of the breadth and depth of data available on commercial real estate (CRE) debt (originations, outstanding balances, maturities, and defaults) as well as how thoroughly real estate debt is monitored on banks’ balance sheets. Levels of debt transparency vary greatly between regions, and 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 with the highest scores for consistent and thorough CRE debt regulation are Australia, Ireland and Canada. In less developed countries, scores on both attributes are in the Semi-Transparent range or lower.
Looking ahead
The last two years certainly demonstrate how high levels of transparency do not eliminate risks for investors or occupiers. Free flows of information and consistent enforcement of local property laws did not prevent values from falling or produce better access to credit at a time when liquidity dried up. The real value of transparency, though, should become evident when comparing how quickly markets are able to open up again after a 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. However, these rights apply to both the equity and the debt sides in the capital structure of real estate, and sorting them out in a complex, securitised capital structure will take time. Occupiers benefit when landlord defaults are resolved quickly and efficiently. Investors benefit when bankruptcy laws are administered fairly and efficiently. This process is unfolding now. In two years time, when our next Index is released, we will be able to report about the role of transparency in the aftermath of a financial crisis.
In the meantime, 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 may 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 2006-2008 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 credit-worthiness 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).