Asia Pacific shows improvement in real estate transparency

Transparency within the real estate industry is one important factor for anyone considering investing within a particular country. The good news for investors in Asia Pacific is that the region has shown a broadly based improvement during the past two years, and in Australia now boasts the most transparent country in the world.

The 2010 Global Real Estate Transparency Index, released this week by Jones Lang LaSalle and LaSalle Investment Management, revealed a worldwide slowdown in the progress of real estate transparency over the past two years. The survey suggested 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.

The average improvement in real estate transparency across the 81 markets covered by the survey has halved in 2008-2010, when compared to the 2006-2008 and 2004-2006 period, with Australia leading the global stage and Asia Pacific showing the best improvement in regional transparency.

According to the transparency index, Australia now ranks as the world’s most transparency market, pushing Canada into second place and the U.K. into third. The traditional leading pack – Australia, New Zealand, the U.K., the United States and Canada, have now been caught up by a number of European markets, namely Sweden, Ireland and France who now sit amongst the world’s most transparent markets. Turkey registered the world’s strongest improvement due to the alignment of its legal and regulatory systems with the European Union.

Of the key components of real estate transparency, the transparency of 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. The quality and depth of information on market fundamentals continues to improve nonetheless, helping to boost this dimension of transparency in most markets across the globe.

Nonetheless, there are a number of bright spots, and transparency continues to improve, albeit modestly, 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.

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. Rising levels of transparency are associated with rising levels of foreign direct investment, a powerful incentive for encouraging the free flow of information and the fair and consistent application of local property laws.

It is in India and China where the region’s greatest improvements in transparency has been recorded, a trend that has now filtered across India and China’s secondary and tertiary cities which have shifted from the Low-Transparency to a Semi-Transparent level..

Alastair Hughes, Chief Executive Officer for Jones Lang LaSalle in Asia Pacific, said: “I am pleased to see the most transparent real estate market is in the Asia Pacific region and that transparency of the transaction process is improving generally in our market. One of the chief concerns for the international real estate investor is where to safely place capital, and at the same time corporate occupiers need a clear understanding of global operating conditions. The Transparency Index will help both investors and occupiers operating in foreign markets to anticipate these challenges. For governments and industry organizations, the index provides a gauge to help improve the transparency in their home markets.”

He added: “The steady improvement in market fundamentals, including stabilizing/increasing rentals is likely to underpin strengthening investment activity in the region. Asia Pacific is expected to grow faster than the overall global economy in 2010 on the back of broad-based growth in both the domestic and external sectors, however further interest rate hikes that are expected across the region may impact on buying sentiment.”

Dr. Jane Murray, Head of Research for Asia Pacific, said; ‘The most notable Asia Pacific improvers in terms of global rankings have been Australia, moving to first place, along with China and India which have seen the largest jumps up the transparency ladder.”

She added: “The big improvement for China and India has been mainly due to increased data availability and ongoing regulatory changes. In both markets, the recent boom in real estate markets has greatly contributed to the improvements, as both public and private sector players have taken important steps forward to promote greater levels of transparency. International corporate occupiers and investors are increasingly demanding better information on market fundamentals, while government agencies and market regulators have made slow but steady progress on the regulatory and legal front.

“In terms of the sub-index categories, Asia Pacific has continued to record steady progress over the last two years in relation to market fundamentals, mainly due to improvements made by China and India, as well as Macau. Asia Pacific has also continued to make good progress on the regulatory and legal front, not only in China and India but across South East Asia as a whole.”

Singapore

While Singapore may not have made it to the world’s top most transparent market yet, its strengths lie in some key areas. Of all the sub-indices in the survey, Singapore’s strength, as expected, lies in its regulatory and legal environment.

The transparency of the regulatory framework supported the influx of US$4,671 million, which is more than half of the total dollar value investments, into the commercial asset market (excludes residential, land, equity transactions and those that are less than US$5 million) during the peak in 2007. On average the foreign component usually contributes circa 30 per cent to the total commercial investment during the pre-crisis period 2004-2007. While the level of cross border funds into the commercial investment market remains mired by the global financial crisis today, the interest from regional and international investors is returning. In the first quarter of 2010 alone, a total of US$982 million worth of commercial investments was transacted, of which more than 10 per cent were from non-domestic funds.

An area that we could show further improvement is market performance measurement particularly in the depth, width and quality of market data and transaction processes. Dr. Chua Yang Liang, Head of Research South East Asia, said: “We have seen how the various stakeholders in the Singapore property market support the free flow of property information through the recent launch of the National University of Singapore (NUS) residential price index, which provides an alternate to the existing URA Property Price Index. The mechanics of this series is widely circulated and freely available on the NUS website. Such private/public partnership that supports greater data democracy bodes well for the property market as it further supports the development of more alternative financial products such as real estate derivatives in the market. I believe as we continue to push for more data democracy in the real estate market, our ranking on the performance measurement will only improve in time to come.”

Another area that Singapore could work on is the transaction processes, which is also a challenge for many countries around the world. Of all 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.

“The recent announcement by key government agencies on strengthening the regulatory framework to increase the level of professionalism and general practices of real estate agents is a long overdue development. As a key vital component in the real economy, the real estate industry needs to strengthen its ethical standards and the eventual regulatory structure if enforced will surely push Singapore further upwards on the transparency rankings,” said Dr. Chua.

Thailand

As in previous years, Thailand continued to score in the ‘semi-transparent’, however, the country has gradually improved its level of real estate transparency with its real estate market ranking 39th out of 81 markets covered in the 2010 index, compared to the 45th ranking in 2008.

The change in Thailand’s ranking is a result of the relative improvement in the country’s overall transparency score. The scores in the Global Real Estate Transparency Index range between one and five, with one being the highest level of transparency and five being opaque. Thailand’s real estate transparency score has improved to 3.02 in 2010 from 3.16 and 3.40 in 2008 and 2006, respectively.

The improved score is primarily a reflection of more transparency in the capital markets, specifically as they relate to real estate. Currently there are 60 firms listed under the Property Development sector on the Stock Exchange of Thailand. There are also 26 property funds which trade on the Stock Exchange of Thailand, holding assets of various real estate types. These listed vehicles are subject to higher governance and regulation, as well as regular and standardized reporting, thus providing more transparency to Thailand’s real estate markets.

This is in contrast with the past when Thailand suffered badly from a lack of information about real estate transactions in the market. Major sale transactions in particular tended to be kept confidential by the sellers and/or the purchasers. As a result, actual transacted values against which to benchmark were scarce.

“Having said that, higher levels of market transparency and an increased availability of reliable market information do even the playing field overall, helping investors as well as owners and occupiers make more informed real estate decisions,” he said.