Diploma Thesis, 2007, 100 Pages
List of Figures
List of Tables
List of Abbreviations
1.1. Problem Definition and Aim
1.2. Course of the Investigation
2.1. Definition of Transparency in the Economic Context
2.2. Definition of Transparency in the Real Estate Context
2.2.1. Transparency on the Investment Market
2.2.2. Transparency on the Letting Market
2.3. Relevance of Transparency for the Real Estate Market
2.3.1. Uncertainty, Risk and Risk Premiums
2.3.2. Trading and Liquidity
2.3.3. Image, Reputation and Professionalism of the Real Estate Sector
2.3.4. Information Efficiency and Availability of Reliable and Accurate Market Data
2.3.5. Investor Behavior
2.3.6. Market Models
2.3.7. Limits of Transparency
2.3.8. Ethical Issues
3 Approaches for Transparency Measurement on Real Estate Markets
3.1. Literature Review
3.2. Jones Lang LaSalle Real Estate Transparency Index (RETI)
3.2.1. Jones Lang LaSalle and LaSalle Investment Management
18.104.22.168. Europe, Middle East and Africa (EMEA)
22.214.171.124. North and South America
3.2.5. Correlation of Transparency to Other Market Indices and Parameters
4 Concept of Transparency Components
4.1. Investment Products
4.2. Regulatory Environment
4.2.1. Reporting Standards
4.2.2. Corporate Governance, Codes and Self-Commitment
4.3. Information Availability
4.3.1. Performance Benchmarks
4.3.2. Market Data, Research and Publication
4.3.3. Valuation Transparency
5 Application of the Transparency Components on Germany, the UK and the USA
5.1.1. Investment Products
5.1.2. Regulatory Environment
126.96.36.199. Reporting Standards
188.8.131.52. Corporate Governance, Codes and Self-Commitment ..
5.1.3. Information Availability
184.108.40.206. Market Data, Research and Publication
220.127.116.11. Performance Benchmarks
18.104.22.168. Valuation Transparency
5.2.1. Investment Products
5.2.2. Regulatory Environment
22.214.171.124. Reporting Standards
126.96.36.199. Corporate Governance, Codes and Self-Commitment ..
188.8.131.52. Market Data, Research and Publication
184.108.40.206. Performance Benchmarks
220.127.116.11. Valuation Transparency
5.3.1. Investment Products Regulatory Environment
18.104.22.168. Reporting Standards
22.214.171.124. Corporate Governance, Codes and Self-Commitment ..
5.3.3. Information Availability
126.96.36.199. Market Data, Research and Publication
188.8.131.52. Performance Benchmarks
184.108.40.206. Valuation Transparency
6 Conclusion and Outlook
Figure 1: Jones Lang LaSalle Real Estate Transparency Index 2006 Ranking
Figure 2: Jones Lang LaSalle Transparency Ranking of Countries in the Asia- Pacific Region
Figure 3: Jones Lang LaSalle Transparency Ranking of Countries in Europe, Middle East and Africa
Figure 4: Classification of Countries in the American Regions into Transpar- ency Tiers
Figure 5: Relation of the Transparency International Corruption Ranking to the Jones Lang LaSalle Transparency Ranking
Figure 6: Relation of GDP per capita to the Jones Lang LaSalle Transparency Score
Figure 7: Attractiveness of the Business Environment in relation to the Jones Lang LaSalle Transparency Score
Figure 8: Relation of Share of Institutional Real Estate to the Jones Lang La- Salle Transparency Score
Figure 9: Countries with the Largest Cross-Border Investment and their as- signed Transparency Score and Rank
Figure 10: Relation of the Transaction Volumes to the Jones Lang LaSalle Transparency Scores
Figure 11: Transaction-Based Value Indices of NCREIF vs. Appraisal-Based NPI and Securities-Based NAREIT (NAREIT prices of June 30th each year) Indices
Figure 12: Absolute Difference Bands in Germany, 2005
Figure 13: Direction Weighted Difference in Germany, long-term: Open-Ended Funds vs. Other Funds, 2005
Figure 14: Absolute Difference Bands in the UK, 2005
Table 1: Real Estate Online Portals in Germany
Table 2: Valuation Price Differences in Germany, 2005
Table 3: Valuation Price Differences in the UK, 2005
illustration not visible in this excerpt
Currently, numerous discussions are taking place concerning transparency in economic, financial and business sectors.1 Access to information is a prerequisite for efficient and developed economic markets. It enables market participants to analyse their macro- environment, monitor and to evaluate competitors and events. This function allows markets to alter with the aim to improve economic and social welfare. In real estate markets transparency is a prerequisite for investment and attracting foreign investors.2 The functioning of markets and the free flow of information can reduce principle-agent problems, and assure a more efficient allocation of resources in economic and financial, as well as political markets.3 The real estate market was once perceived to be restricted and not accessible from the outside, as each country applied individual peculiar rules, had opaque market structures and depended primarily on domestic capital.4 Still, the lack of transparency is a key feature of the real estate market. However, transparency has improved in recent years around the world and is expected to improve in the future. This is due to the efforts of academic institutions, research organizations, brokers, con- sultants, banks, the emergence of the Internet and so on.5 Real estate markets are still fragmented, even though the trend is towards convergence and markets are pressured to disclose information in the course of increasing competition of markets on a global level.6
The aim of the thesis is to analyse approaches that measure the transparency of real es- tate markets and to compile a concept of transparency components. The components are to be applied for the German, the United States (US) and the United Kingdom (UK) real estate markets. The only global and most prevalent approach to measure transparency is the Jones Lang LaSalle Transparency Index 2006. There are other approaches that only focus on a single or a few countries. As transparency has various interpretations and the components of transparency are assigned different weights, it is difficult to compare individual research or to rank countries according to their transparency of real estate markets.
The basics and relevance of transparency are essential for the understanding of the transparency measurement approaches, as the basic definitions of real estate have to be broken down into its components. Transparency is first defined on a general level to make the relevance clear it has in so many respects. It is further concretized in an eco- nomic and real estate context, both for the investment and the letting market. Transpar- ency effects and also is affected by several market characteristics. The connections of market characteristics and characteristics of transparency are drawn and explained.
As the relevance of transparency in real estate markets and the range of definitions are communicated, the thesis approaches the concepts of transparency. The analysis of measurement approaches will mainly focus on the Jones Lang LaSalle Transparency Index as it is the only worldwide prevalent and consistent transparency measurement instrument for real estate markets. The elaboration of the methodology of the index will illustrate how such a survey can only be based on perceptions of professionals and how difficult it is to maintain consistency when many countries are analysed. The transpar- ency survey of Jones Lang LaSalle shows interesting results that will be put into rela- tion with other indices and market parameters and scatter plots will help to observe cor- relations. The explanation of existing approaches and the understanding of the relation of transparency to market components facilitate the summarizing transparency meas- urement approach. The compilation of transparency components in Section 4 will pre- pare for the application on specific real estate markets. Before this is possible it will be defined how the transparency components are of relevance and how each of them can be measured. Transparency of the US, the German and the UK real estate markets will depend on the compliance of the countries with the transparency components which will be empirically investigated in Section 5. Finally, a conclusion will summarize the find- ings, evaluate the overall transparency situation of real estate markets from a global view and an outlook will point out the perspectives for future transparency develop- ment.
Transparency is an important issue in politics, business, professions, culture, religion and society. In all those fields there is a trend observed that could be described by the following characteristics: First, there is a trend towards higher transparency. Second, there is increasing scrutiny from an increasing number of people and institutions. Third, there are demands for new sorts of information. Fourth, the attention is proactive by the observer and the observed. There are lots of debates ongoing about information disclo- sure.7
There is not one definition for transparency. The broadest definitions can be found in general dictionaries. The implication from timely general definitions is “letting the truth be available for others to see if they so choose, or perhaps think to look, or have the time, means, and skills to look”8. Based on international relation research, it is usually assumed that low transparency is related to corruption.9 The World Trade Organization defines transparency with three core requirements: First, the availability of information on laws, regulations and other policies to the public. Second, the notification of parties about changes of laws, regulations and policies. Third, the enforcement of laws, regula- tions and policies in a way that is uniform, objective and reasonable. The OECD agreed on a definition of transparency as information symmetry, meaning that agents have relevant information about their environment and that the costs to acquire this informa- tion are low. It started negotiations on the Multilateral Agreement on Investment (MAI) in 1995 at the annual meeting of the OECD council. The aim was to develop a frame- work of high standards for the liberalisation of investment environments. The negotia- tions were discontinued in April 1998.10
The approach of Vishwanath/Kaufmann (1999) relates transparency not only to the amount of information that is published but also expects the information to be in a spe- cific scope, to be accurate and timely, defining it as “the increased flow of timely and reliable economic, social, and political information”11. A lack of transparency therefore exists when information is deliberately withheld, misrepresented or not relevant and not qualitative.12 In the work of Islam (2003), transparency is based on the frequency with which economic data is published in a country.13
The institution Transparency International is representative for the increasing demand around the globe for organizational transparency through improved information systems.14 Its research focuses on the Corruption Perception Index (CPI) and the Bribe Payers Index (BPI).15
The Security Exchange Commission (SEC) defines transparency for secondary markets in a way that stock prices reflect all information, transaction costs are low and that de- mand and supply can be accurately assessed.16 This definition will be especially rele- vant for assessing transparency on markets for Real Estate Investment Trusts (REITs) or REIT-equal structures, real estate public companies and other exchange listed real estate vehicles.
Florini (1999) makes it clear that transparency is also closely connected to accountability defining it as “the release of information by institutions that is relevant to evaluating those institutions”17, which means that the observed can be held accountable for his policies and performance.18
The Transparency Task Force from the Brookings Institute describes transparency as the openness of institutions. In transparent markets “outsiders” can to a high degree monitor and evaluate the actions of “insiders”. Outsiders are the stakeholders, whereas insiders are the observed institutions, for example corporations and the government.19 In Summary, all stakeholders of a company or an investment trust want to know all data of financial, structural and strategic nature and want to ensure that all personnel act in their interest. Transparency has helped economies around the world to establish a plat- form for competition, increased the standard of life, pressured for further development of conditions in the third world and contributed to the rapid development of world trade.20
In the work of Schulte/Rottke/Pitschke (2005) transparency is briefly defined as infor- mation equivalency and opacity as information asymmetry among market participants. The definition is extended for the application on the German real estate market: “Real estate markets can be described as transparent when it becomes clear how the market mechanisms and the variables behind these mechanisms work, i.e. that there is as much information as possible available at any point in time.”21 This definition aims at the un- derstanding of the market by and the quantity of available information for market par- ticipants.22 The quality of the information is not included as transparency factor in the definition. It can only be assumed that market participants can interpret and analyse the information critically, if they understand the market mechanisms and the variables be- hind it.
The work of Jones Lang LaSalle in Brown et Al. (2004) defines transparency broader as the openness and clarity of the organization of a real estate market, the quality of its legal and regulatory framework, the consistency in the enforcement of rules and regulations and the respect for private property rights.23
The heterogeneity of real estate complicates the evaluation of the market. Financial markets have homogenous products, such as shares of the same company. But there is no homogenous real estate. Moreover, there is generally incompleteness and a time lag in the publication of real estate information, whereas trading data in financial markets are made public immediately.24
Transparency on the investment market is necessary for the evaluation of risk premiums and an effective risk management. In low transparency markets investors may remain unsure if the compensation for the risks is fair. This could be positive if the compensa- tion is higher than it is in comparable risk-level markets. On the other hand this could be disadvantageous if investors receive a too low risk premium. In summary, if yields are
lower in developed real estate markets investors may also be interested in underdeveloped real estate markets to achieve higher yield returns.
What is the requirement for a valid evaluation of risk? Risk management requires free flow of information, which is available at low costs in highly transparent markets, whereas in low transparent markets complex research and due diligence may be expen- sive and international investors will seek advice from local consultants.25 In the invest- ment market variables of interest are, for example, property rents and yields, as well as purchase and selling prices; while in the developer’s investment market, for example, building costs; and in capital markets, for example, lending conditions.26
Variables of interest for the letting market are occupation costs, construction and completion figures, ancillary costs, vacancy, cost of land, demand and supply of space, acquisition costs, rent levels, tax rebates and other related costs.
In transparent markets this information is available at low cost. Investors are interested in an easy entry into the market and an exit option, which is the case in highly liquid markets. Innovative options like sale and leaseback27 are additionally attractive. This makes markets where the securitization of real estate is established a preferred target for renters as large sale and lease back transactions may be easier if the property can be issued publicly. Moreover, transparent markets are regarded to be more mature and are characterized by a better reputation and image. Especially legislatory maturity correlates with the development of the property, legal and general market.28
Most of the literature focuses on transparency and accountability in their function to prevent financial crises and reduce risks that is expressed in the volatility of financial markets. An example is the East Asian Crisis that could possibly have been prevented with the reporting of critical financial transactions according to international reporting standards.29
Risk premiums will decrease if the professionalism of real estate markets improves, as undesired developments can be detected early and the probability of crises can be re- duced.30 Furthermore, in transparency research a distinction is usually made between risk and uncertainty. Risk is a kind of measurable uncertainty, whereas “true” uncer- tainty is not quantitative according to Knight (1921).31 In Erbas (2004) it is stated that the reduction of the Knightian uncertainty in a market creates transparency and pro- motes investment and growth. In the real estate context uncertainty would prevail if the market cannot be judged reasonably due to a lack of information about the critical vari- ables. If some uncertainty in a market could be transformed into quantifiable risk, trans- parency would be created as risk in a market can be priced properly. Market participants have a preference for risk over uncertainty, as an uncertain prospect involves two events and a risky prospect involves only one. This means that a higher risk premium will be demanded by investors for the uncertainty involved rather than for the risk. Especially the availability of information and the information technology to process the informa- tion reduces uncertainty and transforms it into quantifiable risk. It is stated in Erbas (2004) as a generic assertion that volatility is caused by uncertainty. The investor will benefit from information about quantitative risk as this variable is used in economic analysis favourably. Consequently, it is inferred that it would be possible to reduce the real estate market’s volatility by eliminating uncertainty through transparency efforts. The transparency efforts could be the development of scientific knowledge, databases, institutions and markets.32
The investor’s behaviour will be influenced by the level of uncertainty in the real estate market. If investors perceive uncertainty about rules, conditions, enforcement and adju- dication in a country’s business environment they may evade these markets and invest in those with less uncertainty. Depending on the risk aversion of the investor, he would invest in countries with higher uncertainty if he is compensated with higher returns.33
The measurement and surveillance of changes in asset values is essential to understand and make asset classes of public and private markets comparable. This is especially a problem in the private real estate investment industry. The reason is that risk and return are the variables that are be measured accurately to make real estate comparable to stocks and bonds. Real estate is traded infrequently and irregularly and with few bidding and selling parties. A measurement period does not measure all real estate traded but only a fraction, which always leads to sample selection bias.34 The volumes of real assets traded are lower compared to financial securities, which may be due to the high capital outlay per real asset acquired and high transaction costs.
Transparent economies and business environments are more recognized in literature and in international organizations. Transparency is regarded as a generally accepted fundamental for investment and growth.35
The past performance of a market is responsible for shaping the reputation of a market. For example risk is mainly determined with historical data.36 If trust in the signals of a market is lost, and recurring recessions are common in the market, it will be difficult to shake off the image in the future. Furthermore, with market and information inefficien- cies it is probable that risks are mispriced, and this could damage reputations.37 When in past exaggerated return promises and expectations made to investors could not be met, the participants lose confidence in the sector. To create an investment environment it is far better to promote realistic promises and then to outperform those. This means that credibility of a sector is a result of transparency in terms of information accuracy and reliability.
2.3.4. Information Efficiency and Availability of Reliable and Accurate Market Data
There is a linkage between transparency and information symmetry. Consequently, low transparency does not necessarily mean that no information is available in a market at all, but that the information is unequally distributed among the market participants and the gap among them becomes larger.38 The quantity and quality of the information that is available to the market is of high importance. There is even an incentive for market players to provide information. Those who provide reliable and accurate information for the market and have a full disclosure mentality will be honoured. This information ac- quisition requires extensive research, which is usually very costly involving the de- mand, supply and transaction data, formulating expectations and reviewing the data. Consequently, rising information costs are the results of lower transparency.39 As in- formation in low transparency countries is valuable it can be sold if it is acquired. Cost of capital will even be lowered for funds and companies, which reveal their internal information to avoid investor’s uncertainty. Those who hide information will be judged as if they would hide negative information with the consequence of rising capital costs. The assumption is that a company has no reason to hide positive information. Inaccurate and incomplete information may send faulty signals to the market participants. Overly positive signals could cause hyperinflation of property prices and overbuilding. This adds up to economic cycles with its euphoria and recession times. If there would be more accurate and consistent expectations among market participants the behaviour on real estate markets would be more rational and cycles could be reduced.40 Consequently, investors tend to be more careful with their money in countries that observe such behav- iour, as they prefer stability in an economy. Gordon (2002) leaves the question open if an increase in market efficiency, further market disclosure, better corporate governance and more accuracy in signals would reduce the intensity of cycles in the economy. However, it seems logical that information symmetry contributes to market efficiency.41 But does market efficiency provide higher returns and reduce risk? Actually, it becomes even more difficult to achieve excess returns. It is more difficult for investment banks to earn excess returns from their investments in efficient markets as information is disseminated equally and insider information is of less value.42
Investors can choose where to invest their money in the world, although there may be restrictions in countries that complicate a market entry. Restrictions can be regulations and laws, but also the absence of appropriate investment vehicles, information on mar- ket fundamentals and performance benchmarks which hinder investors from accessing a market or cause them to shy away. Transparency and non-discrimination are magnets that attract business and investors. This is because investors do not enter markets they do not understand, for example if they are unable to acquire sufficient information. Though, investors may invest in countries43 with lower transparency, in terms of insuf- ficient legal and regulatory frameworks, if there is some clarity about the environment in which they operate. On the other hand, foreign direct investments often improves transparency in the invested country, as foreign corporations demand more transparency in the actions of the government, urge more corporate transparency and are interested in fighting corruption.44
Cross-border capital flows are 54 percent of total investments in European real estate. According to Jones Lang LaSalle’s transparency statistics, the “high transparency” countries showed significant increases in investment activities. The investments in- creased by 60 percent, 15 percent in the United Kingdom and 12 percent in France in 2005. According to Tony Horrell, international director and chief executive officer of European capital markets of Jones Lang LaSalle, there is a convergence of different markets and returns in those markets. The result is higher transparency in the European region, as the investors are getting more confident with investments in different finan- cial systems with different laws.45
For example, investors avoid regions with low transparency like China, where the real estate market industry has a reputation of corruption and unreliable data.46 In contrast, informed real estate investors, usually high volume investors, may feel more comfort- able in low transparency regions as they can profit from their information advantage by selling information or using it for their investment tactics. Moreover, investors who trade high investment volumes could also take advantage of opaque markets, as they can easily conduct a large trade without attracting too much public attention.47 The advan- tages of informed investors are at the expense of less informed, with the trend of a redis- tribution of wealth from less informed to informed investors.48 Less informed market participants will feel more comfortable in highly transparent markets as they believe to be less disadvantaged by adverse selection costs and insider trading of informed market participants.49
Gelos/Wei (2002) advances the view saying that international funds tend to invest less, herding behavior is rather amplified and panic reactions from funds are more likely in less transparent countries. These findings point out the major weaknesses of less trans- parent real estate markets. The consequence is a promotion of more transparency by financial institutions worldwide. If herding behavior is explained by the assumption that fund managers are compared with benchmarks meaning that they avoid strong deviation from the market behavior, the assertion that herding behavior is linked to transparency is weakened. The assertion that in transparent markets risk is reduced due to lower vola- tility can be weakened as well. The reason is that higher frequency of information re- lease rather increases price volatility. The research of Gelos/Wei (2002) showed that there is some modest evidence on the amplification of panic reactions by opacity in markets. The assertion that institutional investors invest more in transparent countries is also relatively clearly proven. The institutional investors that are analyzed by Gelos/Wei (2002) are international investors. They did not investigate the reaction of domestic in- vestors in regard to transparency.50
The strict distinction between domestic and foreign investors is no longer applicable as capital will seek global opportunities independent of its origin. Domestic investors will go abroad if the economy of the home country does not offer an attractive risk-return relationship and even if the risk-return is reasonable they seek diversification by ap- proaching foreign markets. Today’s mobility of capital makes domestic capital equal to foreign capital. Though, domestic investors have usually proprietary information about the home market which can be a competitive advantage over foreign investors not spe- cialized in that region. This is especially applicable in inefficient markets where information is unequally distributed. Therefore, domestic investors can make use of their advanced research to select most attractive investment opportunities. Globally oriented foreign investors will approach local real estate companies if they believe that a market is information inefficient and local knowledge is rather in the hands of local players. Moreover, domestic investors usually have greater access to legal mechanisms to reduce tax liabilities. In most of the areas outside of the European Union (EU) the local regulations are rather in the possession of domestic investors.51 If there are many investors active in a market, insider information is of lesser value.52
The Capital Asset Pricing Model (CAPM) by William Sharpe and the Arbitrage Pricing Theory (APT) by Richard Ross and Steven Roll are standard models used to derive rates of return for investments. As many real estate assets and portfolios of real estate assets are not publicly traded they cannot be easily analysed by these models. These models are being successively applied in real estate investments. The prerequisite for that development is the availability of reliable information about the market to make a realistic judgement about the variables for the model, such as risk. Uncertainty and market inefficiencies will cause problems with the application of these models and is the reason why the models are not broadly applied yet. When market and information efficiency improves further the relationship between risk and return will become more linear. The application of the CAPM and the APT models will make real estate invest- ment easier to compare to investment in other assets and sectors. The result is more competition for capital and pressure on returns will increase. At the same time competi- tion can foster the capital inflow into the real estate market if the risk-return relationship is perceived to be attractive. When risks are priced more accurately long-term capital costs decrease as risk premiums decrease. If the portfolio theory by Markowitz53 is ap- plied on real estate markets the reduction of the aggregate risk of a portfolio is rather aimed at and single returns of individual real estate are seen more in the context.54
It is obvious that transparency also involves costs and effort. The goal for transparency should be to achieve as much disclosure as possible, but considering reasonableness and obtainability. If costs for disclosure are too high it may be a financial burden.55 Disclo- sure is to be kept in the range of the possible. Furthermore, confidentiality cannot only be regarded as a threat to information efficiency. Confidentiality is common in real es- tate transactions and important to investors in order to protect their proprietary informa- tion and intentions.
Transparency in a market promotes fairness and counteracts abusive practices.56 If there is opacity in markets illicit and unethical actions are likely. The result would the impairment of the pertinent economy.57 In transparent markets all investors have equal timely access to information giving them equal chances and opportunities.58
In summary, it can be said that real estate markets want to offer investors attractive opportunities with an appropriate risk-return relationship, an easy entry and an exit option and information about the market. An investment environment that turns out to have performed well in the past and gains confidence will benefit from its reputation in the future. Furthermore, ethical values in a profession promote sustainability and fairness. All those factors either effect or are affected by market transparency.
There are many approaches to measuring transparency in the public policy sector. Transparency International publishes the Corruption Perceptions Index (CPI) and the Bribes Payers Index. The institution connects transparency in international relation terms to corruption.59
Broader transparency measurement by Islam (2003) includes in its transparency index four sectors, namely the real, fiscal, financial and external sector for 169 countries and measures the mere availability of economic data.60
On company level there are publications by Standard & Poors which engage in transparency and disclosure research for emerging markets by surveying Russian banks and Russian companies, Ukrainian banks and Turkish companies for their transparency and disclosure standards.61
However, there are only a few publications that measure transparency for real estate markets. The transparency measurement approach of Schulte/Rottke/Pitschke (2005) closely analysed the German real estate market in regard to the availability of private and public market data, information on real estate investment products, the regulatory environment, the contribution of research and publications and the engagement of the industry in form of the organization of events and fairs. Briefly the results are compared to the transparency in the real estate markets of the US and the UK.62
The most widely known approach to measure transparency in real estate markets comparatively and globally is from the research of Jones Lang LaSalle and LaSalle Investment Management. It will be elaborated in the following section.
Jones Lang LaSalle and LaSalle Investment Management were the pioneers who first introduced a global Real Estate Transparency Index in 1999. Since then it was updated in 2002, 2004 and 2006. The methodology evolved over time, adding further transparency components to the investigation.63
Jones Lang LaSalle Incorporated declares itself as an industry leader in real estate services and money management. The firm has its headquarter in Chicago, Illinois, USA and has offices in 450 cities and 50 countries worldwide staffed with approximately 22,000 employees, which make Jones Lang LaSalle to a global player in the real estate and money management sector. The firm as it exists today was formed through a merger of LaSalle Partners Incorporated and Jones Lang Wotton in 1999. LaSalle Investment Management is a subsidiary that operates the investment management business and has positioned itself as one of the largest and most diverse real estate money management firms with $ 30 billion of assets under their management.64
The Real Estate Transparency Index investigates the transparency of the real estate market in 56 countries65. The index only focuses on the commercial public and private real estate markets.66 It provides information in the form of a country-comparing rank- ing.67 The investigation is conducted via the Jones Lang LaSalle Transparency Survey. This survey accumulates perceptions of senior Jones Lang LaSalle and LaSalle Invest- ment Management employees responsible for the particular region that is to be investi- gated.68 They received a questionnaire with 27 questions concerning transparency issues in real estate.69 The questionnaire is divided into the following five subcategories. The availability of reliable and comprehensive investment performance indices is tested with five questions. In transparent markets there are public and private indices that are up- dated frequently and have a long data history. The availability of fundamental market data was questioned with five questions concerning all property types, major markets and the time series. The next three questions were about the standardization and effi- ciency of public company reporting. More precisely, in transparent markets there is high efficiency of financial disclosure, good corporate governance, and high standardization. The most frequently asked category with eleven questions is about regulatory and legal factors, subdivided into the following subtopics: First, the enforceability of contracts, the security of titles and the tradition of property rights was observed. Second, clarity and consistency in the regulatory environment was tested, followed by topics about the efficiency and fairness of the administration of taxes, fees, zoning codes and building codes. The last category concerns the openness and fairness of the transaction process. An open and fair transaction process requires availability of information on properties for sale or lease, high transparency of the transaction processes and professional stan- dards of agents and service providers.70 The performance of countries in each of the categories can be obtained by the five sub-indices71.
The scoring system ranges from one to five, with one being the highest value for transparency and five being the lowest value for transparency. The scores were predefined with descriptive choices72 so that the respondents could match their opinion with a given category to reduce subjectivity in the grading system. Subsequently, the answered questionnaires were then reviewed and checked for quality by regional73 coordinators. To reach consistency between the regions the steering group of the project checked for consistent interpretation of the responses.74
The composite Transparency Index was calculated from the survey. This index catego- rizes into the following five real estate transparency categories: High transparency (composite score: 1.00 - 1.49), transparent (composite score: 1.50 - 2.49), semi- transparent (composite score: 2.50 - 3.49), low transparency (composite score: 3.50 - 4.24) and opaque (composite score: 4.25 - 5.00).75
Since the first issue of the index in 1999 several modifications have been made to the methodology of the Jones Lang LaSalle transparency measurement. The index in the year 2004 did not include the measurement of ethical and professional standards of private sector advisors, agents and broker who are licensed.
Figure 1 gives an overview over the countries that were reviewed and how they were rated. The following Sections will elaborate the transparency rating for the regions Asia-Pacific, European, Middle East and Africa and North and South America individu- ally.
Figure 1: Jones Lang LaSalle Real Estate Transparency Index 2006 Ranking
illustration not visible in this excerpt
Source: Brown, P. et Al. (2006), p. 3.
The Transparency survey includes 15 countries in the Asia-Pacific region. The follow- ing illustration in Figure 2 shows in which transparency tier the countries are positioned and the transparency score they received in the recent survey and in the previous issue of the index.
Figure 2: Jones Lang LaSalle Transparency Ranking of Countries in the AsiaPacific Region
illustration not visible in this excerpt
Source: Cf. Brown, P. et Al. (2006), p. 7.
The big improvers were Hong Kong, Singapore, Japan and India, which moved up one tier, whereas only two countries showed slightly lower scores in 2006 compared to 2004. The improvements can be linked to the fact that the region has opened their econ- omy for international investors, implementing internationally accepted practices, pub- lish more data in the English language and especially the degree of securitization has improved with the introduction of the REIT structure. Australia and New Zealand take the lead for the Asia-Pacific region in the survey. The reason is that Australia has im- proved their corporate governance and accounting standards. New Zealand has been slightly downgraded because of new laws that increased compliance costs and had ad- verse effects on the liability of real estate development. Hong Kong and Singapore have improved due to advances in their accounting standards, governance and publication of property information due to the popularity of listed property vehicles. The introduction of Japan-REITs in Japan in December 2001 was a big step towards more transparency and led to more market penetration by foreign investors and increased information effi- ciency in the market. Further improvements for Japan that Jones Lang LaSalle took ac- count of were improvements in tax transparency and the contract enforceability. India could improve by one tier. Successively investors have entered the Indian market and contributed to the availability of reliable market information. As the high transparency countries improve further an opaque country like Vietnam shows even an adverse de- velopment. Even though investors are carefully approaching the country they may be promoters of transparency. On the other hand transparency could be the magnet and drag investors into the region. This would mean that both increasing transparency and increasing investment volumes amplify each other. The increases in investment volumes into direct real estate were 46 percent in 2005 and cross border inflows were 56 percent higher in the Asia-Pacific region, with Japan and China as the most popular destinations for investors. On the one hand, Japan has also improved significantly in transparency, which could explain a positive correlation between transparency and investment vol- umes. On the other hand China is preferred increasingly even though it is still regarded as a country with low transparency. Going further into detail, we see that the invest- ments in China were to 64 percent by foreign investors in 2005, whereas Japan only received investments to 15 percent by foreign investors. This means that foreign inves- tors do not shirk from low transparency countries. The fact that relatively few invest- ments went into high transparency countries may be explained by restrictions of foreign ownership76. Especially in India strict control mechanisms have been implemented so that investors had little flexibility in the market. In Australia as one of the most trans- parent real estate markets in the world only 14 percent accounted for cross-border in- vestments. This is similar to the high transparency countries Hong Kong and Singapore with only 13 percent and 20 percent respectively of cross-border investments. This does not mean that there is a negative relationship between transparency and foreign invest- ments. In some Asian regions foreign investors have it difficult to access the real estate market, as commercial contacts to local market participants are necessary. Contact net- works are already established in developed markets and new entrants may have difficul- ties to get access to a closed connection network. Investors try to avoid this in approach- ing low transparency countries in Asia in which connection networks are more open to foreigners to establish needed contacts in a business environment that is still in the de- velopment. Consequently, in markets that have high barriers of entry due to established connection structures and regulations restricting foreigners with their investment, do- mestic investors will dominate.77
In Australia and the USA, countries that take the lead in the transparency survey, it is noticeable that high degrees of securitization and the establishment of the REIT struc- ture characterize high transparency. In Asia the number of REITs has more than dou- bled from 2005 to 2006 and it can be anticipated that transparency will further rise in the region in tandem with this ongoing development. In June 2006 seven Asian coun- tries offered the REIT structure. An introduction is planned in China and India for 2008. The impact that the introduction of REITs had on the markets was the release of more information about real estate assets. The development towards more securitization of the Asia real estate sector is facilitated by the Asian Public Real Estate Association (APREA). The APREA was founded in 2005 and cooperates with the European Public Real Estate Association (EPRA) and National Association of Real Estate Investment Trusts (NAREIT).78
The highly ranked countries are those which had an EU or a European Free Trade Asso- ciation (EFTA) membership before 2004, with the only exception of Greece which still has no land registry79, no performance indices and does not provide sufficient market data. New members that joined in 2004 are semi-transparent. Countries with no mem- bership in those organizations have low transparency, with the only exception of South Africa which has investment performance indices, a well-established regulatory and legal framework, high standards in transaction processes and impresses with high pro- fessionalism. The following Figure 3 shows the transparency ranking by Jones Lang LaSalle of the EMEA countries.80
The United Kingdom and the Netherlands take the lead in the survey followed by Swe- den and France. These countries meet the highest requirements like the availability of performance indices with long historic data and qualitative fundamental market data, meeting international accounting standards, have high degrees of disclosure, are con- trolled with consistent regulations and show highest professional standards. If countries scored with lower grades it was mainly due to low securitization, insufficient availabil- ity of performance indices and data on market fundamentals and weaknesses in the legal frameworks.81
Figure 3: Jones Lang LaSalle Transparency Ranking of Countries in Europe, Middle East and Africa
illustration not visible in this excerpt
Source: Cf. Brown, P. et Al. (2006), p. 10.
Having a look at investment behaviour we observe a different correlation of foreign investments as we did in the Asia-Pacific region where foreign investment flows were slowed by other factors than transparency. That there could be a positive correlation between foreign investment and transparency implies the EMEA markets. The transpar- ent markets are also the main targets for international investors. Cross-border invest- ments were allocated with 36 percent to the United Kingdom, 21 percent to Germany, 14 percent to France and eight percent to Sweden. When assumptions about correlation of transparency and cross-border investment flows are made it is important to keep in mind that cross-border investment behaviour depends on other factors as well, such as market liquidity, access to the products of the market, past performance and future development expectations.82
More securitization is the current phenomenon of most real estate market in the EMEA region. France, Netherlands, Belgium and the UK have already introduced REITs.
1 Cf. Florini, A. M. (1999), p. 1.
2 Cf. Schulte, K.-W./Rottke, N./Pitschke, C. (2005), p. 90; Gelos, R. G./Wei, S.-J. (2002), p. 19.
3 Cf. Bellver, A./Kaufmann, D. (2005), p. 5; Lambert, C. (2003), p. 1.
4 Cf. Gordon, J. N. (2000), p. 1; Scharmanski, A. (2006), p. 2.
5 Cf. Schulte, K.-W./Rottke, N./Pitschke, C. (2005), p. 90.
6 Cf. Gordon, J. N. (2000), p. 1.
7 Cf. Oliver, R. W. (2004), pp. viii-ix; Brown, P. et Al. (2006), p. 2; Chittum, R. (2006), p. B10.
8 Oliver, R. W. (2004), p. 3.
9 Cf. Brown, P. et Al. (2006), p. 3.
10 Cf. Bellver, A./Kaufmann, D. (2005), p. 4; OECD (Ed.) (1998), pp. 13, 81.
11 Vishwanath, T./Kaufmann, D. (1999), p. 3.
12 Cf. Vishwanath, T./Kaufmann, D. (1999), p. 3.; Kaufmann, D./Kraay, A. (2002), pp. 30-31.
13 Cf. Islam, R. (2003), pp. 6-7.
14 Cf. Harvard International Review (Ed.) (2004), p. 21.
15 Cf. Andvig, J. C. et Al (2000), pp. 38-44.
16 Cf. SEC (Ed.) (1994), p. 17.
17 Florini, A. M. (1999), p. 5.
18 Cf. Florini, A. M. (1999), pp. 4-5.
19 Cf. The Brookings Institution (Ed.) (2006), p. 1.
20 Cf. Oliver, R. W. (2004), p. 6.
21 Schulte, K.-W./Rottke, N./Pitschke, C. (2005), p. 91.
22 Cf. Schulte, K.-W./Rottke, N./Pitschke, C. (2005), pp. 90-91.
23 Cf. Brown, P. et Al. (2006), pp. 3-4.
24 Cf. Bone-Winkel, S./Schulte, K.-W./Focke, C. (2005), p. 22.
25 Cf. Jones Lang LaSalle (Ed.) (2006d), p. 16.
26 Cf. Schulte, K.-W./Rottke, N./Pitschke, C. (2005), p. 91.
27 In a sale and lease back transaction a party sells real estate and afterwards leases the same real estate back. A common motivation for corporations is the opportunity to free up capital.
28 Cf. Jones Lang LaSalle (Ed.) (2006d), pp. 15-16.
29 Cf. Bellver, A./Kaufmann, D. (2005), pp. 5-6.
30 Cf. Derkum, M. (2005), p. 23.
31 Cf. Knight, F. H. (1921), p. I.I.26.
32 Cf. Erbas, S. N. (2004), pp. 3-8, 21.
33 Cf. Erbas, S. N. (2004), pp. 8-9.
34 Cf. Fisher, J. et Al (2003), pp. 269-270.
35 Cf. Erbas, S. N. (2004), p. 3.
36 Innovative risk calculation methods also take professional expectation about the future into account when calculating risk.
37 Cf. Gordon, J. N. (2000), pp. 2-3.
38 Cf. Gelos, R. G./Wei, S.-J. (2002), p. 2.
39 Cf. OECD (Ed.) (2002), p. 26.
40 Cf. Rottke, N./Wernecke, M./Schwartz, A. L. (2003), p. 342.
41 Cf. Board, J./Sutcliffe, C./Wells, S. (2002), p. 211.
42 Cf. Gordon, J. N. (2000), pp. 2-5.
43 For an overview over foreign direct investment flows see Appendix 1.
44 Cf. OECD (Ed.) (2002), pp. 25-26.
45 Cf. International Real Estate Institute (Ed.) (2006), p. 11; Brown, P. et Al. (2006), p. 3.
46 Cf. The Standard (Ed.) (2004), p. 1.
47 Cf. Board, J./Sutcliffe, C./Wells, S. (2002), pp. 185-186.
48 Cf. Board, J./Sutcliffe, C./Wells, S. (2002), p. 212.
49 Cf. Board, J./Sutcliffe, C./Wells, S. (2002), pp. 185-186.
50 Cf. Gelos, R. G./Wei, S.-J. (2002), pp. 2-5, 19.
51 Cf. Brown, P. et Al. (2006), p. 12.
52 Cf. Gordon, J. N. (2000), p. 3.
53 The portfolio theory by Markowitz is a model to find an optimal portfolio of risky assets and risk-free assets. Cf. Bodie, Z./Kane, A./Marcus, A. J. (2003), p. 223.
54 Cf. Gordon, J. N. (2000), pp. 3-4; Scharmanski, A. (2006), p. 7.
55 Cf. Robbinson, K./Simmons, B. (2004), p. 32.
56 Cf. Board, J./Sutcliffe, C./Wells, S. (2002), p. 179.
57 Cf. OECD (Ed.) (2002), p. 25.
58 Cf. SEC (Ed.) (1994), p. 17.
59 Cf. Brown, P. et Al. (2006), p. 3.
60 Cf. Islam (2003), pp. 6-7.
61 Cf. Patel, S. A./Balic, A./Bwakira, L. (2002), pp. 325-326.
62 Cf. Schulte, K.-W./Rottke, N./Pitschke, C. (2005), p. 91.
63 Cf. Bellman, T. E. et Al. (2004), p. 1.
64 Cf. Jones Lang LaSalle (Ed.) (2006a), pp. 3-8, 35; Jones Lang LaSalle (Ed.) (2006b), p. 1.
65 The countries covered by the Jones Lang LaSalle Real Estate Transparency Index 2006 are: Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, Colombia, Costa Rica, Czech Republic, Den- mark, Egypt, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Indonesia, Ireland, Israel, Italy, Japan, Macau, Malaysia, Mexico, Netherlands, New Zealand, Norway, P.R. China, Panama, Peru, Philippines, Poland, Portugal, Romania, Russia, Saudi Arabia, Singapore, Slovakia, Slovenia, South Africa, South Korea, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, United Arab Emirates (UAE), United Kingdom, United States, Uruguay, Venezuela, and Vietnam.
66 Cf. Jones Lang LaSalle (Ed.) (2006c), p. 1.
67 Cf. Brown, P. et Al. (2006), p. 1.
68 Cf. Brown, P. et Al. (2006), p. 16.
69 Cf. Jones Lang LaSalle (Ed.) (2006c), p. 1.
70 Cf. Jones Lang LaSalle (Ed.) (2006d), pp. 9-10.
71 For an overview over the sub-indices see Appendix 2.
72 Sample Choices for the following question “Please rate the availability of title record and the title in- surance in your country from both domestic and foreign real estate player’s standpoint!”: Highly Transparent: “Title Record are complete, easy to understand, and readily available at reasonable cost; additionally, title insurance is always available.” Transparent: “Title records are complete, but can be complicated to understand; title insurance is usually available.” Semi-Transparent: “Title records may be incomplete and are occasionally contested; title insurance is occasionally available”. Low Transparency: “Title records may be incomplete and are frequently contested; and title insurance is not usually available.” Opaque: “Neither title records nor title insurance are avail- able.” Jones Lang LaSalle (Ed.) (2006d), p. 11.
73 There are regional coordinators at Jones Lang LaSalle for the following regions: Asia Pacific, Europe, the Middle East, Africa and America.
74 Cf. Brown, P. et Al. (2006), p. 16.
75 Cf. Brown, P. et Al. (2006), p. 16.
76 Under Foreign Exchange and Foreign Trade Law (Law No. 228 of 1949) a report has to be submitted to the Bank of Japan by non-resident individuals or entities if they acquire real estate.
77 Cf. Brown, P. et Al. (2006), pp. 6-9.
78 Cf. Brown, P. et Al. (2006), p. 9.
79 There are attempts of establishing a land registry including all Greek territory by 2010 as the govern- ment sees the danger that investors shirk when they see their ownership rights at risk. Cf. Brown, P. et Al. (2006), p. 13.
80 Cf. Brown, P. et Al. (2006), pp. 10-11.
81 Cf. Brown, P. et Al. (2006), p. 11.
82 Cf. Brown, P. et Al. (2006), p. 12.
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