Diploma Thesis, 2007, 100 Pages
EUROPEAN BUSINESS SCHOOL
International University Schloss Reichartshausen
To obtain the academic degree
Elaboration and Critical Analysis of Approaches for Measuring Transparency on
Real Estate Markets, and the Development of a Summarizing Concept and its Application on
Selected European Markets and the USA
Nicolai C. Striewe
Submission Date: February 23rd, 2007
Table of Contents
List of Figures ... I
List of Tables ... II
List of Abbreviations ... III
1.. Introduction ... 1
1.1... Problem Definition and Aim ... 1
1.2... Course of the Investigation ... 2
2.. Basics ... 3..
2.1... Definition of Transparency in the Economic Context ... 3
2.2... Definition of Transparency in the Real Estate Context ... 5
2.2.1... Transparency on the Investment Market ... 5
2.2.2... Transparency on the Letting Market ... 6
2.3... Relevance of Transparency for the Real Estate Market ... 6
2.3.1... Uncertainty, Risk and Risk Premiums ... 6
2.3.2... Trading and Liquidity ... 8
2.3.3... Image, Reputation and Professionalism of the Real Estate Sector ... 8
2.3.4... Information Efficiency and Availability of Reliable and Accurate Market Data ... 9
2.3.5... Investor Behavior ... 10
2.3.6... Market Models ... 12
2.3.7... Limits of Transparency ... 13
2.3.8... Ethical Issues ... 13
2.4... Summary ... 13
3.. Approaches for Transparency Measurement on Real Estate Markets ... 14
3.1... Literature Review ... 14
3.2... Jones Lang LaSalle Real Estate Transparency Index (RETI) ... 14
3.2.1... Jones Lang LaSalle and LaSalle Investment Management ... 15
3.2.2... Methodology ... 15
3.2.3... Ranking ... 17
220.127.116.11... Asia-Pacific ... 18
18.104.22.168... Europe, Middle East and Africa (EMEA) ... 20
22.214.171.124... North and South America ... 22
3.2.4... Critics ... 23
3.2.5... Correlation of Transparency to Other Market Indices and Parameters ... 24
3.3... Summary ... 29
4.. Concept of Transparency Components ... 30
4.1... Investment Products ... 30
4.2... Regulatory Environment ... 30
4.2.1... Reporting Standards ... 30
4.2.2... Corporate Governance, Codes and Self-Commitment ... 32
4.3... Information Availability ... 33
4.3.1... Performance Benchmarks ... 33
4.3.2... Market Data, Research and Publication ... 35
4.3.3... Valuation Transparency ... 37
5.. Application of the Transparency Components on Germany, the UK and the USA ... 38
5.1... Germany ... 38
5.1.1... Investment Products ... 38
5.1.2... Regulatory Environment ... 42
126.96.36.199... Reporting Standards ... 42
188.8.131.52... Corporate Governance, Codes and Self-Commitment ... 44
5.1.3... Information Availability ... 45
184.108.40.206... Market Data, Research and Publication ... 45
220.127.116.11... Performance Benchmarks ... 48
18.104.22.168... Valuation Transparency ... 49
5.2... UK ... 52
5.2.1... Investment Products ... 52
5.2.2... Regulatory Environment ... 54
22.214.171.124... Reporting Standards ... 54
126.96.36.199... Corporate Governance, Codes and Self-Commitment ... 55
5.2.3... Information ... 55
188.8.131.52... Market Data, Research and Publication ... 55
184.108.40.206... Performance Benchmarks ... 56
220.127.116.11... Valuation Transparency ... 57
5.3... USA ... 58
5.3.1... Investment Products ... 58
.. Regulatory Environment ... 58
18.104.22.168... Reporting Standards ... 58
22.214.171.124... Corporate Governance, Codes and Self-Commitment ... 59
5.3.3... Information Availability ... 60
126.96.36.199... Market Data, Research and Publication ... 60
188.8.131.52... Performance Benchmarks ... 62
184.108.40.206... Valuation Transparency ... 63
5.4... Summary ... 63
6.. Conclusion and Outlook ... 64
7.. Appendices ... 67
8.. References ... 78
1.1. Problem Definition and Aim
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 macroenvironment, 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, consultants, 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 estate 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.
1.2. Course of the Investigation
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 economic and real estate context, both for the investment and the letting market. Transparency 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 transparency survey of Jones Lang LaSalle shows interesting results that will be put into relation with other indices and market parameters and scatter plots will help to observe correlations. The explanation of existing approaches and the understanding of the relation of transparency to market components facilitate the summarizing transparency measurement approach. The compilation of transparency components in Section 4 will prepare 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 findings, evaluate the overall transparency situation of real estate markets from a global view and an outlook will point out the perspectives for future transparency development.
2.1. Definition of Transparency in the Economic Context
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 disclosure. 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, regulations 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 information 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 framework of high standards for the liberalisation of investment environments. The negotiations were discontinued in April 1998.10
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.
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