Property markets often appear as complex webs of regulations and transactions far removed from the daily lives of billions of people on this planet. In reality they matter more than you may think.
Now, a growing emphasis on transparency in real estate is having a noticeable effect around the world whether through the construction of more energy efficient buildings in Dubai, job creation in Shanghai or basic civil rights in Peru.
“Real estate transparency is fundamental to people’s livelihoods and quality of life, particularly in developing markets,” says Jeremy Kelly, Director of Global Research at JLL. “Part of it is about having legal and regulatory frameworks that provide basic property rights. That means you would have security of ownership and compensation if your house is going to be knocked down to build a motorway.”
In addition, countries with good levels of transparency tend to offer better protection for citizens. Such measures include a well-functioning property market served by honest professional advisers; financial disclosure regulations for property investment vehicles and a wealth of accessible data (such as monthly house price indicators). These help to build trust and feed through into helping people to make informed, sensible decisions about the buildings in which they live and work.
However, things are changing. From Mexico to Malaysia, better legislation and improved access to independent market data are enabling ordinary people to demand higher safety standards in buildings and to feel more confident in home-buying decisions.
At the opposite end of the scale, a lack of transparency can kill – as shown by the continuing toll of buildings collapses. A failure by regulators to check for the use of counterfeit materials contributed to four deaths in Uganda when a six-storey development gave way in April, according to the mayor of the capital, Kampala.
Moves to take on corrupt practices
The World Economic Forum (WEF) is one of a growing number of bodies pushing the transparency agenda. In a pilot research study in India’s Maharashtra state, it found a real estate sector enmeshed in corrupt, non-transparent practices. Procedures for getting licenses and permits were so opaque that bribes, often worth half the final project cost, became routine. The researchers have now designed some relatively simple solutions including the use of e-procurement to make tender and payment processes public and visible. These are now also being tested in Africa and Latin America.
Peru, one of the world’s fastest growing economies, has reduced its poverty rate 28 percent since 2002 partly because a local think tank recognized that a lack of transparency in the property sector was holding back growth. The Institute for Liberty and Democracy, realized that ordinary Peruvians would be far more able to save, borrow and start businesses if they could buy their homes and be sure that the state or a local tyrant would not repudiate their ownership. The Institute successfully pushed for the introduction of a reliable land registration system as part of a package of “legal tools and institutions required for citizens to participate in the formal national and global economy”.
They’re far from being the only countries who are taking steps to address transparency issues. Two-thirds of 109 property markets around the world have made progress since 2014, according to JLL’s 2016 Global Real Estate Transparency Index.
And better transparency is often accompanied by higher levels of business activity and investment. In Shanghai, for example, transparency advances – such as providing better data on supply, demand and valuations – have gone in parallel with a tenfold increase in real estate investment over the last decade and a fivefold increase in the take up of new office space. In 2015 alone, nearly 600,000 jobs were created.
The link between transparency and investment could be crucial in the next decade, says Kelly. ”Within the next decade we could see annual direct investment into commercial real estate assets hitting in excess of US$1 trillion across the globe and investors, developers and occupiers want to know exactly where their money is going.”
Harnessing the power of data
While governments and the real estate professions are playing a major role in putting transparency on the agenda, technology and sustainability are also key.
As information and data becomes more widely available and easier to analyze in the public domain, people, companies and governments can be more easily held to account for their actions. In its Maharashtra pilot, the WEF wants the public to read and scrutinize bids and deals and act as informal ‘social’ auditors who will blow the whistle if the deals look suspect.
Meanwhile, property market apps, help consumers make informed decisions about properties they buy, rent or invest in using comparative data. “Technology has made possible the biggest transparency gains of the past two years,” says Kelly. “These relate to ‘market fundamentals’ – the access, depth and quality of aggregated and disaggregated data on real estate market conditions and it’s set to increase as technology evolves.”
As sustainability gains ground, it’s supporting transparency. Required to make detailed disclosures on materials and emissions, sustainable developers are obliged to be more transparent than their traditional counterparts. The Dubai Smart City project is a pioneer, with plans to become the “innovation benchmark for smart cities seeking global sustainability and competitiveness”.
The Panama Papers effect
Transparency issues are far from resolved – even in developed markets such as Miami, New York, Vancouver and London. In the wake of the Panama Papers scandal, markets with a large selection of luxury residential units are under scrutiny for potential money laundering with unscrupulous organizations and individuals looking to exploit any weaknesses in beneficial ownership disclosure, vetting and regulatory oversight and enforcement.
Requirements from the UK and Canada for estate agents to perform detailed identity checks have not deterred the money launderers. Following the April revelations about secret, offshore investing, steps are being considered in Miami, Manhattan and the UK among others to force disclosure of beneficial owners.
But why are so many scandals being unearthed if such broad progress is being made? “Corruption scandals tend to be uncovered when markets become more transparent,” says Kelly. “In opaque markets scandals don’t become exposed at all.”
For now, transparency is a long term goal reached by taking small steps. Both public and private sector have crucial roles to play in improving transparency and, therefore, in making their real estate sectors more vibrant and supportive of local economies. They have a lot to gain: there is a strong likelihood that the markets which flourish most will also be the most transparent.