Global Real Estate Transparency Index 2004 - Jones Lang LaSalle
Global Real Estate Transparency Index 2004 - Jones Lang LaSalle
Global Real Estate Transparency Index 2004 - Jones Lang LaSalle
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Executive Summary<br />
<strong>Real</strong> estate is a global business today. Once dominated by local<br />
competitors, markets throughout the world now attract a range of<br />
international investors, lenders, occupiers and developers seeking<br />
cross-border opportunities in search of optimal investment returns.<br />
Newcomers, however, often encounter unfamiliar—and at times<br />
unfair—practices in what, to them,are “foreign”markets. To level<br />
the playing field, they need to learn how the locals play the game.<br />
Measures that track the transparency of overall business<br />
environments, political risk and financial/accounting systems are<br />
currently available in most global markets. Information regarding<br />
the transparency of real estate markets has been harder to come by.<br />
Recognizing this need, <strong>Jones</strong> <strong>Lang</strong> <strong>LaSalle</strong> and <strong>LaSalle</strong> Investment<br />
Management introduced the first <strong>Global</strong> <strong>Real</strong> <strong>Estate</strong> <strong>Transparency</strong><br />
<strong>Index</strong> in 1999. Designed to help real estate players better<br />
understand local market dynamics, the <strong>Index</strong> seeks to characterize<br />
the relative transparency of key global markets. The <strong>2004</strong> <strong>Global</strong><br />
<strong>Real</strong> <strong>Estate</strong> <strong>Transparency</strong> <strong>Index</strong>, which addresses transparency in 50<br />
countries 1 ,has been refined to focus on issues of greatest concern to<br />
our clients today. These include:<br />
• Availability of accurate financial and market information<br />
• Regulatory and legal environment<br />
• Security of legal title and enforceability of property rights<br />
• Financial disclosure and governance of listed real estate<br />
companies<br />
• Zoning and building codes<br />
In the period since we created the first <strong>Real</strong> <strong>Estate</strong> <strong>Transparency</strong><br />
<strong>Index</strong>, 22 countries have maintained their ranking, 25 have<br />
improved by one or more tier, and none have slipped back. The<br />
inescapable conclusion is that global real estate markets have<br />
become more transparent in this time.<br />
Six countries, strong in all areas, stand out as beacons of high<br />
transparency: Australia and New Zealand in Asia Pacific, the United<br />
States and Canada in North America, and the United Kingdom and<br />
the Netherlands in Europe. With exemplary underlying legal and<br />
regulatory factors, and a high degree of institutional real estate<br />
ownership, these countries serve as role models in their respective<br />
regions.<br />
<strong>Global</strong> <strong>Real</strong> <strong>Estate</strong> <strong>Transparency</strong> <strong>Index</strong> <strong>2004</strong><br />
Asia Pacific <strong>Transparency</strong> <strong>Index</strong><br />
IN<br />
European <strong>Transparency</strong> <strong>Index</strong><br />
PT<br />
IE<br />
CN<br />
ES<br />
GB<br />
TH<br />
MY<br />
SG<br />
ID<br />
HK<br />
TW<br />
VN<br />
NO<br />
DK<br />
KP JP<br />
PH<br />
SE<br />
NL<br />
BE<br />
DE PL<br />
FR CH AT<br />
CZ<br />
HU<br />
IT<br />
North and South America <strong>Transparency</strong> <strong>Index</strong><br />
CA<br />
US<br />
Source: <strong>Jones</strong> <strong>Lang</strong> <strong>LaSalle</strong>, <strong>LaSalle</strong> Investment Management<br />
AU<br />
GR<br />
MX<br />
RO<br />
EE<br />
FI<br />
UA<br />
CR<br />
TR<br />
NZ<br />
RU<br />
CO<br />
CL<br />
AR<br />
Highly Transparent<br />
Transparent<br />
Semi-Transparent<br />
Low-<strong>Transparency</strong><br />
Opaque<br />
Not Covered<br />
1. Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, Colombia, Costa Rica, Czech Republic, Denmark, Egypt, Estonia, Finland, France, Germany, Greece, Hungary, India, Indonesia, Ireland, Israel,<br />
Italy, Japan, Malaysia, Mexico, Netherlands, New Zealand, Norway, P.R. China and Hong Kong, Philippines, Poland, Portugal, Romania, Russia, Saudi Arabia, Singapore, South Africa, South Korea, Spain,<br />
Sweden, Switzerland, Taiwan, Thailand, Turkey, Ukraine, United Arab Emirates (UAE), United Kingdom, United States and Vietnam.<br />
BR<br />
1
Opaque emerging economies, weak in most areas, sit at the other<br />
end of the spectrum. In addition, most, if not all, of the countries<br />
that are not covered in the <strong>Index</strong> would fall into the opaque<br />
category. They have not been ranked, because they do not tend to<br />
be featured in the investment plans of many international<br />
investors, lenders, developers or occupiers.<br />
Most countries in the <strong>Index</strong> lie in a gray area: 39 are classified as<br />
either transparent, semi-transparent or of low transparency. This is<br />
the area in which the most change has occurred in the last four<br />
years. More than half of the countries included in our 1999 <strong>Index</strong><br />
have improved by one or more tiers. As a region, Europe shows the<br />
greatest improvement. One-third of Asia Pacific countries are<br />
classified to a higher tier in <strong>2004</strong>, due largely to improvements<br />
arising from the widespread introduction of REITs and more active<br />
cross-border capital flows.<br />
A full list of the <strong>2004</strong> <strong>Global</strong> <strong>Real</strong> <strong>Estate</strong> <strong>Transparency</strong> <strong>Index</strong> is<br />
included in the Appendix (see page 17). The <strong>Index</strong> can be a useful<br />
device for analyzing the risk profiles of national, regional or global<br />
property markets. But it should never be employed as the only<br />
factor in decision making. Low transparency can certainly impose<br />
risks and additional costs, for example, but this does not<br />
necessarily mean that all opaque markets should be avoided. In<br />
fact, the assistance of a knowledgeable, trustworthy advisor can<br />
help foreigners navigate such markets profitably. According to the<br />
<strong>Index</strong>, for example, Mexico and Japan are semi-transparent in<br />
terms of real estate practices and information. This means that<br />
firms used to dealing in highly transparent real estate markets<br />
often have to manage these risks and adjust their expectations<br />
when conducting real estate transactions in these countries. The<br />
importance of strong local partners becomes much more apparent<br />
in markets where information is scarce and local practices are so<br />
different from what international firms may be used to.<br />
At the other end of the spectrum, high transparency eases the free<br />
flow of capital and information but also makes it more difficult for<br />
occupiers and investors to identify undiscovered bargains.<br />
Definition and Purpose<br />
We define a real estate market of “pure” transparency as one that:<br />
• Is completely open and clearly organized<br />
• Operates in a legal and regulatory framework characterized by a<br />
consistent approach to the enforcement of published rules and<br />
regulations<br />
• Respects private property rights<br />
Low transparency is frequently considered to be synonymous with<br />
corruption. Indeed, our analysis suggests a close correlation<br />
2. A description of the <strong>2004</strong> <strong>Transparency</strong> Survey methodology is included in the Technical Notes on page 18.<br />
2<br />
between corrupt practices and real estate market transparency. But<br />
a transparent real estate market is not only about freedom from<br />
corruption; it is also about the availability of information and the<br />
efficiency of the market.<br />
<strong>Real</strong> estate participants moving across borders have encountered<br />
many contributors to low transparency:<br />
• Absence of financial benchmarks<br />
• Lack of historical or current market statistics on supply, demand<br />
or rent<br />
• Financial statements of listed vehicles that are neither detailed<br />
nor standardized according to GAAP/IAS<br />
• <strong>Real</strong> estate tax procedures and building and zoning codes that<br />
are not published or are selectively enforced<br />
• Situations where local assistance or under-the-table payments<br />
are required to navigate the investment/development/<br />
management process<br />
• Lack of title records or title insurance<br />
• Environments in which government or public utilities acquire<br />
private property on short notice, introducing risk that owners<br />
will not be fairly compensated<br />
The <strong>2004</strong> <strong>Transparency</strong> <strong>Index</strong> provides an overview of the state of<br />
development in a country’s private and public real estate markets.<br />
Its five sub-indices provide real estate players with a rigorous<br />
framework for comparing the level of transparency of real estate<br />
markets in the 50 documented countries. It can also be used as a<br />
strategic tool to classify markets and evaluate market risk.<br />
The <strong>Index</strong> is based on an analysis of a structured survey conducted<br />
with our global network of researchers. 2 Questions were asked<br />
about the following key attributes of real estate transparency:<br />
• Legal factors<br />
• Regulatory burden<br />
• Availability of information on market fundamentals<br />
• Listed vehicle financial disclosure and governance<br />
• Availability of investment performance indices
We prepared a composite index and sub-indices for each attribute<br />
and grouped the countries/markets into five broad tiers of<br />
transparency:<br />
• Tier 1: Highly Transparent<br />
• Tier 2: Transparent<br />
• Tier 3: Semi-Transparent<br />
• Tier 4: Low <strong>Transparency</strong><br />
• Tier 5: Opaque<br />
<strong>Global</strong> Analysis<br />
While the neutrally-weighted <strong>2004</strong> <strong>Global</strong> <strong>Real</strong> <strong>Estate</strong><br />
<strong>Transparency</strong> <strong>Index</strong> presents a fair and impartial starting point for<br />
comparing real estate markets, it does have limitations. Investors<br />
with a preference for 100% ownership or a particular ownership<br />
structure, for example, will first need to satisfy themselves that this<br />
is available. Cross-border investors will also need to consider the<br />
level of tax leakage to which they will be subject.<br />
Local rules, regulations and market practices vary widely from<br />
country to country, and different investors have different motives<br />
and risk-return profiles. A single global ranking probably cannot<br />
reflect the relative risks of such a range of investment needs and<br />
opportunities accurately. And, since transparency may be as much<br />
about perception as it is about reality, one could argue that any<br />
index might differ along several dimensions:<br />
• The domicile of the investor: What is good from a U.S.<br />
perspective might not be as good (or as important) from a<br />
French or Indonesian perspective (e.g., availability of financial<br />
data in English).<br />
• The nature of the subject: Factors that may be very important to<br />
an investor (e.g., performance indices) may not be as important<br />
to a developer or occupier.<br />
• The nature of the real estate interest: Investors in indirect<br />
markets may attach greater importance to additional or different<br />
factors (e.g., listed vehicle governance) than investors in direct<br />
markets.<br />
By weighting factors according to a client’s own perspective, the<br />
database we have developed on over 20 aspects of real estate<br />
transparency allows us to examine the implications of different<br />
domiciles, real estate subjects and the nature of investment on a<br />
client-specific basis. The analysis can be tailored to a client’s<br />
circumstances and requirements to help underpin business<br />
decisions. It can also be calibrated to their specifications to identify<br />
new locations that may present opportunities with comparable<br />
risk/return profiles. It is a powerful tool to help investors<br />
understand the complex world of global real estate.<br />
<strong>Global</strong> Overview<br />
<strong>Real</strong> estate transparency is a structural factor in real estate<br />
markets. As a result, the <strong>2004</strong> <strong>Global</strong> <strong>Real</strong> <strong>Estate</strong> <strong>Transparency</strong><br />
<strong>Index</strong> is not something that will change on a frequent basis. In fact,<br />
a country ranking is likely to change only when its legal or<br />
regulatory environment changes.<br />
It is striking,however,that,while 22 countries have maintained<br />
their ranking in the four years since our first <strong>Real</strong> <strong>Estate</strong><br />
<strong>Transparency</strong> Survey, 25 have improved by one or more tier, and<br />
none have slipped back. The inescapable conclusion is that global<br />
real estate markets have become more transparent in this period.<br />
This improvement coincides with real estate’s coming of age as an<br />
asset class, alongside stocks and bonds. It also corresponds to a<br />
period in which real estate returns generally exceeded those of<br />
stocks and bonds, with real estate offering stable returns in a<br />
period of stock market weakness and volatility. In addition, it<br />
coincides with an increase in the number and profile of crossborder<br />
investors.<br />
Chart 1: <strong>Real</strong> <strong>Estate</strong> <strong>Transparency</strong>: Overall<br />
# of countries<br />
18<br />
16<br />
14<br />
12<br />
10<br />
8<br />
6<br />
4<br />
2<br />
0<br />
Highly<br />
Transparent<br />
Transparent Semi-<br />
Transparent<br />
Source: <strong>Jones</strong> <strong>Lang</strong> <strong>LaSalle</strong>, <strong>LaSalle</strong> Investment Management<br />
Low-<br />
<strong>Transparency</strong><br />
Opaque<br />
Chart 1 shows that six countries, strong in all areas, stand out as<br />
beacons of high transparency: Australia and New Zealand in Asia<br />
Pacific, the United States and Canada in North America, and the<br />
United Kingdom and the Netherlands in Europe. With exemplary<br />
underlying legal and regulatory factors, and a high degree of<br />
institutional real estate ownership, these countries serve as role<br />
models in their respective regions. Since 1999, the Netherlands has<br />
joined the five other countries in Tier 1.<br />
Opaque emerging economies, weak in most areas, sit at the other<br />
end of the spectrum. In addition, most, if not all, of the countries<br />
that are not covered in the <strong>Index</strong> would fall into the opaque<br />
category. They have not been ranked, because they do not tend to<br />
be featured in the investment plans of many international<br />
investors, lenders, developers or occupiers.<br />
3
Six opaque counties are: Ukraine, Romania and Turkey in Europe,<br />
Egypt and Saudi Arabia in the Middle East and Vietnam in Asia<br />
Pacific. Their <strong>Index</strong> rankings remain unchanged. Both Turkey and,<br />
to a lesser extent,Vietnam, have shown signs of improvement,<br />
albeit not enough to move them up to a new tier. Although<br />
underlying legal and regulatory factors remain problematic in<br />
these two countries, the availability of market fundamentals<br />
research has improved.<br />
Chart 2: Correlation between Wealth and <strong>Transparency</strong><br />
GDP Per Capita (US$)<br />
Source: <strong>Jones</strong> <strong>Lang</strong> <strong>LaSalle</strong>, <strong>LaSalle</strong> Investment Management, EIU<br />
Chart 3: <strong>Real</strong> <strong>Estate</strong> <strong>Transparency</strong> Sub Indicies<br />
Source: <strong>Jones</strong> <strong>Lang</strong> <strong>LaSalle</strong>, <strong>LaSalle</strong> Investment Management<br />
Most of the countries in the <strong>Index</strong> lie in a gray area: 39 are<br />
classified as either transparent, semi-transparent or of low<br />
transparency. This is the area in which the most change has<br />
occurred in the last four years. More than half of the countries<br />
included in our 1999 <strong>Index</strong> have improved by one or more tiers. As<br />
a region, Europe shows the greatest improvement. One-third of<br />
Asia Pacific countries are classified to a higher tier in <strong>2004</strong>, due<br />
largely to improvements arising from the widespread introduction<br />
of REITs and more active cross-border capital flows. While<br />
4<br />
45,000<br />
30,000<br />
15,000<br />
0<br />
Turkey<br />
Vietnam<br />
5<br />
(Opaque)<br />
Overall<br />
Investment<br />
Performance<br />
Public Company<br />
Performance<br />
Market<br />
Fundamentals<br />
Regulatory<br />
Legal<br />
Highly Transparent<br />
Brazil<br />
Russia<br />
China<br />
4<br />
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%<br />
Transparent<br />
Japan<br />
Mexico<br />
3<br />
Semi-Transparent<br />
Italy<br />
<strong>Real</strong> <strong>Estate</strong> Market <strong>Transparency</strong><br />
Sweden<br />
Hong Kong<br />
2<br />
Low-<strong>Transparency</strong><br />
US<br />
UK<br />
Australia<br />
1<br />
(Highly<br />
Transparent)<br />
Opaque<br />
transparency levels were raised in many parts of Asia Pacific,<br />
individual country scores often did not improve sufficiently to<br />
trigger a change in ranking. This phenomenon does suggest an<br />
area to scrutinize in the years ahead.<br />
The correlation between wealth and transparency is illustrated in<br />
Chart 2. The wealthier a country, the greater real estate market<br />
transparency tends to be. There are exceptions, however. Japan is<br />
perhaps most notable. A wealthy country, given its level of<br />
economic development, Japan’s real estate markets look like an<br />
untapped opportunity for international capital, especially if real<br />
estate transparency continues to improve as it has in recent years.<br />
Investors would do well to look for countries poised to move in a<br />
positive direction in this chart, either through rising wealth or<br />
improving real estate transparency.<br />
These countries will likely offer attractive returns through their<br />
potential to combine income growth and capital appreciation.<br />
Chart 2 does not, however, prove causality. For example, it does not<br />
show that wealth enables societies to develop a more transparent<br />
real estate market, nor does it provide clear evidence that a more<br />
transparent real estate market necessarily leads to greater wealth.<br />
There is probably some degree of truth in both viewpoints,<br />
however.<br />
Because property is by far the largest store of wealth, development<br />
economics suggests that property rights are the bedrock for<br />
economic development. In the fast-growing urban areas of the<br />
emerging economies, secure legal title to land can be the key for<br />
the poor to raise the finances to improve their homes or start a<br />
business. Using legal factors as a starting point, we developed a<br />
series of sub-indices: Investment Performance, Public Company<br />
Performance, Market Fundamentals, Regulatory and Legal. These<br />
are shown in Chart 3.<br />
These sub-indices have the same thresholds and tier structure as<br />
the overall <strong>Index</strong>. Since each sub-index is based on the answers to<br />
only two or three questions, it is inappropriate to publish subindex<br />
transparency country rankings in detail. Instead we<br />
examined the distribution of countries in each sub-index. In the<br />
overall <strong>Index</strong>, there is a broadly normal distribution. In some cases<br />
for the individual sub-indices, however, strikingly different<br />
patterns emerge. As shown in Chart 3, the legal sub-index, for<br />
example, is skewed towards greater transparency, while the<br />
performance sub-index shows an even distribution.<br />
Are such differences significant? The correlation between the<br />
rankings for the sub-indices is greater than 0.7 in all instances,<br />
suggesting it would be inappropriate to attach too much<br />
importance to the variations.Yet to understand the drivers of the<br />
overall <strong>Index</strong> rankings, it is helpful to go through the distribution<br />
by sub-index.
Legal Sub-<strong>Index</strong><br />
The security of legal title and the enforceability of property rights<br />
are critical issues for investors, lenders, developers and occupiers.<br />
In the other sub-indices, it is possible to offset a low score by<br />
adopting a higher risk premium. However, in this sub-index a low<br />
score on any variable might indicate a “go-no go” issue. Where<br />
there is no security of title or where enforceability of contract is<br />
not enforced consistently—or an under-the-table payment may be<br />
required to obtain remedy—international investors simply may<br />
not be prepared to invest. Or, they may not be allowed to invest by<br />
their domestic regulators.<br />
As shown in Chart 4, the majority of countries have a satisfactory<br />
legal framework in place. In these countries, the distribution is<br />
skewed strongly towards transparency. Indeed, over 50% of these<br />
countries rank as transparent or highly transparent. Less than a<br />
quarter rank as opaque or of low transparency, and these are all<br />
emerging markets. The legal factor is the most important aspect of<br />
transparency on which they must improve, since all else is built on<br />
its foundation.<br />
Regulatory Sub-<strong>Index</strong><br />
Regulatory burdens can represent an area of dissatisfaction for<br />
contradictory reasons. Perceived over-regulation can be just as<br />
great a challenge for developers and investors as perceived underregulation.<br />
The Regulatory sub-index takes into account both the<br />
tax burden and the burden of planning and building regulation. It<br />
focuses on the degree to which there are clear, published codes that<br />
are applied with fairness and consistency. It also considers whether<br />
there are legal, inexpensive and commonly used means to reduce<br />
tax burdens or obtain variances from planning or building codes.<br />
As shown in Chart 5, few countries are highly transparent in this<br />
respect, although many are transparent. In fact, this is one area in<br />
which even the most transparent countries show room for<br />
improvement. However, as two-thirds of all countries rank as<br />
transparent or semi-transparent, they start from a high base.<br />
Market Fundamentals Sub-<strong>Index</strong><br />
The availability of market-fundamentals research for the main real<br />
estate sectors of the major cities of a country is an essential<br />
underpinning for a sophisticated real estate market. We have<br />
examined the availability of time series on major variables such as<br />
supply, demand, vacancy rate, rent and yield for offices, multifamily/residential,<br />
retail, industrial/warehousing and hotels. As<br />
shown in Chart 6, the aggregate distribution of countries is close to<br />
a normal distribution. A quarter or more of countries are<br />
transparent, semi-transparent or of low transparency. Of the<br />
remaining countries, half are highly transparent and half are<br />
opaque.<br />
Chart 4: <strong>Real</strong> <strong>Estate</strong> <strong>Transparency</strong>: Legal<br />
30%<br />
25%<br />
20%<br />
15%<br />
10%<br />
5%<br />
0%<br />
Source: <strong>Jones</strong> <strong>Lang</strong> <strong>LaSalle</strong>, <strong>LaSalle</strong> Investment Management<br />
Chart 5: <strong>Real</strong> <strong>Estate</strong> <strong>Transparency</strong>: Regulatory<br />
40%<br />
35%<br />
30%<br />
25%<br />
20%<br />
15%<br />
10%<br />
5%<br />
0%<br />
Source: <strong>Jones</strong> <strong>Lang</strong> <strong>LaSalle</strong>, <strong>LaSalle</strong> Investment Management<br />
Chart 6: <strong>Real</strong> <strong>Estate</strong> <strong>Transparency</strong>: Market Fundamentals<br />
30%<br />
25%<br />
20%<br />
15%<br />
10%<br />
5%<br />
0%<br />
Highly<br />
Transparent<br />
Highly<br />
Transparent<br />
Highly<br />
Transparent<br />
Transparent Semi-<br />
Transparent<br />
Transparent Semi-<br />
Transparent<br />
Transparent Semi-<br />
Transparent<br />
Source: <strong>Jones</strong> <strong>Lang</strong> <strong>LaSalle</strong>, <strong>LaSalle</strong> Investment Management<br />
Low-<br />
<strong>Transparency</strong><br />
Low-<br />
<strong>Transparency</strong><br />
Low-<br />
<strong>Transparency</strong><br />
Opaque<br />
Opaque<br />
Opaque<br />
It is noteworthy that many countries rank highly in one or more<br />
sectors, but few have universal coverage with sufficient time series.<br />
The highly transparent countries are the Tier 1 countries. The<br />
opaque countries are primarily in Asia Pacific and Eastern Europe.<br />
This category is likely to change very slowly. Once a consistent<br />
quality data source is established, it generally takes many years to<br />
build a time series. Thus, this is an area of transparency in which<br />
improvement is generally predictable.<br />
5
Public Company Performance Sub-<strong>Index</strong><br />
The quality of governance of listed vehicles has earned increasing<br />
importance with the growth of listed property companies and<br />
REITs. In most countries, the quality of governance of listed real<br />
estate vehicles is closely correlated to the overall quality of<br />
corporate governance. This sub-index focuses on the quality of<br />
financial disclosure, the availability of financial data in English and<br />
the extent to which the interests of shareholders and management<br />
are aligned.<br />
Chart 7: <strong>Real</strong> <strong>Estate</strong> <strong>Transparency</strong>: Public Company Performance<br />
30%<br />
Source: <strong>Jones</strong> <strong>Lang</strong> <strong>LaSalle</strong>, <strong>LaSalle</strong> Investment Management<br />
As shown in Chart 7, the distribution of countries is quite even<br />
between each of the transparency tiers. To a significant degree this<br />
probably reflects the impact of globalization, as international<br />
accounting standards have been adopted increasingly around the<br />
world to attract international capital at lower risk premiums. One<br />
distinguishing feature that remains, in some cases, is the<br />
availability of financial reports in English.Another subtle<br />
difference emerges in the alignment of interests between<br />
shareholders and management. Especially in the more emerging<br />
markets, numerous companies are controlled by family or friends<br />
who share little or no alignment of interest with minority<br />
shareholders.<br />
Chart 8: <strong>Real</strong> <strong>Estate</strong> <strong>Transparency</strong>: Investment Performance <strong>Index</strong><br />
45%<br />
Source: <strong>Jones</strong> <strong>Lang</strong> <strong>LaSalle</strong>, <strong>LaSalle</strong> Investment Management<br />
6<br />
25%<br />
20%<br />
15%<br />
10%<br />
5%<br />
0%<br />
40%<br />
35%<br />
30%<br />
25%<br />
20%<br />
15%<br />
10%<br />
5%<br />
0%<br />
Highly<br />
Transparent<br />
Highly<br />
Transparent<br />
Transparent Semi-<br />
Transparent<br />
Transparent Semi-<br />
Transparent<br />
Low-<br />
<strong>Transparency</strong><br />
Low-<br />
<strong>Transparency</strong><br />
Opaque<br />
Opaque<br />
Investment Performance Sub-<strong>Index</strong><br />
The availability of reliable performance indicators based on hard<br />
data is a key advantage in the eyes of many institutional investors.<br />
Performance indices based on national data provide some comfort,<br />
but they are poor substitutes when it comes to benchmarking<br />
performance against peers. Performance indices for indirect real<br />
estate markets are generally well-established wherever listed real<br />
estate companies or REITs have emerged. Direct real estate market<br />
performance indices are becoming more common, but their<br />
acceptance has been slow in some locations.<br />
As shown in Chart 8, the distribution of countries in the<br />
Investment Performance sub-index is bi-polar. Where direct and<br />
indirect market performance indices have been available for a<br />
reasonable period of time, they make a major contribution to high<br />
transparency. This accounts for over 20% of countries represented<br />
in the <strong>Index</strong>. Where real or notional indices do not exist, they are a<br />
source of low transparency or opacity. This accounts for 55% of<br />
countries.<br />
Asia Pacific Overview<br />
Patterns within the Region<br />
The heterogeneous countries of Asia Pacific reflect a wide range of<br />
real estate market transparency. The region has the world’s most<br />
transparent real estate markets and some of the least. To the extent<br />
that there is a geographical pattern, it suggests that there is much<br />
greater transparency in Australasia than in Asia. Chart 9 illustrates<br />
this broad pattern. It does not reveal particularly effectively,<br />
however, areas of greater transparency within Asia Pacific: Hong<br />
Kong and Singapore. Physically and demographically small, they<br />
rank well above their weight economically and in terms of<br />
concentrations of high-value real estate.<br />
The real estate markets in Australia and New Zealand are ranked<br />
as the most transparent real estate markets in the world,<br />
marginally ahead of the United States and the United Kingdom.<br />
They score highly on all categories, but perhaps stand out most in<br />
terms of their legal framework, the availability of public and<br />
private performance indices, and market fundamentals research.<br />
Hong Kong and Singapore are close behind, with few, if any, areas<br />
of significant weakness. The introduction of REITs into the<br />
Singapore market in 2002 and the adoption of a REIT Code in<br />
Hong Kong in 2003 will serve to consolidate their positions.<br />
<strong>Real</strong> estate markets in Japan, Malaysia, Taiwan, South Korea, the<br />
Philippines and Thailand have all become more transparent in<br />
recent years. In part, this is a product of their greater openness to<br />
international investors following the Asian Financial Crisis of<br />
1997-1998. In Japan, one of the world’s most advanced economies,
a painful period of restructuring in the aftermath of a bubble<br />
economy has required greater transparency in the real estate<br />
sector. This emerged as a prerequisite to dealing with nonperforming<br />
loans in the financial sector secured against real estate<br />
assets. The successful introduction of REITs into the Japanese<br />
market has also been a key catalyst for improving transparency.<br />
Malaysia is the principal beneficiary of a greater emphasis on<br />
underlying legal and regulatory issues; its high scores offset<br />
weaknesses in the governance of listed vehicles, quality of market<br />
fundamentals research and the availability of investment<br />
performance indices.<br />
In Asia’s emerging economies, similar pressures have produced<br />
similar results, although primarily, perhaps, through the actions of<br />
the International Monetary Fund and various versions of<br />
Resolution Trust Corporations. In Asia Pacific’s semi-transparent<br />
real estate markets, many of the improvements have come through<br />
welcome systemic change. The quality of market fundamentals<br />
research, however, and the availability of investment performance<br />
indices remain challenging.<br />
The trend is also towards greater openness and transparency in<br />
China, India and Indonesia. But at present, there remain low levels<br />
of transparency within a number of areas, especially governance of<br />
listed vehicles in which further improvement would be desirable.<br />
Vietnam remains the only country we classify as opaque, although<br />
a number of other countries such as Cambodia, Laos and<br />
Myanmar would likely also fall into this category if they were<br />
included in the <strong>Index</strong>.<br />
Impact on Cross-Border Investment<br />
There is no consistent data on cross-border investment in Asia<br />
Pacific that can be used to judge the impact of transparency on<br />
capital flows. If there were data, it would be interesting to test two<br />
complementary theses, namely that real estate investors allocate<br />
larger amounts of capital to:<br />
• More transparent markets and<br />
• Markets experiencing or expected to experience the greatest<br />
improvements in transparency.<br />
There is no clear evidence that international investors allocate<br />
larger amounts of capital to highly transparent countries than to<br />
relatively low transparency countries in absolute terms. As Chart<br />
10 shows, however, to an extent this may be because Asia Pacific’s<br />
more transparent real estate markets tend to be found in its<br />
smaller countries. Thus international investors may be investing<br />
more relative to market capitalization in Australia, Hong Kong and<br />
Singapore. These three highly transparent real estate markets tend<br />
to form an overweight allocation in many cross-border investors’<br />
portfolios, particularly for investors with more risk-averse<br />
investment profiles. The same cannot be said for New Zealand and<br />
Malaysia, however. They do not form an overweight allocation in<br />
many international investors’ portfolios because of their small size<br />
and, in the latter case, because much international capital remains<br />
deterred by ownership restrictions and the legacy of recent capital<br />
controls.<br />
Chart 9: Asia Pacific <strong>Transparency</strong> <strong>Index</strong><br />
Source: <strong>Jones</strong> <strong>Lang</strong> <strong>LaSalle</strong>, <strong>LaSalle</strong> Investment Management<br />
Chart 10: <strong>Transparency</strong> Influences Capital Flows<br />
GDP Per Capita (US$)<br />
40,000<br />
30,000<br />
20,000<br />
10,000<br />
IN<br />
5<br />
(Opaque)<br />
CN<br />
TH<br />
A Strong<br />
Correlation<br />
R 2 = .63<br />
501 or above<br />
MY<br />
SG<br />
ID<br />
Source: <strong>Jones</strong> <strong>Lang</strong> <strong>LaSalle</strong>, <strong>LaSalle</strong> Investment Management<br />
4<br />
VN<br />
HK<br />
P.R. China<br />
India<br />
Indonesia<br />
Vietnam<br />
0<br />
Japan<br />
1<br />
(Highly<br />
Transparent)<br />
<strong>Transparency</strong> in Japan and Korea has improved significantly in<br />
recent years. Arguably this is both a cause and an effect of<br />
international capital flows. Given the size of its underlying<br />
3<br />
Core<br />
<strong>Real</strong> <strong>Estate</strong> Market <strong>Transparency</strong><br />
Size of GDP (US$ BIllions)<br />
201 - 500<br />
KP JP<br />
TW<br />
PH<br />
AU<br />
Taiwan<br />
South Korea<br />
Thailand<br />
Philippines<br />
101 - 200<br />
Highly Transparent<br />
Transparent<br />
Semi-Transparent<br />
Low-<strong>Transparency</strong><br />
Opaque<br />
Not Covered<br />
NZ<br />
Hong Kong<br />
Singapore<br />
Malaysia<br />
2<br />
51 - 100<br />
Australia<br />
New<br />
Zealand<br />
0 - 50<br />
7
economy, Japan in particular tends to be a large but underweighted<br />
part of many investment portfolios. Both countries attract<br />
considerable attention from international investors, particularly<br />
from opportunistic investors, but more recently also from investors<br />
with less appetite for risk. In recent years, Japan and Korea have<br />
not been significant sources of international real estate capital<br />
flows. It is noteworthy, however, that in the 1980s, Japanese and<br />
Korean investors, with semitransparent home markets, found that<br />
a similar lack of transparency in Southeast Asia was not a<br />
deterrent to investment. Recently there have been tentative signs<br />
that Korean capital is again beginning to look offshore towards<br />
Southeast Asia.<br />
China and India tend to attract less international capital than their<br />
market capitalization would suggest. For example, China, probably<br />
the most active and rapidly changing real estate market in the<br />
world, is drawing considerable international investment. Much of<br />
the capital is either recycled Mainland Chinese money or comes<br />
from overseas Chinese individuals and companies, and much of it<br />
is channeled through Hong Kong. This local mediation helps to<br />
mitigate the challenge and risk of opacity in the real estate markets<br />
in Mainland China.<br />
Foreign and Domestic Investors<br />
Foreign investors are often thought to be at a disadvantage<br />
compared with local investors due to real estate market<br />
transparency. The idea is that,with better access to local<br />
information, and in some cases lower tax and other regulatory<br />
burdens, local investors will ascribe a lower risk premium than<br />
international investors looking at the same market. Under such<br />
conditions, the local investor will outbid the international investor.<br />
Chart 11: <strong>Transparency</strong> and Corruption<br />
<strong>Real</strong> <strong>Estate</strong> Market <strong>Transparency</strong><br />
Source: <strong>Jones</strong> <strong>Lang</strong> <strong>LaSalle</strong>, <strong>LaSalle</strong> Investment Management, <strong>Transparency</strong> International<br />
8<br />
(Highly<br />
Transparent)<br />
1<br />
2<br />
3<br />
(Opaque)<br />
4<br />
5<br />
0<br />
A Strong<br />
Correlation<br />
R 2 = .86<br />
Thailand<br />
Philippines<br />
China<br />
India<br />
Indonesia<br />
Vietnam<br />
2<br />
Malaysia<br />
Taiwan<br />
South Korea<br />
4<br />
6<br />
Corruption*<br />
* “0” being most corrupt, and “10” being least corrupt.<br />
Hong Kong<br />
New Zealand<br />
Australia<br />
Japan<br />
8<br />
Singapore<br />
10<br />
In fact, the results of our <strong>2004</strong> <strong>Transparency</strong> Survey for Asia Pacific<br />
give very little support to this viewpoint. There are only isolated<br />
instances in which international investors are at an explicit<br />
disadvantage. Generally, there are easy and inexpensive legal ways<br />
to offset the types of withholding taxes that are thought to<br />
disadvantage foreign capital, for example. Indeed, international<br />
investors can actually be at an advantage, due to preferential<br />
policies that encourage foreign direct investment. Generally it is, or<br />
can be, a fairly level playing field for foreign and local investors.<br />
Korea is a possible exception. There, the standards of financial<br />
disclosure for listed vehicles tend to put indirect investors at a<br />
slight disadvantage. Financial reporting meets local standards, but<br />
these are not overly detailed and are not consistent with IAS or<br />
GAAP. Frequently, financial information is available in Korean but<br />
not in English. The tax regulatory burden for direct investors is a<br />
further distinguishing aspect. While a consistently applied, simple<br />
real estate tax code applies to foreign and domestic investors alike,<br />
it is more expensive and less simple for international investors to<br />
adopt legally acceptable and commonly used mechanisms to<br />
reduce the taxes payable. These issues have held Korea back in our<br />
transparency rankings.<br />
Indonesia and the Philippines are also exceptions. To some extent<br />
their status is counterintuitive. In many aspects, the tax and<br />
regulatory burden for foreign investors scores slightly better for<br />
foreign than for domestic investors. Foreigners are more likely to<br />
be given consistent treatment than domestic investors and are less<br />
likely to be subject to the same degree of pressure for under-thetable<br />
payments. Chart 11 shows that there is a striking correlation<br />
between perceptions of corruption according to international<br />
monitor <strong>Transparency</strong> International and our <strong>Real</strong> <strong>Estate</strong><br />
<strong>Transparency</strong> <strong>Index</strong> scores.<br />
Why, then, is there a widespread perception that the playing field<br />
tilts sharply in favor of local investors in less transparent markets?<br />
There are three possible explanations. First, the answer may lie in<br />
the word “perception.” In less transparent markets, foreign<br />
investors are often simply not sure whether domestic investors are<br />
receiving favorable treatment. Second, it may be that there are<br />
differences in practice that have not been adequately captured by<br />
our <strong>Transparency</strong> Survey. For example, there may be simple, legal,<br />
inexpensive ways to offset tax for both foreign and local capital, but<br />
if one is slightly easier or results in a slightly lower tax burden than<br />
the other, then a significant difference may emerge. Finally, it may<br />
simply be that domestic investors have locational advantages-long<br />
established networks and familiarity with the local market and its<br />
regulations.<br />
<strong>Transparency</strong> and <strong>Real</strong> <strong>Estate</strong> Practices<br />
The level of real estate transparency affects real estate practices in<br />
different countries within the region in different ways for investors,<br />
lenders, developers and occupiers. As Chart 12 shows,
transparency is no barrier to occupier demand. The recent <strong>Jones</strong><br />
<strong>Lang</strong> <strong>LaSalle</strong> Corporate <strong>Real</strong> <strong>Estate</strong> Impact Survey showed strong<br />
levels of demand over the next six months in the Tier 4 countries.<br />
<strong>Transparency</strong> can be an important influence on how occupiers<br />
meet such requirements, however. For example, for years many<br />
multinational corporations found that the only way to invest in<br />
manufacturing capacity in China was to purchase land-use rights<br />
and to develop infrastructure, factory and worker<br />
accommodations. As openness and transparency in the Chinese<br />
real estate market have improved, it has been possible to<br />
commission manufacturing facilities on a design-and-build basis<br />
and, more recently, to lease space in industrial parks built by real<br />
estate investors. As a result, the accommodation strategy of<br />
occupiers in China has changed, taking expensive real estate<br />
investment off the balance sheet as far as possible.<br />
An important trend in recent years has been the growth of<br />
outsourcing multinational corporate real estate functions to<br />
specialist service providers on a global or regional basis. In part<br />
this has been facilitated by improvements in the transparency of<br />
real estate markets, in the sense that it has become more practical<br />
for small, central, in-house teams to manage a large number of<br />
complex real estate transactions with third-party service providers<br />
who provide market knowledge and implementation services at<br />
the local level. In Asia Pacific, this trend is growing. In many of the<br />
mandates, it is the ability to execute transactions in the less<br />
transparent markets that drives appointments of service providers.<br />
This helps to improve transparency in formerly opaque markets<br />
through the development of local market fundamentals.<br />
<strong>Real</strong> estate development remains a largely domestic business.<br />
There are few international developers and fewer genuinely panregional<br />
developers. A lack of transparency, combined with an<br />
insider’s local knowledge, can be an effective barrier to entry and a<br />
source of monopolistic returns. China is an exception that proves<br />
the rule. Many international investors and developers in Chinese<br />
real estate, particularly overseas Chinese companies and<br />
individuals, are active despite—and arguably because of—a lack<br />
of transparency. It is no coincidence that they have concentrated on<br />
a small number of cities, often those with which they have the<br />
greatest historic or cultural connection. Hong Kong developers<br />
have been very active in Shanghai or in the cities of the Pearl River<br />
Delta; Taiwanese investors in the Fujian Province. Access to offmarket<br />
opportunities through personal networks and partners has<br />
been a key part of the strategy.<br />
Attitudes of Investors to High/Low <strong>Transparency</strong><br />
Investor attitudes to transparency tend to provide both a<br />
framework for their regional investment strategies and a basis for<br />
assessing country and real estate risk premiums. Although<br />
attitudes to risk and reward vary from investor to investor, there<br />
are broad patterns, particularly for institutional investors. Core<br />
investors tend to focus on the more mature, open and transparent<br />
real estate markets: Australia, New Zealand, Hong Kong and<br />
Singapore.<br />
Chart 12: <strong>Transparency</strong> is No Barrier to Occupier Demand<br />
Net Change in <strong>Real</strong> <strong>Estate</strong> Demand (next 6 months)<br />
10<br />
8<br />
6<br />
4<br />
2<br />
0<br />
-2<br />
-4<br />
-6<br />
-8<br />
Highly<br />
Transparent<br />
Transparent Semi-Transparent<br />
Source: <strong>Jones</strong> <strong>Lang</strong> <strong>LaSalle</strong>, <strong>LaSalle</strong> Investment Management<br />
However, most core investors also include Japan and Korea, with an<br />
appropriate risk premium added, because of the sheer size of their<br />
economies. Malaysia tends to be excluded from core programs,<br />
because it is small, perceived by many as potentially overbuilt and<br />
has restrictions on ownership and a recent history of capital<br />
controls. Opportunistic investors will also consider less mature,<br />
less open, semi-transparent real estate markets but demand a<br />
higher return commensurate with the higher associated risk. Only<br />
the most opportunistic international investors will consider less<br />
transparent and opaque markets: China, India, Indonesia and<br />
Vietnam.<br />
Recommendations for <strong>Real</strong> <strong>Estate</strong> Investors<br />
Low-<br />
<strong>Transparency</strong> Opaque<br />
Australia<br />
New Zealand<br />
Hong Kong<br />
Singapore<br />
Malaysia<br />
Japan<br />
Philippines<br />
South Korea<br />
Taiwan<br />
Thailand<br />
China<br />
India<br />
Indonesia<br />
Vietnam<br />
<strong>Transparency</strong> is already high in Australasia and is improving in<br />
Asia. REITs have been a powerful force for greater transparency<br />
wherever they have been introduced in Asia Pacific. We expect<br />
continued improvements in most Asian Pacific markets. If this<br />
trend is sustained, more mature, more stable and more transparent<br />
real estate markets should stimulate domestic institutional<br />
investment in real estate and cross-border real estate capital flows.<br />
This suggests that, by acting ahead of a predictable improvement<br />
in transparency, an investor can benefit from enhanced riskadjusted<br />
returns. It suggests investors may lower risk premiums in<br />
the future, which should reduce cap rates in the long-term and<br />
increase capital flows. This may counteract any upward pressure<br />
on cap rates as global interest rates start to rise.<br />
9
Europe, Middle East and Africa Overview<br />
Patterns within the Region<br />
The region covered in this section is geographically diverse, from<br />
Finland to South Africa, and encompasses a wide variety of<br />
business environments and cultures. Chart 13 displays the<br />
countries in the region according to their transparency scores<br />
(excluding the Middle East and Africa). There is a distinct pattern<br />
of transparency moving eastward from the United Kingdom and<br />
the Netherlands (both Tier 1), which have the highest scores, at the<br />
western edge of the map. There are naturally exceptions to this<br />
broad geographic pattern—Greece, for example—but the pattern<br />
is clear. The results of the <strong>2004</strong> <strong>Global</strong> <strong>Real</strong> <strong>Estate</strong> <strong>Transparency</strong><br />
<strong>Index</strong> are, in fact, very highly correlated with the Economist<br />
Intelligence Unit’s (EIU) country ratings for the quality of the<br />
overall business environment.<br />
Chart 13: European <strong>Transparency</strong> <strong>Index</strong><br />
PT<br />
IE<br />
Source: <strong>Jones</strong> <strong>Lang</strong> <strong>LaSalle</strong>, <strong>LaSalle</strong> Investment Management<br />
Omitted from Chart 13 are South Africa (transparent), Israel<br />
(semi-transparent), United Arab Emirates (low transparency),<br />
Egypt (opaque) and Saudi Arabia (opaque). The level of<br />
transparency in these countries broadly conforms to our identified<br />
pattern, with the exceptions of Israel and South Africa.<br />
Countries not evaluated in our <strong>2004</strong> <strong>Index</strong> could be other<br />
exceptions.Direct comparisons between the 2001 <strong>Index</strong> and the<br />
<strong>2004</strong> <strong>Index</strong> are difficult, as the variables that were analyzed have<br />
changed. However, some broad trends can be identified. Overall, 17<br />
of the 27 countries analyzed in 2001 increased their scores relative<br />
to the <strong>2004</strong> <strong>Index</strong> (two markets were not covered by the last<br />
analysis); 10 markets remained static and no markets moved<br />
backwards.<br />
10<br />
Highly Transparent<br />
Transparent<br />
Semi-Transparent<br />
Low-<strong>Transparency</strong><br />
Opaque<br />
Not Covered<br />
ES<br />
GB<br />
NO<br />
DK<br />
SE<br />
NL<br />
BE<br />
DE PL<br />
FR CH AT<br />
CZ<br />
HU<br />
IT<br />
GR<br />
RO<br />
EE<br />
FI<br />
UA<br />
TR<br />
RU<br />
Countries in Central Europe have generally improved their<br />
transparency over the past two years, and we would expect these<br />
European Union accession countries to continue to improve their<br />
position in the short- to medium-term. Our rankings for the<br />
Nordic countries have also generally improved, reflecting the fact<br />
that these markets are opening up to outside investors, and that the<br />
provision of indices and information on market fundamentals has<br />
improved greatly. Finally, the southern European countries, from<br />
Portugal to Greece, have generally improved their transparency,<br />
with all raising their rankings by at least one position, and in the<br />
case of Greece, two positions.<br />
At the top of the rankings, the Netherlands has also improved its<br />
ranking in recent years, although this is partly explained by our<br />
increased focus on public market transparency, where the Dutch<br />
market is particularly strong. At the other end of the scale, parts of<br />
Eastern Europe and the Middle East have failed to increase their<br />
scores. The one exception is Russia, which has moved from Tier 5<br />
to Tier 4.<br />
Impact on Cross-Border Investment<br />
Cross-border investment within Europe is driven by a number of<br />
factors in addition to transparency. Our latest analysis of crossborder<br />
capital flows in Europe reveals that the dominant<br />
destinations for international capital over the last two years have<br />
been the UK and France, dominated by the London and Paris office<br />
markets (see Chart 14).<br />
Clearly the UK and France are both transparent markets, being<br />
Tier 1 and Tier 2, respectively. However, transparency on its own<br />
does not explain the attraction of these markets to international<br />
investors. Germany, for example, is also Tier 2, but its share of<br />
cross-border capital has remained in the 0%-5% range over the<br />
past few years, largely as a result of pricing issues. The<br />
Netherlands, Sweden, Ireland, Belgium and Spain have also<br />
typically attracted 3%-7% of overseas acquisitions, despite having<br />
relatively high transparency rankings. The main reasons why the<br />
U.K. and France continue to dominate are the size and depth of the<br />
markets, and the resulting opportunities for investors.<br />
At present there is no shortage of capital looking for product<br />
within Europe, particularly from debt-driven private investors, and<br />
in part as a result of the recent poor performance of alternative<br />
asset classes. This money is chasing a relatively narrow band of<br />
prime properties let on long leases to good quality tenants,<br />
providing secure income streams. The London and Paris markets<br />
are currently still the most likely sources of such assets.<br />
This is not to say that there is no relationship between<br />
transparency and capital flows. Sweden, for example, has seen its<br />
share of international capital increase from 0% in 2000 to 11% in<br />
2003. Although Sweden has had a performance benchmark from<br />
Investment Property Databank since 1997, we believe its openness
to overseas investors, including information on market<br />
fundamentals and access to product, has improved significantly in<br />
recent years.<br />
A further interesting aspect of the cross-border market in Europe<br />
relates to the retail sector. In most European countries, the office<br />
market is much more transparent than the retail sector, and the<br />
scoring in our <strong>Transparency</strong> <strong>Index</strong> tends to reflect the most<br />
transparent sector,i.e.,offices. However, in contrast to the office<br />
sector, where most purchases are still made by domestic investors,<br />
we estimate that 74% of shopping centers with a gross leaseable<br />
area of over 25,000 square meters that have been sold since 1999<br />
have been acquired by cross-border investors. Consequently, in<br />
southern European countries such as Portugal and Italy, where the<br />
retail sector accounts for the majority of cross-border investment,<br />
the transparency of the retail sector is better than that for offices.<br />
In these circumstances, the national transparency score can<br />
understate the transparency of the retail sector.<br />
Foreign vs. Domestic Investors<br />
In Europe, there is little regulatory and legal evidence to support<br />
the viewpoint that transparency is different for a domestic investor<br />
than for a foreign investor. By most measures, the environment is<br />
considered to be the same for both domestic and overseas<br />
investors. The one exception to this is the tax regulatory burden,<br />
where, for the majority of countries, the transparency burden is<br />
considered to be lower for domestic investors than for overseas<br />
investors. The difference is not considered to be great, usually only<br />
a single point, and largely relates to the availability and cost of<br />
legally acceptable and commonly used mechanisms to reduce the<br />
taxes payable.<br />
But the behavior of international investors is influenced by more<br />
than just the transparency of markets. An example would be<br />
Germany, which is generally considered to be a transparent<br />
market, but where we have seen very little overseas investment in<br />
recent years. This is partly due to the success of the German openended<br />
funds in attracting money from private German investors.<br />
These funds saw record inflows of €15 billion in 2002, while<br />
inflows in 2003 were slightly lower at just under €14 billion.<br />
Despite their increasing overseas investment activity, some 40% of<br />
money invested in 2002 (some €5.2 billion) was spent in the<br />
German market, bolstering prices and creating an extremely<br />
competitive environment for overseas investors at the prime end of<br />
the market. In fact, most international investors choose to avoid<br />
the German market, because they cannot achieve the returns<br />
available in the other main European markets.<br />
Chart 14: Destination of Overseas Purchases 2002 and 2003<br />
2002 – €34.7 Billion<br />
Source: <strong>Jones</strong> <strong>Lang</strong> <strong>LaSalle</strong><br />
Chart 15: European Cross-Border Investment Volumes 2000-2003<br />
€ Billions<br />
Germany<br />
6.1%<br />
24.0<br />
3.1%<br />
Netherlands<br />
4.5%<br />
Sweden<br />
5.3%<br />
Italy<br />
6.1%<br />
Spain<br />
5.0%<br />
Belgium<br />
6.7%<br />
CEE<br />
3.1%<br />
Germany<br />
3.4%<br />
Spain<br />
5.3%<br />
Netherlands<br />
5.8%<br />
Italy<br />
6.8%<br />
Source: <strong>Jones</strong> <strong>Lang</strong> <strong>LaSalle</strong><br />
CEE<br />
Belgium<br />
2.5%<br />
Finland<br />
3.0%<br />
Sweden<br />
11.4%<br />
Denmark<br />
Finland<br />
0.7%<br />
1.6%<br />
26.6<br />
France<br />
19.8%<br />
2003 – €34.8 Billion<br />
Denmark<br />
1.7%<br />
France<br />
17.2%<br />
Luxembourg<br />
0.6%<br />
Portugal<br />
0.3%<br />
Luxembourg<br />
0.2%<br />
Portugal<br />
0.1%<br />
34.7<br />
UK<br />
40.1%<br />
UK<br />
39.6%<br />
38.4<br />
2000 2001 2002 2003<br />
Note: Activity includes sales and acquisitions by foreign investors<br />
11
<strong>Transparency</strong> and <strong>Real</strong> <strong>Estate</strong> Practices<br />
One area where improvements in transparency do appear to act as<br />
a catalyst for long-term change in real estate practices is the level<br />
of transparency in public markets. This is particularly true in<br />
emerging real estate markets, where there has traditionally not<br />
been an open culture and where international investors have not<br />
usually been active in private markets.<br />
In these circumstances, it is very often the emergence of a quoted<br />
public sector, with the accompanying analysis of underlying<br />
markets, which acts as a driver for further improvements in<br />
transparency. For example, public sector vehicles may adopt<br />
innovative financing techniques, attracting international capital<br />
and real estate expertise, which in turn have a positive influence on<br />
other industry players. Our analysis reveals that the top 10<br />
countries in our <strong>Index</strong> all have high scores for public sector<br />
governance, with the UK and the Netherlands consistently<br />
receiving top scores for both the availability of public market<br />
indices and the quality of corporate governance.<br />
Chart 16: Sources of Cross-Border Investment in Europe 2002<br />
Source: <strong>Jones</strong> <strong>Lang</strong> <strong>LaSalle</strong><br />
Attitude of International Investors to<br />
High/Low <strong>Transparency</strong><br />
European real estate capital markets are becoming increasingly<br />
international, with some €38.4 billion of cross-border investment<br />
transactions undertaken in 2003, representing 48% of the total<br />
investment volume of €80.6 billion in Europe. International<br />
investors are aware of the wide variations in market transparency<br />
across the region and adjust their return requirements accordingly.<br />
For most countries in Tiers 1 and 2, transparency is not an issue in<br />
the direct market, and information on market fundamentals,<br />
including time series, is good across all the main investment<br />
sectors. Performance indices are generally available, enabling<br />
12<br />
Quoted<br />
Property<br />
Company<br />
8.7%<br />
German<br />
Special Fund<br />
2.0%<br />
Unknown<br />
4.0%<br />
Third Party<br />
Managed Fund<br />
7.9%<br />
Institution<br />
9.6%<br />
Open-Ended<br />
Fund<br />
1.9%<br />
Bank<br />
Sponsored Fund<br />
9.7%<br />
Closed-Ended<br />
Fund<br />
1.6%<br />
Owner<br />
Occupier<br />
0.7%<br />
Public<br />
Sector<br />
0.1%<br />
Private<br />
Property Company<br />
13.8%<br />
German<br />
Open-Ended<br />
Fund<br />
21.4%<br />
Private<br />
Individual /<br />
Syndicate<br />
18.6%<br />
performance measurement, benchmarking, assessments of risk<br />
and return, and market forecasting.<br />
For countries in Tier 3 and below, investors tend to adopt a much<br />
more cautious approach. There is a wide variety of reasons why<br />
these countries fail to appear in the top two tiers, from lack of<br />
private market indices to poor governance for listed vehicles.<br />
However, a common factor is relatively poor information on<br />
market fundamentals when compared to core western European<br />
markets. This type of information serves to underpin investor<br />
confidence in a market, and its absence will lead to increased<br />
country risk premiums and consequently higher required local<br />
returns. In some cases, lack of transparency will cause a country to<br />
be omitted from the “investable universe” when investors draw up<br />
their international investment strategies.<br />
Although this is not always the case, and while many middle-tier<br />
countries remain firmly on the radar screens of mainstream<br />
investors (the German open-ended funds, for example), these<br />
countries are at present dominated by “risk-seeking” opportunistic<br />
investors who have high leveraged return targets. Tier 3 countries<br />
where this type of investor has traditionally been dominant<br />
include the Czech Republic, Hungary, Poland and Greece.<br />
Recommendations for <strong>Real</strong> <strong>Estate</strong> Investors<br />
<strong>Transparency</strong> is continually improving within the region, and there<br />
are now only seven countries in Tiers 4 and 5, representing 25% of<br />
the sample. At the same time, investment volumes in Europe have<br />
been growing.We estimate that total investment volumes grew by<br />
21% between 2000 and 2003, from €66.5 billion to €80.6 billion.<br />
Cross-border investment as a proportion of the total increased<br />
from under 40% to 48% over the same period, rising from €24.0<br />
billion to €34.7 billion. We estimate that there is currently about<br />
€40 billion of available capital (equity) targeted at Europe from a<br />
variety of sources: institutions, opportunity funds, open-ended<br />
funds, property companies and leveraged private investors.<br />
With the exception of the opportunity funds, most of this capital is<br />
targeted at the prime end of the market, properties let on long<br />
leases to secure covenants. Competition for this type of product is<br />
most intense in the mature western European markets, although<br />
the opportunities in these countries are greater as a result of the<br />
greater size, depth and maturity of the real estate markets.<br />
One way for investors to avoid the intense competition of the<br />
mature western European countries is to diversify into the less<br />
transparent countries in Tier 3 and below. In doing so, they are not<br />
only avoiding the competitive threat of cross-border investors who<br />
would not consider these countries, but are also potentially<br />
exploiting price variations within the region by betting on<br />
improving transparency in the hope that this will be accompanied<br />
by an inward yield shift.<br />
International investors need to be certain, however, that they are<br />
not being taken advantage of by local investors. For many local
investors, lack of transparency presents an opportunity rather than<br />
a risk, and they do not welcome increased competition from<br />
overseas. If this does occur, they will seek to use their local market<br />
knowledge and experience to their advantage.<br />
When expanding into new territories, international investors will<br />
need insightful advice from market professionals familiar, not just<br />
with local market trends and sources of product (on- and offmarket),<br />
but also with local market culture and business practices.<br />
North and South America Overview<br />
Regional Patterns<br />
The North and South American region ranges from Canada to<br />
Chile and Argentina. Cultures and business environments vary to a<br />
great extent throughout the region. As a result, real estate markets<br />
in the region are highly diversified. Eight countries in the North<br />
and South American region are included in the <strong>2004</strong> <strong>Index</strong>:<br />
Argentina, Brazil, Canada, Chile, Colombia, Costa Rica, Mexico and<br />
the United States.<br />
As can be seen in Chart 17, Canada and the United States are in<br />
Tier 1; Chile and Mexico are in Tier 3; and Argentina, Brazil,<br />
Colombia and Costa Rica are in Tier 4. Countries shaded in gray,<br />
such as Panama, Peru, Uruguay and Venezuela, were not evaluated.<br />
From north to south, the <strong>Index</strong> tends to move from high<br />
transparency to low transparency.There are exceptions, however.<br />
Chile, for example, is much more transparent than the rest of South<br />
America. In addition, as many countries were not evaluated, there<br />
could be other exceptions.<br />
Comparing the <strong>2004</strong> <strong>Index</strong> to the 2001 <strong>Index</strong> 3 ,we see that most<br />
countries either improved their real estate market transparency or<br />
remained at the same level (see Chart 18). Since Costa Rica was<br />
added to the <strong>Index</strong> in <strong>2004</strong>, no comparison is available.<br />
Unsurprisingly, the U.S. and Canada remain in Tier 1. Brazil<br />
remains in Tier 4. Impressively, Chile moved up two tiers, from Tier<br />
5 to Tier 3. This improvement reflects the fact that several<br />
institutional investors track the performance of Chile’s residential<br />
and office markets, thus increasing the transparency of real estate<br />
practices in the country. Mexico moved up one tier to Tier 3. The<br />
existence of some publicly-traded real estate firms in Mexico’s<br />
stock market helped the country improve its level of transparency,<br />
probably due to the fact that financial statements and corporate<br />
governance are standardized and disclosed to the public.<br />
Mexico also has better hotel and multifamily/residential market<br />
data than most other Latin American countries. However, there are<br />
still many real estate market aspects Mexico can further develop.<br />
For example, although local regulations are consistently applied on<br />
real estate-related issues, it may take two to three years for the legal<br />
system to process a case. Thus, the inefficient legal process in this<br />
country may hinder investors from further exploring its real estate<br />
market.<br />
Chart 17: North and South America <strong>Transparency</strong> <strong>Index</strong><br />
Source: <strong>Jones</strong> <strong>Lang</strong> <strong>LaSalle</strong>, <strong>LaSalle</strong> Investment Management<br />
Chart 18: Comparison between <strong>Transparency</strong> <strong>Index</strong> <strong>2004</strong> and 2001<br />
Country<br />
Argentina<br />
Brazil<br />
Canada<br />
Chile<br />
Colombia<br />
Costa Rica<br />
Mexico<br />
United States<br />
2001 <strong>2004</strong><br />
Tier 5<br />
Tier 4<br />
Tier 1<br />
Tier 5<br />
Tier 5<br />
N/A<br />
Tier 4<br />
Tier 1<br />
Tier 4<br />
Tier 4<br />
Tier 1<br />
Tier 3<br />
Tier 4<br />
Tier 4<br />
Tier 3<br />
Tier 1<br />
Source: <strong>Jones</strong> <strong>Lang</strong> <strong>LaSalle</strong>, <strong>LaSalle</strong> Investment Management<br />
Highly Transparent<br />
Transparent<br />
Semi-Transparent<br />
Low-<strong>Transparency</strong><br />
Opaque<br />
Not Covered<br />
Comparison<br />
Improved<br />
Same<br />
Same<br />
Improved<br />
Improved<br />
N/A<br />
Improved<br />
Same<br />
Argentina and Colombia both moved up from Tier 5 to Tier 4.<br />
Most market fundamentals data is closely held by local real estate<br />
players in these markets. For instance, Argentina’s prime office<br />
market is relatively small. When a new building is introduced, it<br />
3. Direct comparison with the 1999 or 2001 <strong>Index</strong> is difficult, as the specific variables analyzed have changed and more countries were added to the <strong>2004</strong> <strong>Index</strong>. However, broad trends can still be<br />
identified.<br />
CA<br />
US<br />
MX<br />
CR<br />
CO<br />
CL<br />
AR<br />
BR<br />
13
may trigger great volatility in the market. With no readily available<br />
market information, risk-averse foreign investors may hesitate to<br />
explore the office market; however, opportunistic investors may be<br />
attracted to this type of market.<br />
Colombia has a high transparency level in the category of<br />
enforceability of real estate contracts and security of title. The lack<br />
of reliable real estate market data and the instability of tax<br />
regulations account for the country’s overall low transparency.<br />
Improvements in the transparency levels among the Central and<br />
South American countries reflect the globalization of business,<br />
investments, finance and trading. In other words, the transparency<br />
level reflects the degree of corporate representation in a country.<br />
The opening of the real estate markets in these countries to foreign<br />
investment is but one example. Indeed, the availability of real<br />
estate market data and improvements to real estate-related<br />
regulations and corporate governance are all the result of<br />
interventions by the government, or by real estate firms or<br />
consulting firms from more transparent countries.<br />
Impact on Cross-Border Investment<br />
Foreign real estate investors tend to invest larger amounts of<br />
capital in countries with relatively high transparency. Chart 19<br />
illustrates that U.S. investors over-weighted real estate investments<br />
in transparent or highly transparent countries, such as the UK<br />
(Tier 1) and France (Tier 2), while they under-weighted<br />
investments in countries with less transparency,such as Mexico<br />
(Tier 3). Generally, investors tend to increase investment in<br />
transparent or highly transparent countries over time, and reduce<br />
or maintain the amount of investment in low transparency or<br />
opaque countries. As evidence, U.S. real estate investors increased<br />
their investments in France from 18% of the total foreign direct<br />
real estate investment in 1999 to 26% in 2001, while increasing<br />
investment in the UK from 39% to 42%.<br />
While the theoretical link between real estate market transparency<br />
and capital allocation to individual real estate markets is not<br />
absolutely explicit, the trend is clear. Three other factors can also<br />
influence real estate capital flow:<br />
1) Tax treaties between two countries could be a much stronger<br />
influence than market transparency. Countries with high reciprocal<br />
tax rates are usually less attractive to foreign investors. For<br />
instance, Canada is a highly transparent country. However, U.S.<br />
foreign direct real estate investment in Canada has always<br />
remained at around 2% of the total investment, due to the<br />
unattractiveness of the high tax rate. The 18% capital flow to<br />
Canada in 1999 was an exception.<br />
14<br />
2) The asymmetries of the real estate portfolio managers’ and asset<br />
managers’ grasp of market information in countries of the same<br />
transparency level can affect cross-border real estate investments.<br />
3) Countries that are geographically distant from the U.S., although<br />
highly transparent, tend to receive less or no capital from the U.S.<br />
For example, in 1999, only 1% of U.S. foreign direct real estate<br />
capital was invested in Australia, as compared to 39% of foreign<br />
direct real estate investment in the U.K., despite the fact that<br />
Australia reflects the same transparency level as the U.K. However,<br />
we observed an increase in U.S. capital flowing into the Australian<br />
real estate market in 2001, which could be an indication of<br />
increasing awareness of this highly transparent country.<br />
Foreign vs. Domestic Investors<br />
The <strong>2004</strong> <strong>Index</strong> more completely analyzes real estate market<br />
transparency than in previous years. It not only examines issues<br />
that highly concern foreign investors, but also topics faced by both<br />
foreign and domestic investors in a country. These issues include<br />
tax and other regulatory burdens; legal environments faced by<br />
foreign versus domestic investors; transparency of local zoning<br />
and building codes for foreign versus domestic investors; and the<br />
availability of financial information in English. It is obvious that<br />
foreign investors are not eager to invest in countries where<br />
domestic investors have easier access to information and thus a<br />
competitive advantage, since the costs and risks of such<br />
transactions are high.<br />
In North and South America, foreign investors are treated as<br />
equally as domestic investors on most of the issues we surveyed,<br />
especially in highly transparent countries like the U.S. and Canada.<br />
However, in some emerging markets, there are differences between<br />
how foreign investors and domestic investors are treated, although<br />
the differences are not great.<br />
Some of these differences include:<br />
• Tax and other regulatory burdens: Canada and Colombia have<br />
lower transparency for foreign investors than for domestic<br />
investors; however, the difference is not enormous. It is mostly<br />
related to the enforcement of tax regulations, and the availability<br />
and cost of legal mechanisms to reduce taxes.<br />
• Zoning and building codes: Costa Rica has lower transparency<br />
for foreign investors than for domestic investors. The difference<br />
is mostly related to the availability and application of zoning and<br />
building codes.<br />
• Availability of financial information in English: Brazil, Chile,<br />
Colombia and Costa Rica have lower transparency for foreign<br />
investors than domestic investors. Brazil, Colombia and Costa
Rica’s real estate firms do not have publicly-available financial<br />
information in English. Chile has partial financial information<br />
available in English. The inaccessibility of financial information<br />
has added to the problems of foreign investors who want to<br />
check the financial performance of real estate firms and the<br />
overall real estate markets. Therefore, the cost and risk of<br />
investing in these countries will be higher than in more<br />
transparent countries like the U.S. and Canada.<br />
<strong>Transparency</strong> and <strong>Real</strong> <strong>Estate</strong> Practices<br />
Just as real estate market transparency in the Americas influences<br />
investor behavior, investor behavior influences real estate market<br />
transparency in the region. On the one hand, real estate investors<br />
tend to invest more capital in transparent or highly transparent<br />
countries than in low transparent or opaque countries. This trend<br />
invites competition among the top-tier countries, which leads to<br />
less attractive returns.<br />
In this section, we will examine the U.S. real estate market (mainly<br />
due to the availability of a relatively complete set of foreign real<br />
estate investment capital flow data).<br />
It has become increasingly hard for investors in the U.S. real estate<br />
market to achieve the high yields they have become accustomed to<br />
in the past. Therefore, foreign investors have tended to reduce their<br />
real estate investments in the U.S. or maintain the same levels. As<br />
shown in Chart 20, Panamanian and Bahamian investors reduced<br />
their capital flows to the U.S. from 1997 to 2001, while Mexican<br />
investors maintained the same level of investment. However, there<br />
was an increase in Canadian capital flow to the U.S. from 1997 to<br />
1999, which was mainly due to changes in the strategic planning of<br />
Canadian pension funds, which had previously invested exclusively<br />
in the domestic real estate market. To diversify their portfolios,<br />
these funds decided to invest in the U.S. in the late 1990s. Although<br />
the returns have not been as attractive as they anticipated.<br />
Canadian real estate capital investment in the U.S. real estate<br />
market has remained around $6-6.5 billion annually.<br />
On the other hand, due to less attractive real estate returns in<br />
transparent or highly transparent countries, investors also seek<br />
investment opportunities in less transparent markets. Although<br />
investing in less transparent countries incurs higher risk, it usually<br />
earns higher returns. To better support these investment activities,<br />
either the investors will help to promote transparency, or the<br />
countries will improve transparency to attract or retain real estate<br />
investors. In addition, the governments or public organizations in<br />
less transparent countries must begin to collect more real estate<br />
market data and make it accessible to investors.<br />
Mexico is a great example of a nation that has improved its real<br />
estate market transparency significantly. Over the past few years,<br />
4. Office, industrial, retail, multi-family/residential and hotel properties.<br />
more real estate market data has become available to investors. For<br />
instance, one Mexican firm regularly collects detailed hotel and<br />
tourism data. The Mexican government and housing associations<br />
also make large amounts of housing data available to the public.<br />
Chart 19: Destination of U.S. Foreign Direct <strong>Real</strong> <strong>Estate</strong><br />
Investment Capital<br />
1999 – $3.2 Billion<br />
Japan<br />
4.4%<br />
Canada<br />
18.1%<br />
Japan<br />
8.7%<br />
Canada<br />
2.3%<br />
Belgium<br />
0.2%<br />
Others<br />
18.6%<br />
Belgium<br />
0.3%<br />
Others<br />
19.3%<br />
France<br />
26.4%<br />
Australia<br />
0.7%<br />
France<br />
18.0%<br />
2001 – $4.3 Billion<br />
Australia<br />
1.2%<br />
Mexico<br />
0.6%<br />
Mexico<br />
0.6%<br />
Source: BEA, <strong>LaSalle</strong> Investment Management<br />
UK<br />
39.3%<br />
UK<br />
41.4%<br />
Attitude of Investors to High/Low <strong>Transparency</strong><br />
Investors are fully aware of the market transparency across North<br />
and South America. High market transparency environments in<br />
the Tier 1 countries have helped international investors better<br />
understand the real estate markets in these countries. In the U.S.<br />
and Canada, public and private real estate performance indexes,<br />
and rent, yield, and supply and demand data for all property types 4<br />
are generally available. Time series of more than 10 years are<br />
accessible to investors, except that Canada has few reliable market<br />
15
statistics for the retail market. By studying historical performance<br />
and the market supply and demand cycles, investors can better<br />
forecast the performance of their current assets or prospective<br />
projects. The Tier 1 countries also exhibit high transparency in the<br />
availability and quality of their listed vehicles’ financial<br />
information and corporate governance. Moreover, tax regulations,<br />
zoning and building codes, and other legal factors are applied<br />
consistently between domestic and foreign investors in the U.S.<br />
and Canada. Since market information and regulations are highly<br />
transparent to all investors, they can easily set up their expected<br />
returns, assessments of risk, benchmarking and investment<br />
strategies.<br />
Chart 20: Foreign Direct <strong>Real</strong> <strong>Estate</strong> Investments to the U.S.<br />
$ Millions<br />
500<br />
Source: BEA, <strong>LaSalle</strong> Investment Management<br />
For countries in Tier 3 or below, investors tend to extend their<br />
investment policy in two extremes: either implementing a more<br />
conservative approach or becoming opportunistic investors. There<br />
are many reasons for the six countries—Argentina, Brazil, Chile,<br />
Colombia, Costa Rica and Mexico—to appear in Tiers 3 and 4.<br />
Generally, it is due to the lack of market data, inconsistency in<br />
applying regulations, no published simple regulation or code on<br />
real estate practices and low enforceability of real estate contracts.<br />
16<br />
400<br />
300<br />
200<br />
100<br />
0<br />
-100<br />
$ Millions<br />
7,000<br />
6,500<br />
6,000<br />
5,500<br />
5,000<br />
4,500<br />
1997 1998 1999 2000 2001<br />
Panama Bahamas Mexico<br />
1997 1998 1999 2000 2001<br />
Canada<br />
In Argentina, for example, enforceability of real estate contracts is<br />
fairly loose. By law, a tenant cannot terminate a lease agreement<br />
within the first six months of the lease. Within the first six to<br />
twelve months of the lease, the tenant is allowed to terminate with<br />
a one month advance notice by paying 1.5 months rent as penalty.<br />
After one year, the tenant can terminate the lease at any time with<br />
one month advance notice and one month rent as penalty. Foreign<br />
investors may avoid a deal in Argentina due to the above<br />
regulation. Tenants are also required to pay commission fees and<br />
the cost of improvements. Since tenants can terminate a lease any<br />
time after six months, the revenue from a property could be<br />
volatile due to tenant instability.<br />
The concept of “stabilized year” does not apply in countries like<br />
Argentina when evaluating the market value of a property. The low<br />
transparency environments in these countries have prevented<br />
some foreign investors from pursuing deals or forced them to<br />
proceed cautiously. Opportunistic investors are risk-takers,<br />
however. They are interested in exploring emerging markets like<br />
Argentina, Colombia and Costa Rica, where returns on successful<br />
deals could be two or three times higher than those in the U.S. or<br />
Canada.<br />
Recommendations for <strong>Real</strong> <strong>Estate</strong> Investors<br />
As discussed, investing in highly transparent countries is<br />
extremely competitive. It is hard for capital from various<br />
sources—institutions, pension funds, mutual funds, open-end<br />
funds, private investors and opportunities funds—to find bargain<br />
deals. Opportunistic investors should seek other investment<br />
opportunities in less transparent markets (usually emerging<br />
markets) like Argentina, Brazil, Chile, Colombia, Costa Rica and<br />
Mexico to diversify their investment portfolio. Investment in Tier 1<br />
markets can serve as a fixed-income financial product in the<br />
portfolio. Since the availability and quality of market information<br />
are low in less transparent countries, investors with insider<br />
information in the market could be empowered with competitive<br />
advantage.<br />
Partnership or joint venture is always the fastest way to adopt the<br />
local platform. However, finding the right partner and structuring<br />
the partnership could be another significant issue affecting<br />
returns.<br />
It is well understood that a first-mover’s advantage can be<br />
compensated by appealing returns. However, it also involves high<br />
risk. It is eventually up to the investor’s nature and degree of risktolerance<br />
to decide whether or not to enter a low transparency<br />
market.
Appendix<br />
Chart 21: <strong>Global</strong> <strong>Real</strong> <strong>Estate</strong> <strong>Transparency</strong> <strong>Index</strong> <strong>2004</strong><br />
<strong>Real</strong> <strong>Estate</strong> <strong>Transparency</strong><br />
Rank Country<br />
Tier 1-5 (<strong>2004</strong>)<br />
1 Australia 1.19 1 Same<br />
2 New Zealand 1.19 1 Same<br />
3 United States 1.24 1 Same<br />
4 United Kingdom 1.24 1 Same<br />
5 Canada 1.37 1 Same<br />
6 Netherlands 1.37 2 Improved<br />
7 Hong Kong 1.50 2 Same<br />
8 Sweden 1.51 3 Improved<br />
9 Singapore 1.55 2 Same<br />
10 Germany 1.60 2 Same<br />
11 France 1.62 2 Same<br />
12 Finland 1.64 3 Improved<br />
13 Switzerland 1.68 3 Improved<br />
14 Ireland 1.82 2 Same<br />
15 Belgium 1.92 2 Same<br />
16 Denmark 2.01 3 Improved<br />
17 Austria 2.08 3 Improved<br />
18 Norway 2.15 3 Improved<br />
19 Spain 2.19 3 Improved<br />
20 Malaysia 2.30 3 Improved<br />
21 South Africa 2.37 3 Improved<br />
22 Italy 2.73 4 Improved<br />
23 Portugal 2.85 4 Improved<br />
24 Czech Republic 2.88 4 Improved<br />
25 Hungary 2.88 4 Improved<br />
26 Japan 3.08 3 Same<br />
27 Taiwan 3.1 N/A N/A<br />
28 Poland 3.12 4 Improved<br />
29 Mexico 3.14 4 Improved<br />
30 Israel 3.21 4 Improved<br />
31 Chile 3.24 5 Improved<br />
32 Greece 3.31 5 Improved<br />
33 Estonia 3.36 N/A N/A<br />
34 South Korea 3.36 3 Same<br />
35 Philippines 3.43 4 Improved<br />
36 Thailand 3.44 3 Same<br />
37 Brazil 3.62 4 Same<br />
38 Russia 3.64 5 Improved<br />
39 P.R. China 3.71 4 Same<br />
40 Argentina 3.76 5 Improved<br />
41 India 3.90 5 Improved<br />
42 Costa Rica 4.00 N/A N/A<br />
43 Colombia 4.10 5 Improved<br />
44 Indonesia 4.11 5 Improved<br />
45 United Arab Emirates (UAE) 4.31 N/A N/A<br />
46 Turkey 4.50 5 Same<br />
47 Vietnam 4.60 5 Same<br />
48 Egypt 4.67 5 Same<br />
49 Saudi Arabia 4.67 5 Same<br />
50 Romania 4.71 5 Same<br />
51 Ukraine 4.86 5 Same<br />
Source: <strong>Jones</strong> <strong>Lang</strong> <strong>LaSalle</strong>, <strong>LaSalle</strong> Investment Management<br />
<strong>Real</strong> <strong>Estate</strong> <strong>Transparency</strong><br />
Tier 1-5 (2001) 2001-<strong>2004</strong> Change<br />
Highly Transparent (Tier 1)<br />
Transparent (Tier 2)<br />
Semi- Transparent (Tier 3)<br />
Low Transparent (Tier 4)<br />
Opaque (Tier 5)<br />
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Technical Notes<br />
<strong>Transparency</strong> Survey<br />
Through our global network of researchers we conducted a real<br />
estate market transparency survey using a structured<br />
questionnaire guided by three regional coordinators. The<br />
<strong>Transparency</strong> Survey assessed the following five key attributes of<br />
real estate transparency:<br />
• Legal factors<br />
• Regulatory burden<br />
• Availability of information on market fundamentals<br />
• Listed vehicle financial disclosure and governance<br />
• Availability of investment performance indexes<br />
Questions were developed for each attribute to capture the<br />
perceptions of transparency. Every question had five well-defined<br />
choices: each assigned a score of 1 to 5, with “1” representing the<br />
highest level of transparency and “5” the lowest level of<br />
transparency. Each respondent was required to apply a sequential<br />
test from the lowest level of transparency upward. A<br />
country/market had to pass all aspects of an answer before it could<br />
be considered for the next higher tier. We worked upward until the<br />
country/market failed a test. The last test the country passed was<br />
the score given. Three regional coordinators reviewed the<br />
responses and carried out quality checks within each region. A<br />
project Steering Group reviewed results within and between<br />
regions to ensure there was a consistent interpretation of questions<br />
and answers.<br />
<strong>Transparency</strong> <strong>Index</strong><br />
A composite <strong>Index</strong> was compiled from the results of the<br />
<strong>Transparency</strong> Survey. The composite <strong>Index</strong> was calculated by using<br />
a neutral weighting. The composite scores range between 1 and 5.<br />
A country with a perfect 1.00 would be the country with the<br />
highest level of transparency. A country with a total of 5.00 would<br />
be a country with total opacity. Since small differences in the index<br />
scores are unlikely to be significant, we grouped countries in broad<br />
bands according to a normal distribution:<br />
• Tier 1: Highly Transparent<br />
• Tier 2: Transparent<br />
• Tier 3: Semi-Transparent<br />
• Tier 4: Low <strong>Transparency</strong><br />
• Tier 5: Opaque<br />
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Sub-Indices<br />
We also compiled sub-indices for each of the five major attributes:<br />
• Legal factors<br />
• Regulatory burden<br />
• Market fundamentals<br />
• Public company performance<br />
• Investment performance<br />
Each sub-index was calculated using the same distribution into<br />
tiers as the composite <strong>Index</strong>.<br />
Limitations<br />
There is only one <strong>Jones</strong> <strong>Lang</strong> <strong>LaSalle</strong>/<strong>LaSalle</strong> Investment<br />
Management <strong>Global</strong> <strong>Real</strong> <strong>Estate</strong> Market <strong>Transparency</strong> <strong>Index</strong>. It is a<br />
simple tool and generally should only be used in broad<br />
impressionistic ways.For particular assignments, it may be<br />
appropriate to apply different weights (e.g., for investment strategy<br />
work, or occupier services work). However, where this is the case,<br />
under no circumstances should the resulting work be described as<br />
the <strong>Jones</strong> <strong>Lang</strong> <strong>LaSalle</strong>/<strong>LaSalle</strong> Investment Management <strong>Global</strong><br />
<strong>Real</strong> <strong>Estate</strong> Market <strong>Transparency</strong> <strong>Index</strong>.<br />
The <strong>2004</strong> <strong>Global</strong> <strong>Real</strong> <strong>Estate</strong> <strong>Transparency</strong> <strong>Index</strong> is based on a new<br />
and improved questionnaire and methodology. While we believe<br />
the results are broadly consistent in terms of presentation (we have<br />
adopted the same tiers and cover broadly the same attributes), our<br />
<strong>2004</strong> <strong>Index</strong> is not strictly comparable to our 1999 or 2001 <strong>Index</strong>es.
Contributing Authors<br />
Timothy E. Bellman<br />
Regional Director, Asia Pacific Research and Strategy<br />
<strong>Jones</strong> <strong>Lang</strong> <strong>LaSalle</strong>, Hong Kong<br />
+852 2846 5278<br />
Timothy.Bellman@ap.joneslanglasalle.com<br />
Robin N. Goodchild<br />
European Director, Research and Strategy<br />
<strong>LaSalle</strong> Investment Management , London<br />
+44 (0)20 7852 4390<br />
Robin.Goodchild@eu.joneslanglasalle.com<br />
Jacques N. Gordon<br />
Director, <strong>Global</strong> Strategy<br />
<strong>LaSalle</strong> Investment Management, Chicago<br />
+1 312 228 2760<br />
Jacques.Gordon@am.joneslanglasalle.com<br />
Nick Leming<br />
National Director<br />
<strong>Jones</strong> <strong>Lang</strong> <strong>LaSalle</strong>, London<br />
+44 (0)20 7399 5377<br />
Nick.Leming@eu.joneslanglasalle.com<br />
Anthony Liu<br />
Analyst, Asia Pacific Research and Strategy<br />
<strong>Jones</strong> <strong>Lang</strong> <strong>LaSalle</strong>, Hong Kong<br />
+852 2846 5135<br />
Anthony.liu@ap.joneslanglasalle.com<br />
Elysia Wai Kuen Tse<br />
Associate, American Research and Strategy<br />
<strong>LaSalle</strong> Investment Management, Chicago<br />
+1 312 228 2311<br />
Elysia.Tse@am.joneslanglasalle.com<br />
Editor<br />
Tim Lynch<br />
Director, Marketing and Communications<br />
<strong>Jones</strong> <strong>Lang</strong> <strong>LaSalle</strong>, Chicago<br />
+1 312 228 2329<br />
Tim.Lynch@am.joneslanglasalle.com<br />
References<br />
1. Asia Pacific Research Team,“<strong>Transparency</strong> <strong>Index</strong>: Guidelines for<br />
Preparation and Interpretation,” <strong>Jones</strong> <strong>Lang</strong> <strong>LaSalle</strong>/<strong>LaSalle</strong><br />
Investment Management, Feb. 2002.<br />
2. Gelos R.G . and S-J. Wei,“<strong>Transparency</strong> and International<br />
Investor Behavior,” International Monetary Fund (IMF), 2002.<br />
3. Kaufmann D., A. Kraay and P. Zoido-Lobaton,“Governance<br />
Matters,” the World Bank, Oct. 1999.<br />
Copyright © <strong>Jones</strong> <strong>Lang</strong> <strong>LaSalle</strong> <strong>2004</strong>.<br />
All rights reserved. No part of the publication may be reproduced or used in any form or by any means, including photocopying, without the prior written permission of <strong>Jones</strong> <strong>Lang</strong> <strong>LaSalle</strong>. The<br />
document is based upon material in our possession or supplied to us, which we believe to be reliable. While every effort has been made to ensure its accuracy and completeness, we cannot offer any<br />
warranty that factual errors may not have occurred. We would like to be told of any such errors so that these can be put right. <strong>LaSalle</strong> Investment Management and <strong>Jones</strong> <strong>Lang</strong> <strong>LaSalle</strong> take no<br />
responsibility for any direct or indirect damage or loss suffered by reason of the inaccuracy or incorrectness of this report.<br />
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