December  2008 VOL. 2

Seeing Clearly: Cross-border investment drives transparency

With commercial property investors around the world feeling anxious and uncertain about real estate values, credit availability, and the weak economy, transparency is even more important today than it has been in the past. Fortunately, more and more countries are increasingly transparent. They're making it easier to do business by facilitating the availability and accuracy of market information and cracking down on corruption.

Guy Langford, a principal with Deloitte, says the recent improvements in transparency have been driven by globalization and cross-border investment. "Those countries that have seen steady improvement in transparency have been beneficiaries of investment," he points out. "The question is what comes first: the capital or the transparency? Many emerging economies have been making strides to address transparency because they want to attract foreign investment."

But investors face a big challenge when it comes to defining transparency and measuring it. Some well-known organizations such as Transparency International (TI) equate high transparency with low levels of corruption. (TI defines corruption as "the misuse of entrusted power for private gain").

Each year TI produces the Corruption Perceptions Index (CPI), which measures the perceived levels of public-sector corruption in a given country. The Index draws on different expert and business surveys, and the 2008 CPI scores 180 countries on a scale from zero (highly corrupt) to 10 (highly clean). Denmark, New Zealand and Sweden share the highest score at 9.3, followed immediately by Singapore at 9.2. Bringing up the rear is Somalia at 1.0, slightly trailing Iraq and Myanmar at 1.3 and Haiti at 1.4.

But LaSalle Investment Management and Jones Lang LaSalle, which recently introduced its Global Real Estate Transparency Index 2008, take a broad approach to transparency that goes beyond equating low transparency with corruption. In fact, the presence or absence of corruption is only one component of transparency, according to Jacques Gordon, international director and global strategist at LaSalle Investment Management.

Other components include consistently applied and interpreted laws and regulations, the respect of private property rights, the access to and time series of investment performance indices and market fundamentals data, and ethical standards of professionals in the commercial real estate market. In comparison to the CPI, the Index produced by LaSalle Investment Management and Jones Lang LaSalle ranks Canada as the most transparent country, followed by Australia and the United States. Neither Denmark nor Singapore crack the top 10 (see chart below).

"As a concept, transparency in the world of real estate is extremely important both for investors and occupiers," Gordon says. "Transparency provides clarity and is essential to being able to manage all the idiosyncrasies of a market. It is not impossible to invest in countries with low transparency, but it's a lot more difficult."

However, it's important to note that transparency does not eliminate risk, so investors can't let down their guard too much and make assumptions based solely on where a country ranks on transparency, Gordon says. He adds: "People put up with the lack of transparency because they're looking for higher returns, but that doesn't mean that transparent markets cannot provide good returns too."

Supporting transparency  

LaSalle Investment Management and Jones Lang LaSalle have been evaluating real estate market transparency since 1999. Since then, a number of countries have made significant strides in transparency, but transparency is not something that can be achieved overnight, experts note. Nor is it something that can flourish without support from the government and a stable political environment.  

Venezuela and Russia are examples of two countries that rank low on the transparency scale because of issues related to their governments and political environments. "Russia and Venezuela lack transparency in very obvious ways, not just as it relates to commercial real estate, says Steven Williams, former president of RICS Americas, the New York-based division of the Royal Institution of Chartered Surveyors. "In these countries, courts won't uphold the laws even if there are laws on the books."

In fact, Venezuela is moving in the wrong direction when it comes to transparency. While other countries in Latin America are becoming more transparent – Mexico and Brazil, for example – Venezuela is becoming less transparent, according to the Global Real Estate Transparency Index 2008. Out of all the countries evaluated in the Index, only Venezuela posted a lower transparency score this year compared with the 2006 Index, principally due to changes in government regulations and new taxation policies targeting foreign investors

In Venezuela's case, much of the decreased transparency can be blamed on the country's government, says Pedro Azcue, CEO of Jones Lang LaSalle's Latin American operations. Under the leadership of President Hugo Chavez, Venezuela's regulatory environment is in constant flux and foreign investors are afraid to invest in a country where the "rug can be pulled out from under them at any time," says one expert.   

"If you're dealing with a highly transparent country, even if the rules are complex, they'll be administered fairly, rather than enforced sporadically," Gordon says.

Similarly, Russia's recent political environment has created tensions for foreign investors. Transparency experts point to the country's recent invasion of Georgia as an example of regional instability. Moreover, there are worries about corruption throughout various levels of Russia's government.  

The commitment governments have to transparency and their efforts to foster it (or prevent it) is important to most investors. Behringer Harvard, for example, carefully evaluates the political situation and government regulations related to transparency before investing in foreign countries, says chief administrative officer Jason Mattox.

In 2006, the Dallas-based REIT launched an investment venture with Hamburg, Germany-based HCI Capital AG to invest in the UK, Germany, and the Netherlands. "We chose those countries because we viewed the government as stable and the currency situation was one we could understand," Mattox says.

Most recently, Behringer Harvard acquired seven additional assets in Central Europe via Wenceslas Behringer Ltd., a joint venture between Behringer Harvard Opportunity REIT I, Inc. and St. Wenceslas Property Fund. The new acquisitions include a retail property in Hungary, five retail properties in the Czech Republic and a Czech logistics facility.

Interestingly, many experts consider the Czech Republic, along with several former Eastern Bloc countries, to be a model for countries trying to establish a culture of transparency and create a transparent commercial property market. Romania, Ukraine, Poland, and the Czech Republic are among the countries that showed the largest improvements in transparency, according to the Jones Lang LaSalle/LaSalle Investment Management Index.

Availability of market information  

Experts say transparent markets have one main thing in common – available and accurate information. The more information that is available to investors, the more transparent the market, says Lisette van Doorn, CEO of INREV, the European Association for Investors in Non-listed Real Estate Vehicles. Moreover, market data and research are not only more readily available in transparent markets, they're also less expensive.

"Information is the most crucial element of transparency when it comes to investing in real estate," van Doorn says. "It becomes even more important when investors need to be able to compare their real estate allocations with other allocations."

Across the globe, however, commercial property is still far more opaque than other investments such as stocks and bonds, where minute-by-minute transactional data allows rapid decision-making. "The actual operating performance of the underlying asset and its ability to generate a net return to the investment is often cloaked in secrecy," says Williams, who has been speaking with the United Nations about encouraging more transparency in emerging markets. "This opaqueness has caused a lot of investors to lose billions of dollars because they've put money into investments they didn't understand."

Michael Acton, managing director at Boston-based AEW Capital Management LP, says market knowledge makes asset pricing more efficient. "If investors have access to all the information they can reach similar opinions," he explains. "The less transparent the market, the more difference there will be in the valuation and pricing of an asset."

Historically, real estate markets have been dominated by private players who saw market research as a competitive advantage – investors with information believed they could cut a better deal over investors who lacked information. That attitude has largely changed, although there are still countries and investors who prefer that markets remain opaque to further their own objectives, Acton notes.

Van Doorn believes transparency in commercial real estate is not an option, but a necessity. "After this recent financial crisis, if real estate is not as transparent as other asset classes, it will not survive as an institutional investment," she contends. "If the industry wants to avoid a scenario where only select investors are interested in real estate, transparency is a necessity."