Asian property markets need more transparency.
Singapore, Hong Kong and Japan are home to some of the world's richest and most dynamic real estate markets. But they all lag behind countries in Europe and North America when it comes to transparency. Most of the rest of Asia, including high-growth markets such as China and India, is still behind.
Global investors, including financial institutions, are looking for higher standards of transparency in real estate, in everything from transaction costs to environmental and safety standards. Asia has made progress in recent years but needs to do more if it is to rank among the world's top rated markets, in terms of standards.
In the latest edition of JLL's Global Real Estate Transparency Index, which ranks markets on legal, regulatory, environmental and financial criteria, Singapore, Hong Kong and Japan stand on the cusp of the Highly Transparent group, the top category. They are ranked 12th, 13th and 14th respectively.
The top 10 spots in the Highly Transparent category are occupied by the likes of the U.K. (first), U.S. and Canada (taking third and fifth place) and France and Germany (in fourth and eighth position). Australia and New Zealand are the only two Asia-Pacific countries in the top 10 in second and seventh place.
The Global Real Estate Transparency Index is one of our most closely watched and anticipated pieces of research. Cities, governments and businesses around the world understand that market transparency has a direct correlation with investment and corporate activity as it allows international businesses to operate and make decisions with confidence. It gives the legal and regulatory frameworks that provide basic property right, increases accountability and quality of governance for a productive business environment. Lastly, it builds trust in citizens to make informed, sensible decisions about the buildings in which they live and work.
We have been tracking the progress of real estate transparency since 1998, based on a combination of quantitative market data and information covering six broad topic areas: Investment Performance Measurement, Market Fundamentals Data, Governance of Listed Vehicles, Regulatory and Legal Environment, Transaction Processes and Sustainability Transparency. This year, we analyzed 186 factors to drill deeper into where markets differ -- for instance, the extent of investor activity and market data in specific "alternative" property sectors from senior housing to data centers.
Markets are placed in one of five categories -- highly transparent, transparent, semitransparent, low transparency, and opaque.
In the last 20 years, Asia has made significant progress in terms of its transparency: China and India entered the Index in the Low Transparency and Opaque tiers respectively in 1998, today they are at the top end of the Semi-Transparent tier, in 33rd and 35th position. Myanmar, which first entered the index in the opaque category in 2014, registered the biggest leap globally this time. It moved up 15 places from 2016 to join the Low Transparency group, taking the 73rd spot, as the country continues to open its economy and increasing corporate activity translates into greater market intelligence.
While Asia's dynamic developing economies continue to make progress and move up the global rankings, some of the region's most mature real estate markets remain outside the Highly Transparent group, behind their global peers. The two main areas where Singapore, Hong Kong and Japan currently underperform are corporate governance and transparency of tenants' costs.
Corporate governance applies to listed vehicles and includes the rules, practices and processes by which a company is directed and controlled. In Asia, there tends to be less detailed disclosure of operating and financial metrics and more limited shareholder power due to greater management control and the influence of founders and parent companies.
The transparency of tenants' costs covers the occupier transaction process and occupier services. Tenants do not always have full visibility of service charges and occupational costs, and have limited powers to audit their landlord's accounts and negotiate discrepancies.
The pursuit of higher real estate transparency is greater than before. The top 11 countries account for almost 75% of total direct real estate investment into the 100 markets covered by the index.
Asian markets will need to accelerate progress on transparency to catch up with their global counterparts and get a bigger slice of the investment pie as industry expectations and standards continue to rise.
When cities ignore improving real estate transparency, they risk alienating global investors. They would also appear out of touch against the changing global socioeconomic climate where governments and businesses demand for greater integrity and clarity, and citizens are seeking similar assurances. Developments, such as revelations from the Panama and Paradise Papers, in which thousands of hidden offshore arrangements were disclosed, have put greater focus on property ownership transparency while the increasing importance of new standards such as Environmental, Social and Governance (ESG) criteria often challenge established market practices.
The impact of proptech, which involves new levels of digital technology in real estate, will further create opportunities to raise transparency in markets where traditional real estate data sources are lacking or less than forthcoming as decision-making processes are automated and efficiency is improved.
In Asia, especially Singapore, Hong Kong and Japan, these changes can help markets to enter the Highly Transparent tier. These three economies already possess the infrastructure to take advantage of real estate's technological transformation to produce new and more easily accessible data for greater transparency.
All three have strong smart city tech initiatives. Their respective governments are encouraging the use of technology to boost the industry, whether it is the rollout of smart utility meters in buildings and households across Japan or Singapore's recent introduction of a Real Estate Industry Transformation Map, which promises to improve efficiencies in the market, from facilities management to construction, in terms of access, communication, billing and reporting.
Asia is also a very tech-savvy region with more than 2 billion Internet users in 2017, according to a report by Internet World Stats. We can expect more countries here -- in particular, China, India, Indonesia and Thailand -- to embrace pioneering technologies such as smart building solutions and sophisticated property platforms that will help improve real estate transparency.
With occupiers and investors putting greater emphasis on issues such as workplace safety and wellness, cybersecurity and data protection, sustainability and legal and financial disclosure, Asia needs to understand where future challenges are likely to lie to ensure its markets are ready to respond to new demands.
Rather than wait for these forces to disrupt current market dynamics, Asia can take the initiative to gain a competitive edge and fast-track its progress to join the world's most transparent real estate markets.
Anthony Couse is the Asia Pacific CEO at JLL.
Adapted from Nikkei Asian Review August 17 2018