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August 11, 2016

Recent research shows transparency in global real estate is improving, but what does the future hold?

Real estate transparency continues to advance across the globe, with two-thirds of markets showing progress over the past two years.

Despite this improvement, the ‘Panama Papers’ scandal – in which more than 11 million documents detailing the transactions of offshore entities were leaked –has brought some uncertainty to the issue of transparency, but also the potential for a silver lining.

“The Panama Papers have put the topic of transparency firmly in the spotlight, highlighting that issues exist even in the ‘Highly Transparent’ markets, such as London, New York and Sydney,” says JLL’s Director of Global Research, Jeremy Kelly and author of the firm’s Global Real Estate Transparency report.

“They’ve already galvanised an international response and garnered commitments from a number of countries – if concrete steps are taken, this can only be positive in the long-term.”
It is hoped this international response will help to further improve transparency in global real estate markets, to the benefit of investors.

The UK government announced a series of steps to strengthen transparency both nationally and globally, and is the first country in the G20 to commit to a central public database that discloses the beneficial ownership information of companies owning and purchasing property in the UK.

Australia and the United States have also announced moves to improve transparency, including within the real estate sector. The United States will pilot transparency initiatives in two of the nation’s major destinations for global wealth, Manhattan and Miami, requiring shell companies involved in real estate cash transactions to disclose their beneficial ownership.

A further 10 countries have reportedly committed to steps towards beneficial ownership transparency in property – including France, Italy, Mexico, Nigeria and Spain.
“We believe that 2016 marks a step change in real estate transparency,” Kelly says. “In the wake of the Panama Papers, more countries will undoubtedly join the growing international movement insisting on disclosure of beneficial ownership.”

Another important factor encouraging a positive outlook for transparency improvements is the increasing sophistication of technology. As Kelly explains, technology allows a more granular assessment of real estate market patterns – databases tracking physical assets, investment transactions, tenants, leases and values continue to expand, providing more frequently updated and real-time information than ever before. Importantly, a culture of ‘open data’ is emerging.

“The impact of new ‘prop-tech’ innovations has largely been confined to the ‘Highly Transparent’ markets, such as the United States, the UK, Germany and France,” Kelly says. “These are largely market-led innovations which use technology to improve the transaction process, create more efficient online databases and allow more flexible use of real estate.”

“But there are government-led initiatives in emerging markets which involve moving records online, digitising information and improving access. In the medium-term, countries may be able to leapfrog traditional evolution by using technology to fast-track towards best practice.”

Another major factor set to influence the rise of transparency is the sheer weight of capital flowing into global real estate markets.

“Real estate is becoming an ever-more popular asset class for a broad array of investors, and within the next decade we could see annual direct investment into commercial real estate assets hitting in excess of US$1 trillion across the globe,” Kelly says. “Definitions of what is an acceptable level of transparency will be set even higher as capital allocations to real estate increase.”

“For real estate to compete effectively as an asset class, it needs to raise the bar even further for the highest level of transparency,” Kelly says. “As we look towards GRETI 2018, there may be merit in considering a new category of ‘Hyper-Transparency’ for which those currently in the top tier may not yet qualify.”

But in order to meet such a requirement, “improving performance measurement, coverage of alternative sectors, wider innovation in the commercial real estate industry and stronger moves on beneficial ownership disclosure and anti-money laundering are all required,” Kelly says. “The question is whether the likes of the UK and Australia will break away from the pack to form this new tier, or whether France and Germany will continue to close the gap.”

In summary, Kelly says changes to transparency are incremental – they require much time and effort to implement, and positive results take time to reach fruition.

“The pace of global improvement in transparency is slow – but this is the nature of the game,” he says. “It is likely that transparency will continue to improve at a relatively slow pace. Markets at the top of the pile will push the standards even higher, while the dynamic ‘Semi-Transparent’ markets will continue their ascent. Anti-money laundering and beneficial ownership will be important topics, while innovations in technology may cause a paradigm shift and and create new ways of achieving greater transparency.”

Click here to view the full Global Real Estate Transparancy report

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Jeremy Kelly

Global Research Director, JLL

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