New regulations have been improving the transparency of global real estate, a boon for investors increasingly branching out into new markets.
On paper, the progress looks promising.
Countries from Colombia to South Korea have introduced policies aimed at reducing red tape, curbing corruption and improving legal processes on everything from anti-money laundering, to sustainability and land-use planning.
Canada is targeting sustainability. Thailand is taking steps to upgrade its property taxation system and digitize its land registry. Macau has cracked down on money laundering.
The efforts have followed mounting concerns among investors and the public after the Panama Papers and Paradise Papers leaks, which exposed the murkier side of the property sector. The UK’s proposed beneficial ownership register and the European Union’s Fifth Anti-Money Laundering Directive were explicit reactions to the revelations.
But the true benefit of these regulations is more nuanced, because in some cases, enforcement has been falling short, according to JLL and LaSalle’s biannual 2018 Global Transparency Index.
Mind the enforcement gap
Of the 100 countries surveyed for the index, 85 registered an overall improvement from two years ago.
Yet not all the new policies are being put into practice, creating a potential minefield for investors, says Jeremy Kelly, Global Research Director, JLL.
“There is a significant disconnect between regulation and enforcement in some markets,” he says.
Semi-transparent markets generally show the widest enforcement gaps. Brazil, Argentina, Kenya, China and Greece suffer notable enforcement shortfalls, the index shows.
“China has made progress on enforcement in some areas, such as greater consistency in tax collection efforts, but still has work to do in others,” says Kelly.
Across all markets, enforcement is weakest in ensuring the availability and quality of land registry information, land-use planning regulation, and legal processes.
In Brazil, Argentina and Greece, a practice of under-reporting property sale prices has been noted as a tax-avoidance tactic, resulting in inaccurate records.
“While some transparency issues are a result of outright corruption, others are a symptom of “selective enforcement”, whereby the norm may be to ignore legal requirements, until political pressure is applied.” says Jacques Gordon, Global Strategist for LaSalle Investment Management.
In China, for example, it’s become difficult to predict land-use in some provinces because of recent planning regulation changes around redevelopment and revitalization projects. Taxation and land-use planning is run “by the book” with high levels of transparency in some provinces, but not in others. This situation is also common in federated countries like Brazil, Mexico, the U.S. and Canada where local authorities take very different approaches to enforcing zoning codes and organizing a fair assessment system for property taxation.
In Kenya, enforcement responsibility has been shifted from the national government to local county governments, causing confusion.
While many markets have made steady advancements in transparency in recent years, they “need to address issues of enforcement if they are to progress,” says Gordon.
As institutional investors increase their allocations to real estate, pressure is mounting on governments worldwide to not only introduce new regulations, but to implement them.
India is one market that has made impressive progress on this front.
Private equity investment into the nation’s real estate sector has increased three-fold since 2014 and the introduction of the Real Estate (Regulation and Development) Act, or RERA, in 2016 is expected to further boost its transparency ranking.
“Reforms in bankruptcy policy, cracking down on pseudo-ownership of properties, and consistent measures to improve the ease of doing business, have significantly boosted the confidence and sentiments of buyers and investors alike,” says Ramesh Nair, India Country Head and CEO at JLL.
The 11 markets categorized as ‘Highly Transparent’ in the JLL index attracted 75 percent of global commercial real estate investment over the last five years.
It’s clear that “transparency is critical to the operation of efficient markets,” says Richard Bloxam, Global Head of Capital Markets, JLL.
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