4th April 2017
By: Pranav Sethuraman, Analyst, Capital Markets Research
David Barnett, Research Analyst, Project and Development Services
The latest update to JLL's Global Real Estate Transparency Index (GRETI 2016) comes at a time when the importance of transparency in aiding investment activity continues to be underscored. The clear relationship between an open and transparent market and higher investment activity is one which has been thoroughly investigated and confirmed – with the ten highly transparent countries accounting for 75% of all investment volumes. As countries make progress in improving transparency, investors and occupiers are demanding more accurate, frequent and granular market data and performance measurement. Even the most transparent markets, such as the UK, U.S. and Australia, are striving to make improvements in the way real estate data is collected and reported as part of the effort to raise transparency standards.
In many other parts of the world, major efforts have been made to tackle corruption, strengthen regulatory standards, and improve the availability and quality of market fundamentals data in order to further real estate transparency. These efforts have been underway for some time in many jurisdictions around the world, though they are now juxtaposed against a backdrop of increasingly vocal anti-globalization sentiment. The arrival of the Trump Administration and the vote for Brexit has highlighted a shift in attitudes toward globalization. These events symbolize a rejection of globalization and scepticism toward global and regional trade among advanced market citizenries. However, an examination of real estate transparency and capital flows across multiple markets illustrate that governments have still been willing to reframe their approach to attract investment from abroad. One of the rising stars over the last years has been Central and Eastern Europe (CEE), which has seen a marked improvement in its real estate transparency and higher foreign investment since the previous GRETI.
The 2016 GRETI contains scores for 109 markets based on the most comprehensive country comparisons of data availability, governance, transaction processes, property rights, and the regulatory/legal environment around the world. Of these markets nine are CEE countries: Bulgaria, Croatia, Czech Republic, Hungary, Poland, Romania, Serbia, Slovakia and Slovenia. Just two of these nine countries saw their overall global ranking fall in 2016: Croatia and Hungary both slipped by one spot to 47th and 26th respectively. Standouts from CEE include Poland, which ranks 13th overall and is on the verge of being the first 'Highly Transparent' market in the region, as well as Bulgaria, Serbia, and Slovenia, each of which made double-digit jumps in the 2016 rankings.
CEE countries made the most progress in transparency by improving their regulatory and legal regimes as well as standardizing the real estate transaction process. These categories are fundamentally important to real estate investors as they directly impact how predictably and smoothly assets can be bought or sold. Only Bulgaria does not rank in the top third of all countries for both categories, reaffirming the progress that has been made by governments to help investors conduct business in an efficient manner. Specifically, CEE countries score exceptionally well for the consistency and predictability of their taxation regimes, in addition to how effectively they enforce contracts. Furthermore, they offer investors low transaction and service costs while maintaining high professional standards for agents and providing quality facilities and project management services. Together, these transparency factors make CEE an attractive geography for real estate investment.
The effects of improvements in real estate transparency can partly be seen in the level of investment activity in CEE. Last year saw the highest level of investment activity on record, with more than US$13.5 billion invested into the region. Foreign investment also reached its cyclical peak, with nearly US$11 billion in assets bought by cross-border purchasers. Over 80% of this cross-border investment went into the office and retail sectors, which saw US$4.4 billion and US$3.8 billion respectively. Strong GDP growth, rising household income and robust retail sales growth make these two asset classes especially attractive. While many of the developed economies in Europe still have not fully recovered from the Global Financial and Eurozone crises, most of the countries of CEE were either minimally affected, or have since shrugged off any negative externalities. The dynamism of their economies and sturdy growth prospects are a key driver of what makes their real estate markets so appealing.
The most striking example of the dramatic increase in cross-border investment into the region can be found in the level of South African acquisitions. Last year, South African investors spent over US$3.1 billion in the region, becoming the most active foreign purchasers. In one of the most notable transactions of 2016, Redefine Property, a South African REIT, purchased a 75% stake in the 'Echo Commercial Platform', which included 10 retail and 6 office assets located throughout Poland, for just over US$1 billion. The deal was the largest recorded transaction in Central and Eastern Europe and the single largest cross-border purchase by a South African investor to date. Singapore's sovereign wealth fund, GIC, also made a significant investment into the region by acquiring P3 Logistics parks, a Czech-based owner and operator of European logistics assets. The US$2.7 billion acquisition, which also includes assets in France, Germany, and Italy, gives GIC immediate scale in CEE, with over 2.3 million square metres of logistics space in Bulgaria, Czech Republic, Poland, Romania, Serbia and Slovakia. These two 'mega-deals' by foreign investors are two of the largest examples of growing foreign demand for CEE real estate; their size and scale exemplify the necessary progress that has been made in transparency in order to attract large investments from highly demanding and credible global investors.
It is clear that increased transparency is beneficial to larger capital allocations to real estate. Improvements to transparency made by countries, notably within CEE, have helped develop and mature real estate markets across the region, boosting their appeal to global investors. While these improvements bolster confidence among investors and occupiers alike, they remain susceptible to drastic shifts in the domestic political environment. As such, careful monitoring of any related shifts in real estate transparency within the region's markets remains critical.