This article is from the Australian Property Journal archive
HIGH levels of transparency in certain global property markets have not eliminated risks for investors and occupiers in the last two years during the Global Financial Crisis.
But these high transparent markets are likely to emerge out of the GFC sooner when compared to markets with lower transparency, according to the Jones Lang LaSalle 2010 Global Real Estate Transparency Index (GRETI) report.
JLL said the last two years shows free flows of information and consistent enforcement of local property laws did not prevent values from falling or produce better access to credit at a time when liquidity dried up.
For example, the collapse of Lehman Brothers was, in part, due to its sizeable and highly-leveraged CRE debt portfolio. These holdings lost significant value causing Lehman’s counterparties to question the investment bank’s solvency – ultimately leading to its demise. More recently, The Bank of Spain has announced that it will have to use nearly €100 billion to inject capital into and restructure the 45 Cajas, a banking sector that heavily financed both residential and commercial property during the credit bubble.
So, JLL said whether rising transparency may have contributed to higher levels of volatility is an open question.
“Debt and equity capital clearly flowed into both emerging and developed markets in an undisciplined fashion during the 2006-2008 timeframe. As the world stock markets illustrate, growing access to data does not eliminate volatility or prevent investors from making errors of judgement,”
But the report said the real value of transparency should become evident when comparing how quickly markets are able to open up again after a financial crisis.
“The recapitalisation of real estate in many countries is being helped by the free flow of information and the protection of property rights. However, these rights apply to both the equity and the debt sides in the capital structure of real estate, and sorting them out in a complex, securitised capital structure will take time,” the report said.
But JLL said it is apparent that markets with high or rising levels of transparency are going through the restructuring process faster than those with falling levels of transparency.
“In the future, regulators will rightfully emphasise the importance of greater disclosure in order to gauge the credit-worthiness of commercial real estate and to evaluate the sector’s ability to carry debt.
“As these steps are put in place, we expect the transparency of real estate debt, and hence all real estate capital markets, to rise. However, we do not expect the inherent cyclicality of real estate to ever be eliminated. Higher transparency moves real estate from the world of uncertainty (unknown hazards and outcomes) closer to the world of risk (known hazards, probabilistic outcomes),”
The report continues to champion for higher transparency, because it believes occupiers will benefit when landlord defaults are resolved quickly and efficiently.
It also said investors will benefit when bankruptcy laws are administered fairly and efficiently.
“This process is unfolding now. In two years time, when our next Index is released, we will be able to report about the role of transparency in the aftermath of a financial crisis,” JLL concluded.
Australian Property Journal
