Property Markets, the Rule of Law, and Real Estate Investment

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Real estate investors are attracted to the United States because its strong legal system protects their investment and because of the easy availability of accurate information. (Photo: Wikimedia Commons)

I recently participated in George Washington University’s 2015 Global Real Estate Conference in New York. Having been invited to share CIPE’s work developing the International Property Markets Scorecard at the International Real Estate Federation’s (FIABCI-USA) annual meeting, which dove-tailed with the conference, I took the opportunity to educate myself on the current happenings in the real estate field and see how CIPE’s work might resonate with the professionals most connected to international investment in property.

Headliners at the conference included international representatives from such prominent companies as Morgan Stanley, CBRE, Knight Frank, and Cushman & Wakefield. Mostly I learned a great deal of “inside baseball” language and can now boast a broader vocabulary, but there was another theme that kept coming up. Whether talking about mitigating risk, conducting valuation of property, or trying to determining capitalization rates, it all came down to the need for reliable information and a stable environment that allows for confident investing.

Every year the Association of Foreign Investors in Real Estate (AFIRE) conducts a survey of its members. As in years before, the United States ranked as the most stable market, outstripping the runner-up by 55 percentage points.  Because of this, AFIRE members also indicated that the United States is where they intend to grow their portfolios the most.

So the question then is why the United States has maintained its dominance as the most stable market, and as a result, drawn investment from countries around the world.  The answer is not that there is minimal risk in the US, but that there exists an institutional framework that allows investors to manage that risk and make well informed calculations. Property rights and a sound rule of law offer guarantees to investors that their capital will be safe. Reasonable regulation creates a nimble environment that gives investment in real estate a sense of liquidity. There is also a wide range of market data available backed up by stringent standards, which gives investors the confidence they need to make decisions related to the management of their portfolios.

There are a whole host of other factors that come into play, but what is important is that these institutions exist and instill confidence in investors. If other countries want to begin to increase their potential and become more stable, they must strive for legal and regulatory reform and construct an institutional framework that allows property markets to function.  This is at the heart of CIPE’s International Property Market Scorecard. By conducting an in-depth analysis of an individual country, the scorecard can identify weaknesses and point the way forward for reform.

These institutions will not only make foreign investment more attractive, but will also create an environment in which citizens have a stake in the system and can leverage their assets to generate wealth. With wealth generation comes economic development and with development comes more investment. Fixing property markets has the ability to initiate a cycle of growth that feeds off itself and should be a priority for any developing country.

Frank Stroker is an Assistant Program Officer for Global Programs at CIPE.

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