Tag Archives: property markets

Rebalancing China’s Economy: More than Just Numbers

Customers at a supermarket in China. (Photo: BusinessForum China)

Over the past thirty years, China’s GDP has soared from $140 billion to nearly $6 trillion. This phenomenal growth has been sustained at double-digit rates largely through a reliance on exports from heavy industry.  Recently however, slow growth in the US and a renewed crisis in Euro zone countries have shown China that it cannot count on exports forever.  The new leadership, headed by Xi Jinping, must now oversee a transition to an economy that relies on domestic consumption over export based industrial production.

With the world’s largest population one would think domestic consumption should not be difficult to achieve.  Wang Shiling, who runs a mall in Linyi, perhaps put it best when he said, “people still need to consume living necessities. Toothpaste, notebooks, basins, you name it. Don’t forget that China has 1.3 billion people!” Even with such a large population though, domestic consumption only constitutes about 37% of China’s economy (the rate in developed countries is closer to 70%).

Economic indicators also suggest that China is on the path to rebalancing the economy.  Since 2009, wages have been on the rise while government stimulus packages have focused on infrastructure and construction, which not only employ workers but aid the movement of goods and services throughout the country.

For all this though, China still faces many barriers to growing domestic consumption.  The average Chinese may be earning more than before and stringent restrictions on the financial sector have recently been (ever so slightly) relaxed, but rebalancing the economy is about more than salaries and interest rates.  In order to spur wider consumption, the government must reform current policies to encourage citizens to spend more and  local businesses to expand productivity.

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Keeping Score

The Hermitage, St. Petersburg, Russia. (Photo: Author)

I am 38,000 feet over Hartford, CT on my way home from St. Petersburg, Russia and the International Real Estate Federation (FIABCI) World Congress. This time of year everyone is asking, “Did you catch the game last night?” Depending on your city and allegiances this can be a tricky question. Are we talking about hockey, basketball, or baseball (soccer anyone)? At the many bars that rely on the income from sports fans during these times of year, everyone wants to know the score. Conversation, catching the bartender’s eye and other distractions can be resolved with a quick glance at one of the many screens to check the score.

Who’s ahead in stabilizing their real estate and capital markets after the global financial crisis? Who’s attracting more foreign investment as the European markets continue to struggle? Which countries will be the next BRICs? Who’s keeping score?

For the last several years CIPE and the International Real Property Foundation (IRPF) have been developing the International Property Market Scorecard – a methodology to measure the strength and effectiveness of property market support institutions. You have to know the score to know who’s winning the game. The global financial crisis proved there was no agreed upon regulation for global property markets. No one was keeping score. Rather than a regulated conference where everyone agrees to play by the same rules and the best players challenge each other to win the cup, we had a vast shadow gambling system where insiders chopped up risk and played the odds until finally the system was tapped out.

The Scorecard has proved to be a valuable tool as we come out of the great recession and capital and risk again start to flow across borders. Scorecard projects were completed last year in Armenia, China, Kenya, the Philippines and Russia. Among the key issues in dealing with property market risk in the countries evaluated thus far:

  • Often legal protection does not match implementation. While property rights may be protected in the constitution and laws and regulations may be in place, there is often a wide gap between the text of the law and what actually happens in property markets.
  • Tenants’ rights are of particular concern. Most people either rent their apartment or small commercial property. Standard commercial leases are rare and many people do not have an understanding of their rights to negotiate terms or demand compensation when their rights are violated.
  • Even in developed markets, there is a blurred line between formal and informal sectors. Profits go unreported and sales prices are distorted to avoid taxation.
  • Corruption remains prevalent in property transactions. Connected insiders continue to win bids and extra payments are demanded at every step in the transaction.
  • Even in systems where property rights are fairly strong, most people still have difficulty in accessing credit. In the developing countries interest rates remain high and distrust in the system prevents many people from participating in formal bank credit. Unfortunately, many end up paying more and still losing their property in informal lending schemes.
  • Finally, weak judiciary and dispute resolution procedures prevent the efficient transfer of property when conflicts arise. Properties sit vacant or tenants continue to occupy parcels without payment as blight sets in and the downward cycle exacerbates.

Work continues in these countries. In Russia I saw firsthand how the markets are functioning and the expectations of both local and international investors for the future of this BRIC country. Russian buyers are scooping up multi-million dollar New York apartments. What does this mean for markets in the developed world as real estate investment starts to flow not to, but from the BRIC countries?

And what does it mean when the developed world has lost touch with the ownership and risk associated with trillions of dollars worth of asset-less paper – derivatives once connected to a property asset, but now floating on various suspicious large bank and national balance sheets. As Hernando de Soto pointed out in the keynote at the FIABCI World Congress, there are also trillions of dollars of paper-less assets in the developing world – assets not yet formalized in the system.

The solution to our current crises lies in a rebalancing of the world’s property markets – a reconnection to the core elements that make property markets work, agreed upon standard rules of play, and the building and strengthening of a wide array of institutions that keep score and referee when a player steps out of bounds or takes unfair advantage.

The Scorecard can be a valuable tool in this process – first as an education tool. By completing a Scorecard, key stakeholders in a country can understand 54 interconnected indicators for property market strength. Once understood and benchmarked, transparency advocates can focus efforts on clear policy objectives that can make the greatest impact in the shortest time. Most importantly, as Scorecards are completed for more and more countries, patterns and best practices will emerge that can facilitate agreement on the crucial international rules of play.

On the last night in St. Petersburg, I had dinner with a new colleague from Beirut. The restaurant was in a hidden courtyard behind a music hall where the music flowed gratis out of the windows. We discussed impressions of the Congress and enjoyed the camaraderie of a shared vision for the future. On the walk back to the hotel, we stopped and took photos along Nevsky Prospect at night. Oh, and my friend used his smart phone to check a soccer score.

Bill Endsley is a principal at World Citizen Consulting and the Secretary-General of FIABCI-USA.

Why local institutions matter to international property markets

Participants at the 2012 FIABCI-USA International Symposium (Photo: FIABCI-USA)

Property rights are one of the most fundamental building blocks of market economies – and development. At the most basic level, they provide secure possession of essentials that all of us need to survive: a physical shelter, means to earn a living, etc. But property rights matter in other, broader ways as well. They motivate entrepreneurial spirit of individuals toward innovation; they make assets fungible to foster investment; and, when accompanied by an institutional framework that fosters the rule of law, they enable impersonal exchange which is the cornerstone of a modern market economy.

Yet, in many developing countries, that institutional framework is either missing or not implemented, resulting in a situation where ordinary citizens “have houses but not titles; crops but not deeds; businesses but not statutes of incorporation,” as Hernando de Soto put it in his book The Mystery of Capital. Those conditions affect mostly the poor and those in the informal sector but are of significance also to larger businesses and especially to international real estate professionals whose job it is to advise their clients on property-related transactions in foreign countries. Are property rights protected? Are contracts respected? Are relevant laws and regulations enforced? Are the courts independent? Those are all vital questions for anyone contemplating buying or selling property across borders.

Recently, FIABCI-USA’s International Real Estate Symposium in Miami, Florida gathered over 60 representatives of the international real estate industry from the U.S. as well as Colombia, Dominican Republic, the Netherlands, Nigeria, Panama, Spain, Turkey, and Venezuela. Representatives from international organizations and U.S. government also attended. The conference’s theme was “The Americas Enhanced: Connections for International Market Development” and I had the pleasure of presenting CIPE’s work on the International Property Markets Scorecard at that forum.

The Scorecard illustrates linkages between key property market elements: property rights, access to credit, effective governance, rational dispute resolution, financial transparency, and appropriate regulation. Importantly, it also helps identify country-specific gaps where some of those institutions remain weak. The participants, many of whom have international experience as FIABCI members outside of the U.S., agreed that such weaknesses greatly affect their daily work.

FIABCI (International Real Estate Federation) was founded in 1948 and is a global real estate network. Its membership embraces all categories of the property industry as well as major universities with real estate departments, public sector organizations, and multinational corporations. FIABCI enjoys Non-Governmental Consultative Status with the Economic and Social Council (ECOSOC) of the United Nations and as one of its core values advocates that property rights are fundamental to economic systems. FIABCI-USA is the Federation’s chapter in the U.S. and this symposium provided an opportunity to advance the organization’s global values and goals when it comes to improving property rights and property market institutions in countries aruond the world.

To quote de Soto again, “the challenge these countries face is (…) whether they can understand the legal institutions and summon the political will necessary to build a property system that is easily accessible to the poor.” Many continue to struggle with that task. Indeed, as fellow presenter Robin Rajack from the World Bank noted, property markets in many countries are the “industry of ambiguity” where there is a vested interest in keeping things obscure. But if those markets can be reformed to inject more transparency and accountability in property transactions and institutions that facilitate them, there are great economic gains to be made for local entrepreneurs and international real estate investors alike.

Building Institutions that Make Property Markets Work

Property rights scorecard

Hernando de Soto famously asked: although cities across the developing world are teeming with entrepreneurs, why do those countries seem unable to become prosperous market economies? The answer, he argues, is that they hold “resources in defective forms: houses built on land whose ownership rights are not adequately recorded, unincorporated businesses with undefined liability, industries located where financiers and investors cannot see them.”

CIPE and partners Association for Foreign Investment and Cooperation in Armenia, Unirule Institute of Economics in China, Institute of Economic Affairs in Kenya, Institute for Solidarity in Asia in the Philippines, and Saratov Chamber of Commerce and Industry in Russia set out to explore this crucial question in more detail, identifying the barriers small entrepreneurs face in urban property markets using the International Property Markets Scorecard.

The Scorecard provides a methodology for property market system analysis to investigate the six core elements necessary for sustainable market development: property rights laws and enforcement, access to credit by small businesses, efficiency of governance, rational dispute resolution, financial transparency, and appropriate regulations. This approach not only illustrates the linkages between property market elements but also helps identify gaps and advocacy priorities where some of those important institutions remain weak, either due to a lack of proper legal and regulatory framework or its weak implementation.

Following an in-depth analysis of the available secondary data such as international indices and national statistics, CIPE partners conducted fieldwork in two select cities to localize the results. This work was tailored in each country through a mix of focus groups and interviews to obtain the most accurate snapshot of the conditions entrepreneurs face in dealing with the government, banks, and professional services providers in the property sector. These views from small businesses have a unique power to illustrate key problem areas because of the real, personal experiences they reflect.

Property markets are multi-dimensional institutional frameworks that touch upon issues key for all citizens but particularly vital for small businesses. As such, property markets are a microcosm reflecting the state of a country’s institutions that build democracies and market economies alike.

This Feature Service article summarizes key findings – both shared and country specific – as well as reform recommendations for the next advocacy-oriented stage of our efforts. You can also read full country reports here (China coming soon): Armenia, Kenya, and the Philippines.

Article at a Glance

  • Understanding of property rights often remains limited to property titles, without deeper appreciation of the underlying and interconnected institutions that make property rights meaningful and allow property markets to function.
  • Although private property rights are legally protected in most countries, that protection varies greatly in practice because the implementing regulations and institutions that build property markets remain weak.
  • The development of competitive and transparent property markets for small businesses requires not only legally protected rights but also strengthening of the broader institutions of good governance and market economy.

System shocks and property market institutions

Participants at the Beijing roundtable on property markets (Photo: Unirule)

I first traveled to China in 2001 not long after the real estate reforms of 1999 to help build professional real estate services there. China was committed to moving to more privatization of its real estate markets and there was a great desire to replicate – often uncritically – the success of U.S. property markets. It was quite a different world on my recent trip to China to attend an expert roundtable held earlier this month by the Unirule Institute of Economics at Renmin University in Beijing on the findings of the International Property Markets Scorecard.

The roundtable was a part of CIPE’s larger program in Armenia, China, Kenya, Philippines, and Russia meant to explore the barriers faced by small businesses in urban commercial property markets and ways to overcome them. The scorecard is a tool evaluating various elements of property markets, such as property rights or access to credit, showing interconnections between them, and highlighting priorities for reform. The roundtable participants engaged in a lively debate and were determined to make sure that local circumstances are accurately represented in the scorecard. “This came from the U.S. so it will need to be adjusted.” This was a new attitude, openly expressed.

Today real estate is the hot topic in China. Residential housing in urban areas was the first wave and privatization of residential markets has led to enormous speculation in apartment prices. Everyone now wants to get rich in real estate. The government recently issued a Purchase Limit Order – limiting each family to buying two apartments. The Chinese experiment with partial privatization has led to regulation problems just as the lack of regulation led to problems in the sub-prime crisis in the U.S.

Property is a mean for distributing power – and for creating economic opportunity. This requires appropriate regulation, primarily to monitor system drains. If systems are not aligned properly, power will be diverted to few and economic opportunity will be undermined for many. Ultimately such diversions can cause system failures. The U.S. housing market has yet to recover from the last system failure.

Credit markets across most assets types in the U.S. remain tight. The Chinese are now also pulling back in commercial markets where there is a trend toward renationalization. Property rights and access to credit are core elements of the property market system. A shock in one area spreads around the entire system, not only affecting residential mortgages but the availability of loans for small businesses.

China’s property market system is a dual system. Property rights are bifurcated into land use rights and buildings. The appropriate regulation in a dual system is even more complex. As China formalizes its property markets there are enormous costs. Over the last decade people have at least been compensated when their land and homes are taken for development, although the structure of incentives and fairness of compensation is often in question. At the roundtable one of the participants mentioned that he knew someone who was told by local officials that they could get more money if they demolished their home. The farmer set to tearing down his own house.

So U.S. citizens are walking away from their mortgages while Chinese farmers demolish their own homes – each hoping for a better life. Over the last decade, I have seen the U.S. and China meet in the middle of the economic cycle – the U.S. on the way down, China on the way up. At this unique moment we have to take responsibility and realize we are now in one integrated system. To avoid more shocks, and to create more economic opportunity based on sound market institutions, we all have to work together with more honesty and trust to see that power through property rights is more equally distributed for the citizens of the world.

Bill Endsley is a CIPE consultant and principal of the Chicago-based World Citizen Consulting with broad experience in developing international property markets as a means for broader economic development and global security.

Beaten to the punch

Participants at the Manila expert roundtable (Photo: CIPE)

A controversy over property rights has captivated Philippine news media with the drama that unfolded earlier this month in Davao on the southern island of Mindanao. The city suffered from flooding that in particular affected people living in informal settlements. In an untimely intervention on July 1, as the city was struggling with the impact of the flood, the police went ahead with executing a demolition court order that would forcibly resettle around 300 families living in the 3,143 square meter shantytown. Enraged inhabitants resisted and Davao mayor Sara Duterte Carpio requested a two-hour stay in the demolition because an appeal against it was underway. When a court sheriff Abe Andres refused to stop, Ms. Duterte repeatedly hit him in the face becoming an unlikely hero of the poor. The incident was caught on tape and quickly became an online sensation.

The mayor maintains that the mandatory provisions governing demolition policies were not followed and the sheriff has not yet filed a formal complaint against her so the legal outcome of the scuffle remains to be determined. But there is a broader significance to the problem that this case highlighted: the pervasiveness of informal property in the Philippines. People who live on untitled plots, or who squat on privately owned land, face resettlements and thus have little incentive and ability to invest in the land they live on.

RA 7279, or Urban Development and Housing Act of 1992, and the so-called Lina Law outline the bases for community consultation as well as the steps and rules of relocation. Yet, the laws fail to address the root causes of informal settlements and – while in theory are meant to protect the settlers – in practice they create “professional” squatters. At the same time, the practice of illegal settlements undermines legal property ownership, leading to confrontations such as the one in Davao.

As a part of the international property markets scorecard project, CIPE and the Institute for Solidarity in Asia (ISA), discussed this and other problems affecting urban property markets in the Philippines during July 12 expert roundtable held in Manila. Participants included banking, real estate, and SME experts as well as policymakers and representatives of relevant government agencies. The discussion was based on the international property markets scorecard approach and focused on challenges faced by small businesses in urban commercial markets and opportunities for reform. The challenge for the country is to look beyond the punching incident and think more broadly and systematically about property markets reform that would empower the poor, many of whom are SME owners, to gain secure land ownership to end the vicious cycle of demolitions and resettlements with no better job or life prospects.

Sara Duterte Carpio is now dubbed “The Puncher.” But reforming property markets requires more than punching your way through problems. Reforms need a systematic approach that examines which elements of those markets are not functioning well and how they can be improved.

The Philippines is one of the four countries where CIPE is working on this project with local partners, along with Armenia, Kenya, and China (roundtable upcoming).

The need for transparency in China

From Reuters: A labourer carries a window at an under-construction residential area in Wuhan, Hubei province November 29, 2008. (Reuters/Stringer/Files)

A series of articles have come out in recent months that might lead one to believe that something just isn’t quite right with the Chinese property market. Like the finding that there are apparently enough vacant properties in China to house 200 million people. That 65 percent of commercial properties in Beijing are empty. That buildings are blown up soon after being completed simply so they can be rebuilt. Perhaps it is the stories of ghost cities. That Chinese developers have taken to hiring young Westerners to pretend to be heads of (non-existent) Western firms that are supposedly commissioning building projects.

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