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.