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.