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China’s Real Estate Market Continues to Make Progress in Transparency while Hong Kong Remains Most Transparent Market in Greater China

But Headwinds Remain for Greater China Markets, as Revealed by JLL’s Global Real Estate Transparency Report

Shanghai, 2 July 2014   - The eighth edition of JLL and LaSalle Investment Management's biennial Global Real Estate Transparency report shows continued progress in the transparency of commercial real estate around the world.  Over 80% of markets have registered improvement since 2012, and the Asia Pacific region has seen a moderate pace of progress. China's real estate sector has seen limited progress since 2012, with the improvement mainly centred on the country's primary cities. Meanwhile, Hong Kong still holds its strong lead ahead of other Chinese cities, ranking as the fourth most transparent market in the Asia Pacific region. Please see the two figures below for a list of the world's most transparent real estate markets in 2014 and the transparency tiers of all the monitored Asia Pacific markets.

Real estate markets in China's Tier I cities were categorized as "Semi-transparent" and ranked 35th among the 102 markets surveyed worldwide in the Transparency report. They were also among the top ten Asia Pacific improvers that have seen significant advances in real estate market transparency over the past ten years. According to the report, China fares relatively well globally in investment performance measurement and market fundamentals, partly attributed to the growing presence of international real estate advisors.

However, progress since 2012 has been restricted to a few areas such as land use planning and compulsory purchase by a public body, and the report shows that these have been partly offset by lower scores in taxation consistency and predictability as well as a decline in the accuracy of data in real estate debt, which has suffered from the increase in trust lending and debt from shadow banking channels. Meanwhile, China has made slow progress in structural reforms and regulatory enforcement and the gap between Tier I and lower tier cities has slightly widened (China's Tier II cities ranked 47th and Tier III cities ranked 54th in transparency globally).

Ironically, the pressure from potential bond defaults in China's real estate sector might lead to greater transparency in the long term as investors are now demanding more information to better assess credit risks in the market. Another area that is moving in a positive direction is the regulatory and legal environment. The national property registry is being implemented on a pilot basis in several Tier II cities, and should thereby help to promote a more transparent operating environment for real estate players. A third area to watch for improvement will be in the listed real estate sector where the extension of REIT structures should help to underpin improving transparency.

Michael Klibaner, Head of Research, Greater China for JLL, commented, "We are optimistic that China will make steady progress in real estate industry transparency in the future, especially on the regulatory and legal fronts. However, China continues to lag in areas such as transaction process, and its Tier II and III cities still lag behind globally. Regulators and investors will have to watch out for headwinds and volatility in the market."

Meanwhile, Hong Kong remains the most transparent city in Greater China and ranks as the fourth most transparent market in the region after Australia, New Zealand and Singapore. The city is in the top quartile globally in every transparency category (highest for market fundamentals at 7th place globally).

Nevertheless, Hong Kong has seen its transparency score fall marginally since 2012, mainly due to the property market cooling measures introduced in the commercial and residential sectors, which have lowered tax predictability and reduced tax consistency for foreign buyers. Moreover, Hong Kong scored lower on both accounting standards and corporate governance, reflecting both the need for more details in financial reports as well as the slow pace of listed companies' compliance with the new requirements set in the Corporate Governance Code of the Hong Kong Stock Exchange.

Joseph Tsang, Managing Director at JLL Hong Kong, remarked, "Hong Kong will maintain its high levels of transparency globally and continue to set the example for cities in Greater China in the long run. However, given that the property market cooling measures will likely stay in place for the foreseeable future, we are concerned that the ongoing uncertainties over tax consistency and predictability will undermine investors' confidence in the city's real estate market outlook, and inevitably, deter market activity and affect foreign direct investment as a result."

Figure 1: Global Real Estate Transparency Index, 2014
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Global real estate Transparency index2.jpg
Source: JLL, LaSalle Investment Management

Figure 2: Real Estate Transparency Index, 2014, Asia Pacific Region

Australia, New ZealandHighly Transparent
Singapore, Hong Kong, Japan, MalaysiaTransparent

Taiwan, China (Tier 1), Thailand, Philippines,
Indonesia, India (Tier 1-2)

South Korea, China (Tier 2),
India (Tier 3), China (Tier 3)

Semi Transparent
Vietnam, MacauLow Transparency
Mongolia, MyanmarOpaque

About JLL's Global Real Estate Transparency Index

The Global Real Estate Transparency Index, first published in 1999, is based on a combination of quantitative market data and information gathered through a survey of the global business network of JLL and LaSalle Investment Management. For each market a total of 115 separate factors have been assessed, through data collection and survey questions, answered by local research teams in collaboration with business leaders. These 115 factors are grouped into 13 topic areas and further grouped into five sub-index categories – a) performance measurement, b) market fundamentals c) governance and financial disclosure of listed and unlisted vehicles d) regulatory and legal and e) transaction process. A Composite Index for each market is created from the weighted scores of the 115 factors. The scores range on a scale from 1.0 to 5.0. A country or market with a perfect 1.0 score has total real estate transparency; a country with a 5.0 score has total real estate opacity. Countries/markets are assigned to a one of five transparency levels ranging from Highly Transparent, Transparent and Semi-Transparent to Low Transparency and Opaque.

For investors, the Index provides a risk management tool by offering comparative information across multiple geographies, facilitating informed global/regional investment strategies and country target allocations. The Index enables corporate occupiers to more efficiently assess different real estate operating environments across the globe. Transparent markets allow for easier comparison of occupancy costs; provide more options for strategic action (e.g. the execution of sale and leasebacks); and raise the efficiency of transactions and facilities management.

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