The Global Real Estate Transparency Index 2018 (Japanese version) by JLL and LaSalle Investment Management was released on July 25. JLL and LaSalle have conducted real estate transparency surveys once every two years since 1998, and the 2018 Index marks 10th edition. Although Japan has jumped to 14th place, from 19th in the previous survey, the Index has revealed issues that the country has to solve.
In truth, a shocking drop in the rankings
The Index is used by government officials and industry associations around the world as a reference to measure the ease of investment in different real estate markets. Naturally, here at JLL Japan, we are most concerned with how Japan fared in the rankings. Japan ranked 19th in the previous Index (the 2016 edition), and 26th in the one before last (2014). The country has steadily climbed the chart, and jumped to 14th place in the 2018 edition—the highest it has ever reached. Japan is listed near the top of the “Transparent” group, following Singapore and Hong Kong, so close and yet so far from the “Highly Transparent” tier.
However, we cannot accept this rise in the ranks at face value. “Transparency in the Japanese market has improved, but other counties are achieving even more significant improvement. Japan will be left behind the global trend unless it increases the speed of improvement,” warns Yuto Ohigashi of the JLL Japan Research Department, who took part in conducting the transparency survey.
The leap in the rankings is mostly thanks to the new “Sustainability” sub-index, which was newly added in the 2018 survey. Japan actively promotes green buildings, as can be seen in the development of the Building-Housing Energy-efficiency Labeling System, and was ranked 3rd in the “Sustainability” category. These efforts were evaluated highly, and helped boost the country’s overall ranking. When evaluated on the traditional five sub-indices, however, Japan comes in 21st —two places lower than in the previous Index.
Other countries’ transparency improvements far exceed Japan’s
Out of the 100 countries that were surveyed for the 2018 Index, market transparency increased in 85% of them. Activities for improving transparency are now becoming a global trend. In particular, we can see rapid progress in countries whose governments are committed to increasing transparency as a policy. Dubai has launched a building classification project and enhanced the government’s official app for registration of property brokers and operators. India reinforced its real estate regulatory act in 2016, and has implemented regulatory reforms by the SEBI (Securities and Exchange Board of India) to support expansion of REIT market. The Netherlands, ranked 6th among the countries that have most improved the transparency in the world, also make active use of “real estate tech.” In the Netherlands, technology has encouraged a shift toward open data, and it has become easier to check transaction prices and registered information. These factors contributed to the country’s higher transparency.
Japan still hurting for information disclosure
In comparison to other countries showing dramatic improvements, what issues does Japan have? The survey for the Index has revealed six problems. Japan recorded favorable results in three sub-indices, ranking 3rd in “Sustainability,” 5th in “Performance Measurement,” and 17th in “Regulatory and Legal.” However, the country’s ranking remains low in the other three sub-indices. Japan was ranked 31st in “Governance in Listed Vehicles,” 35th in “Transaction Process,” and 36th in “Market Fundamentals.” These poor showings are mainly due to the fact that, in Japan, disclosure of information and data relating to transactions falls devastatingly short. For example, in the sub-index “Governance in Listed Vehicles,” the country was held down in the rankings by the fact that data pertaining to properties owned by general corporations is not disclosed on the market. In “Transaction Process,” although the Japanese land registration system is well-reputed in terms of accuracy and coverage, record books contain no information on transaction prices. In addition, information regarding common service charges on tenants is a complete blank. This, too, is pulling Japan down. The low ranking in “Market Fundamentals” is a result of extremely little data available—for example, indices for unlisted funds remain undeveloped.
Enhance strengths, rather than focusing on weaknesses
Japan’s issues regarding transparency all come back to a weakness in information disclosure. Dubai and India, which were mentioned above, are working on government-driven transparency improvements, but in Japan, a developed society, the thought of renovating the existing systems and making information disclosure an obligation is unrealistic. Although administrative officials fully understand the issues, they have not made any radical changes toward solving them.
Then, what should Japan do to increase transparency? “Japan should enhance its strengths, rather than focus on improving its weaknesses,” suggests Ohigashi. Take the “Sustainability” ranking, for example. While Japan is ranked 3rd, and its green building management systems and other efforts for the environment have been well-received, some other countries are going above and beyond, by, for example, encouraging the application of green lease clauses, or even developing indices to measure the performance of tenants in green buildings. Japan can take ideas from these innovative approaches and implement them in its own way to improve market transparency.
Real estate transparency is closely related to the amount of direct real estate investment. This is proven by the fact that countries that are ranked high in the transparency rankings attract 75% of the total amount of investment in the world. Not only that, countries around the world are increasing their transparency, and high transparency is becoming a strong weapon for attracting companies and human resources as well as investment money. On the other hand, real estate investors desire further improvements, even in the countries that are at the top of the transparency rankings. “There are two keys to increasing transparency: changing the market mechanism through government initiatives, and having private market players be conscious of transparency in their business activities. While other countries are increasing transparency dramatically, we cannot deny the possibility that Japan will be left behind,” warns Ohigashi.
Coincidentally, our next transparency survey will be conducted in 2020, the year of the Tokyo Olympics, The Olympics are regarded as a “trade show” for introducing the appealing points of Japan to international society. In between the festivities, be sure to watch how the country’s real estate transparency progresses.