Financial System Reforms Over the Literature Review
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3.2.3 Portfolio Diversification of Investment in Global Property Markets
Because the global property markets are affected by globalization and specific country / regional factors, means that the overall amounts of risks will vary, the most notable include: transparency and efficiency. Where, each country / region has different on laws and regulations pertaining to the real estate markets. This means that the risks in a number of different markets will depend upon specific market conditions themselves, reflecting these two factors. To protect themselves against these kinds of risks, many investors will often seek to diversify their portfolio. Diversification is: when you are investing a number of different asset classes in real estate, across a variety of countries / regions. The idea is that if a risk occurs in a specific country or region, the other areas that you are diversified in will protect you against the severity of the declines. For example, someone who invested in the U.S. real estate market might diversify in Canada to reduce their exposure to risks in the U.S. This is because Canada has tougher regulations on real estate investing, which causes prices to remain more stable in comparison to the United States. (MacGee 2009) A prudent investor could theoretically invest in Canada to help mitigate the possible risks faced in the U.S. real estate market. Such a strategy is often used involving a number of different countries. This is designed, to reduce the overall risks that a portfolio of real estate could be exposed to.
3.3 Transparency and Efficiency in the Global Property Markets
One of the biggest issues facing the global property markets in the past was transparency and efficiency. This is because many markets were considered to be closed or limited, as far as how much money foreign investors can invest in a particular country. Then, the various reporting statistics on the market and the difficulty of buying or selling a property were: the biggest factors that limited the amounts of investment capital into this area. As a result, many of the real estate markets benefited the local entrepreneur in the past. However, over the last ten years, globalization has caused transparency and efficiency to increase in many property markets around the world. As a result, foreign investors in these markets are demanding increased amounts of information on the property before investing to include: accurate market information, property rights / contracts that are enforceable, equality during the transaction process, professional standards and a reliable benchmark for measuring changes in prices. Once this begins to take place consistently, means that a change will occur in the overall transparency and efficiency of the various real estate markets around the world. A good example of this can be seen by looking no further than in a report released by Jones Lang LaSalle, where they found that transparency / efficiency are increasing in a number of different markets. Because numerous foreign investors no longer at a disadvantage in many markets, in comparison to local real estate entrepreneurs. This is because these improvements were seen in a number of different mechanisms that are helping to increase the overall amounts of transparency / efficiency. To include: improved regulation of many different real estate markets, greater public disclosure from real estate companies and many markets introducing public / private benchmarks for measuring volatility. While these different areas have helped improved transparency / efficiency, the report also found that there were still many different challenges faced by these markets. The most notable would include: the underperformance of all public / private benchmarks, the fact that many countries have still not embraced performance based indexes and the various taxation issues. (Transparency Improves Around the World, 2006)
What all this shows, is how the global property market has seen increased amounts of transparency and efficiency. However, despite these different challenges many of these indexes are underperforming the actual markets and many countries still have not adopted performance benchmarks. Then, when you combine this with the different taxation issues, means that these issues will continue to affect transparency / efficiency. This is problematic, due to the fact that the underperforming indexes in relations with the actual market shows that transparency needs to increase even more. Where, if these markets have the right amounts of transparency, the performance of the bench marks will mirror the actual market itself. Then, the reality
that many countries are slow to adopt such benchmarks is: an indication that increased amounts of transparency around the globe needs to have more far reaching effects. Where, those markets that are facing one of these different situations can be able to improve, which will help increase the overall amounts of FDI being invested in a country.
3.4 Property Investment Vehicles
As the global real estate market has become more affected by the rapid changes that are taking place. Has meant, that a number of different investment vehicles have been developed to provide investors with number of options. Where, investors can now invest in numerous asset classes that will provide them with opportunities in the real estate markers in other countries. As a result, a number of different investment vehicles have emerged to address this need to include: property companies (PCs); real estate investment trusts (REITs) and mutual funds (MFs). Together, these different tools have allowed investors the chance to participate in a number of different property markets around the world.
3.4.1 Property Companies (PCs)
A property company is: when there is a company that is focused on buying land or property that could contain various fixed assets such as: buildings. These companies can either be publically traded or private. They will either sell or rent the different properties that they purchase, as way to generate revenues. The overall focus of these kinds of companies can range from raw land, to some of the more complex commercial real estate projects. During the last ten years, the overall amounts of FDI have been helping to fuel the rise in property companies that are focusing on investing in a number of different real estate markets around the world. This was occurring because these companies were taking advantage of the increased opportunities, that globalization has created through liberalizing different markets. What happened was: many countries around the world liberalized the regulations regarding who can own real estate. Once this began to take place consistently, meant that many markets that were once closed off from foreign investors began to see increasing amounts of capital. In many of these different emerging markets, this new foreign investment capital along with low interest rates, helped fuel the rise in a number of different real estate assets around the world. However, once the economy began to cool many of these different investments, began to fall apart. As a considerable number of PC's had large holdings of real estate that they could not sell and the occupancy for rental properties were declining. A good example of this can be seen by looking no further than, a forecast provide by the property company Cushman and Wakefield. Where, they found that investment inflows into the United States from property companies are expected to increase by 50% in 2010. However, the reason why such a situation is occurring is many companies are either looking to sell the large inventory of properties that they are holding or make significant purchases at distressed prices. (Global Property Investment Flow Set to Jump by 30%, 2010) What this shows is: how many of the different property companies experienced a similar down turn that is felt in numerous property markets around the globe. Where, some have been seeking to take advantage of this downturn, while others are trying to unload their portfolio of properties in certain markets.
3.4.2 Real Estate Investment Trusts (REITs)
A real estate investment trust (REIT), is when a publically traded company is directly investing in real estate. This can take place by the purchasing of the actual properties themselves or it can involve investing in a portfolio of various mortgages. The way that REITs are structured, means that they must pay out to investors at least 90% of what they make to shareholders in the form of a dividend. This has caused many entities that are focused on investing in various real estate markets, to use this type of investment vehicle. As a result, the total number of REITs has risen dramatically since the 1980's. Then, when you combine this with more liberalized property markets and the favorable tax status (no capital gains taxes or rental income taxes), means that that the total numbers of REITs that invest in a number of different areas has been increasing dramatically. (Harper 2010) During times of economic expansion, many REITs saw a tremendous rise in revenues as they were participating in a number of different areas, including mortgages. Once the global property market began to implode in 2007, many of these different REITs would face a number of financial challenges. A good example of this can be seen in…
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