User:Julie Miao/International Real Estate Market

International Real Estate Market

Summary

The nature of the financial and economic environment has dramatically changed over the last three decades. The rapid pace of liberalisation and deregulation had lead to the increasing globalisation of markets. The shift in the scale and interactions of capital and financial markets has major implications for investors in terms of reduced costs, easier access to information and a wider range of available investment opportunities.

Investment management itself has become internationalised as the benefits of international diversification have been accepted. Today, the greatest challenge faced by an investor is dealing with the sheer complexity of international capital and financial markets. The real estate sector has been profoundly affected by the fundamental changes which globalisation has brought about in both the real estate market and in the broader economy.

1.1 Changes in the global economy 1.1.1 International political systems There have been major adjustments to world markets over the last three decades. These changes have been driven by a shift in the political and economic rationale behind the management of economic systems. In essence, the globe has become more democratic with greater emphasis being placed on economic neo-liberalism and global capitalisation. This shift arose from the increasing realisation of the efficiency in free markets, and the failures of public ownership and intervention. This gave rise to the abandonment of Keynesian aggregate demand management in a number of economies and the removal of barriers to international interaction. Examples of the new trend include the fall of socialism in Central and Eastern Europe, the collapse of apartheid in South Africa and the adoption of more liberal economic policies within the Communist regimes of China and Vietnam. Free trade is now seen as the engine for growth in the working economy. In the postwar period, three main economic zones have emerged: North America, the Pacific Rim and Europe. The US had been the dominant world economy prior to the 1950s and remains so today. However, the rise of economies in the Far East and the Asian Pacific Rim has reduced its relative importance. Economic growth within the Pacific Rim over the last 15 years was double that of the other two economic zones.

1.1.2 International financial markets The 1980s saw dramatic changes within the financial markets as political and economic systems restructured in order to promote free markets and trade. A central strategy of this new approach was to open domestic markets to international trade and capital flows. In order to encourage freer international movement of capital and international investment a number of radical changes were necessary. Before the removal of many barriers to international investment was achieved there was a need to establish the formal mechanisms for liberalisation. Major in-roads in the establishment of the necessary international financial infrastructure were made as far back as the 1940s. In 1945 the International Monetary Fund (IMF) was founded. Its broad aim was to establish an exchange rate regime and facilitate the balanced growth of free international trade. The World Bank started business in 1947, and the intention was to link it to the IMF. The aim was to encourage the provision of private investment. Although the Bretton Woods1 exchange rate regime collapsed in the early 1970s, the IMF is still active today. The current aims of the IMF and World Bank are to control Balance of Payment deficits, and provide the funds and technical advice on finance to less developed countries. Deregulation and liberalisation of financial institutions and markets within individual countries was achieved during the financial deregulation of the 1970s, 1980s and 1990s. For example, the deregulation of stock markets occurred in the USA in 1975, in Japan the process was gradual through the mid-1980s and in the UK in 1986. These large scale changes are usually referred to as “the Big Bang”. In banking the USA amended its regulatory bank legislation through the introduction of the Depository Institutions Deregulation and Monetary control Act of 1980 and the Garn-St Germain Depository Institutions Act of 1982. The Financial Services Act 1986 reformed the regulation of investment in the UK. Other changes that were required to increase the speed and flexibility of capital movements included the removal of exchange controls on capital/financial account balances (this is the section of the Balance of Payment accounts that refers to transactions in international financial assets), the institutionalisation of savings and the development of new liquid and flexible financial intermediaries. The wider investment opportunities, and increased speed and flexibility in capital movements have transformed the scale and nature of financial markets [Lizieri and Finlay, 1995]. There was also the rapid development of international information networks that linked the major financial centres of the world. These networks, which deal in the trading of equities, bonds, currency and other financial assets, enable a 24-hour trading day and can transmit up-to-date information right around global financial markets. However, an unfavourable aspect to the free transfer of information and capital funds is that the interlinking of financial markets can lead to high volatility as shocks are transmitted from market to market [Ratcliffe, 1998; Soros, 1998]. Over the last twenty years the greater integration of financial markets has fuelled the dramatic surge in global economic growth. Yet, in the last four years we have been made fully aware of the negative implications. The integration of capital and financial markets is the reason for the global extent of the current liquidity crisis. The widespread exposure to toxic debt linked with collateralised debt obligations and structured financial products has led to the current unprecedented banking crisis, which in turn has led to the failure of the banking system in a number of economies with national governments required to step in and intervene to stop domestic banks going bankrupt. uncertainty remains with regard to the future of the international banking system. Once the immediate dangers have been averted the one thing that is certain is that the international banking system will not remain unscathed. Politicians in a number of countries are proposing a radical shake up to prevent a similar situation reoccurring. This is bound to involve a period of restructuring and a tightening of regulation. One such change to emerge quickly has been Basel III, as agreed by members of the Basel Committee on Banking Supervision. This is a new set of global regulatory standards which strengthens bank capital requirements and tightens the bank liquidity and leverage constraints. Implements in September 2010 has been the establishment of a minimum common equity level of 7%, plus a further counter-cyclical buffer containing up to 2.5% of risk-weighted assets with new liquidity ratios in the pipeline.

1.1.3 International trade There have also been notable increases in the levels of global trade. This increase in international trade has “resulted in an increase in the interdependency between major economies. Regional integration is becoming increasingly formalised by the development of the international political and economic institutions” [McAllister,2000]. The creation of free trade areas (i.e. North America Free Trade Association (NAFTA), Association of South East Asian Nations (ASEAN) and the Chinese Economic Area) and a common market in Europe has created regional trading blocs with different degrees of integration. Full economic and monetary union is the end-state being sought within the EU which had 27 member states by the end of 2007. So far 17 countries have adopted the Euro but European Monetary Union (EMU) still “represents an economic experiment on an unprecedented scale” [Jones Lang LaSalle, 1999] and proposed significant implications for foreign investors within this zone and European property markets as the last barriers to the free movement of trade and investment money were removed. So far, this experiment has not been without its problems – concerns over the strength of the Euro against the dollar, uncertainty over the success of the European Central Bank (ECB) and the difficulties experienced by member states when using fiscal policies alone to control their economies. Once over these initial teething problems, full economic and monetary integration promised to yield a single low interest rate and a stable investment environment but instability has been created by the sovereign debt crises that have emerged within the eurozone and the credit crunch. The result of proposal banking reforms may tighten the credit available in the market and lead to higher interest rates. Even at the global level the removal of trade and market barriers has led to greater international economic integration. This has given rise to an increase in the cross-border mobility of raw material and goods; business activity and services; technology, information and expertise; knowledge and education; labour at top/middle level of management; less skilled employment and capital. This increase in the movement of resources, manufactured goods and services has lead to greater global competition, and impacted on the distribution of economic activity. The resulting greater regional specialisation based on comparative advantage, massive growth in multinational companies, and the creation of new business clustering have altered the location and mix of industries throughout the global. These shifts have given rise to major alterations in occupation and investment demand that have reshaped the built environment.