The Global Neighborhood,

The GLOBAL Neighborhood International Presidential Advisory Group October 2007 The GLOBAL Neighborhood  The GLOBAL N The Global Neighborhood International PG Participants Vicki Cox Golder (AZ), Chair Mark Allen (MN) Harry DeLeeuw (Canada) Norm Flynn (WI) John Fridlingon (FL) Carlos Fuentes (FL) Jim Harris (WA) Jim Helsel (PA) Judy Lowe (AZ) Gail Lyons (CO) Carmela Ma (CA) Tony Macaluso (FL) Peggy Ann McConnochie (WA) Richard Mendenhall (MO) Maire Rosol (UT) David Segrest (NC) Toni Sherman (IL) Furhad Waquad (MI) John Tuccillo (FL), Facilitator Julie Collins (IL), Writer Janet Branton (IL), NAR Staff Miriam Lowe (IL), Staff Executive Carol Weinrich (IL), NAR Staff It may be true that all real estate is local. But in an age when technology enables global connectivity and national economies are closely intertwined, the world has effectively shrunk. Suddenly many “local” markets have a reach and scope that transcends geography. And “international” real estate may, in fact, be right outside your door. The global neighborhood of international real estate transactions—including foreign purchases in the U.S. and U.S. purchases abroad—is growing at an accelerating pace, presenting opportunities that should not be ignored. For this reason, the National Association of REALTORS® convened an International Presidential Advisory Group (PAG) to evaluate recent developments and form recommendations regarding NAR’s role on the global stage and in providing tools for its members that will render these markets more accessible to and viable for them. Their work included a series of structured interviews in July 2007 with various subject matter experts. For reasons of confidentiality, the names of those participants are not included in this report; however, their comments are cited as direct quotations. The following document provides a comprehensive yet concise snapshot of current trends, transnational market forces, future expectations in world real estate markets, and related insights that were gleaned from these experts, as well as members of the PAG. It will be particularly helpful to those REALTORS® who want to gain a greater understanding of the dynamics driving today’s international real estate market in order to recognize and respond to opportunities that are more prevalent than many realize. I. World Economy: Current State and Direction Today’s world economic picture is unique in post-World War II history. Significant changes have occurred in the structure and dynamics of the world economy, with several key trends playing an important role in shaping the future direction of international real estate markets. The U.S. no longer dominates the world economy. Throughout much of the second half of the last century, the United States has driven the world’s economic growth engine; world growth would not occur unless the U.S. was expanding its economy. This, however, is no longer the case. The world economy is expanding, and it is doing so without solid participation from the U.S., where growth has stagnated at roughly 3 percent. Even though this country currently remains the world’s largest economy, other nations, most notably China, are growing at a much faster pace. The world economy is expanding, and it is doing so without solid participation from the U.S, where growth has stagnated at roughly 3 percent. China’s economy is on track to eclipse the U.S. If China is able to continue growing its economy at its current annual pace of 10 percent, it will surpass U.S. economic output by 2030. While this pace of growth may not be sustainable over the long term, a slower rate of growth will only delay what appears as inevitable; it is only a matter of time before China assumes the United States’ position as the world’s largest economy. While this may come as alarming news in this country, it’s important to point out that China also exerts a positive influence on the U.S. economic picture. For example, in illustrating the point of global economic interdependence, a leading economist noted that “it is estimated that if China were to ‘disappear’ from the U.S. market, mortgage rates in this country would jump 4 percentage points.” China will also present unprecedented demand for housing and commercial real estate to fuel its own economic growth engine, as well as new, substantial investment wealth. New paradigms have emerged for stimulating growth in developing countries. In the post-World War II era, several Washington-based institutions, including the International Monetary Fund (IMF), the World Bank, and the U.S. Treasury Department, set forth a prescription for reform in countries experiencing economic crisis. Nicknamed the Washington Consensus, their formula for growth included a relatively specific set of economic policies. The GLOBAL Neighborhood  These policies, however, proved non-productive or even counter-productive, especially for several Latin American nations, and Argentina in particular. Other countries, however, that chose a different path, such as China and India, have grown nonetheless. Urbanization, or a policy of stimulating growth by concentrating economic development in cities, has been a key component of the new paradigm which has largely displaced the policies of the Washington Consensus. Viable real estate markets and affordable housing play a vital role in supporting the urbanization trend. Improved real estate market transparency throughout the world is playing a key role in the global economy. Real estate market transparency is improving across the world—an essential development for the continued growth of international real estate and the global economy at large. Elements of market transparency include accurate market and financial information, enforceable contracts and property rights, clarity and consistency in the taxation and regulation of real estate, and ethical standards among real estate professionals. One global real estate and investment organization that tracks international progress in market transparency noted that the last two years in particular, from 2004 to 2006, showed marked improvements. During that period, the number of highly transparent countries jumped from six to 10, and continues to grow. The five most transparent countries last year were Australia, the United States, New Zealand, Canada and the United Kingdom. Improvements were also noted at the other end of the transparency spectrum, where the number of opaque countries dropped from six to three—namely, Egypt, Venezuela and Vietnam. Continued economic growth is generally expected. At this time, leading economists expect continued economic growth throughout much of the world, with other trends—namely the strength of the private property movement, improved market transparency, and an improving mortgage market—all pointing towards continued strength in global real estate markets. While sustained growth is generally expected, potential set-backs include higher interest rates and a possible oversupply which in turn triggers “bubble” markets and/or subprime lending fallout on a larger scale than is currently being experienced in the U.S.  II. Key Market Demographics: Now and in the Future It would be difficult to understate the importance of population shifts, both in terms of size and composition, in shaping the future international real estate market. Population growth, aging, income distribution and ethnic composition are the major themes in the U.S. But real estate markets around the world will feel the impact of demographic shifts both within and outside their borders. Top spots for population growth. Over the next 50 years, there will be rapid population growth in developing countries, led by China and India, but also in Pakistan, Indonesia, Nigeria, Bangladesh, Brazil and Ethiopia where, in several instances, populations will double between 2000 and 2050. Of course, many of these developing countries will be challenged to meet their housing needs, even in China and India, where growing economies have brought newfound wealth. Among Western nations, however, only the United States will experience population growth over the first half of this century. For most European nations, populations will remain relatively flat or decline in places like Germany, Italy, Spain and Poland. Japan and Russia are also expected to experience declining populations. Among Western nations only the United States will experience population growth over the first half of this century. Two groups—baby boomers and Hispanics—play pivotal roles in the U.S. Within the U.S., two major population themes prevail. The aging baby boomer demographic, those born between 1946 and 1964, will continue to dominate the real estate market, at least for the foreseeable future. This is because baby boomers, in the aggregate, command unprecedented wealth and have provided much of the fuel behind second-home purchases, both for vacation and investment purposes. These U.S. buyers are also expected to increase their purchases of foreign properties, particularly in locations that offer more attractive value and growth opportunities than can be found here, where price run-ups in numerous markets have subsequently stalled and reduced desirability. The growing U.S. Hispanic population will also make a major imprint upon the future U.S. housing market. One noted economist points out that two-thirds of new U.S. residents between 2000 and 2050 will be from “foreign” influences, meaning immigrants and children of newer immigrants. Of these people, the vast majority will be of Hispanic origin. While Latino homeownership in the U.S. is currently much lower than that for Caucasians, the gap is closing. To illustrate this point, a representative of Hispanic real estate professionals pointed out that according to HMDA data, $300 billion in mortgages are now issued to Hispanics, representing 11 percent of the market and establishing these buyers as more than a “niche” opportunity. The GLOBAL Neighborhood  III. Transnational Structure and Trends The fundamental structure of international real estate markets has been changing in several important ways, improving the most essential conditions for supporting viable markets and cross-border transactions. The private property movement is gaining strength around the world. Here in the U.S., where our founding principles are so grounded in the idea of private property rights, it is often easy to forget that this right is not shared throughout much of the world. Of course, it is also our strict protection of private property rights that has served as a magnet, attracting substantial foreign investment into the U.S. Recognizing this, an increasing number of countries have removed this major roadblock to the development of their own real estate markets. And it is increasingly evident that those countries that have not yet privatized their housing stock, such as Venezuela and Ethiopia, will not be able to experience growth until this occurs. The vital role of market transparency. As already noted, real estate market transparency has been improving throughout the world. In many cases, however, there is still a long way to go. These hurdles include a lack of historical or current market statistics on demand, supply or rents. It may also be difficult to determine local tax procedures, as well as building and zoning codes. In some markets, securing title records or title insurance may not be possible. Clearly, U.S. agents engaged in transactions abroad need to understand these differences. Besides facilitating the work of transaction agents and appraisers, transparent real estate markets also appear to exhibit substantial general economic benefits. To illustrate this point, a global real estate and investment concern studied real estate market transparency around the world. The research found close correlations between transparency and GDP per capita, as well as between transparency and favorable business environments. In other words, highly-transparent markets tend to exhibit other strong signs of economic health. Not surprisingly, highly-transparent countries also have higher real estate transaction volumes. Major improvements have occurred in access to mortgage finance and in mortgage market innovations. There have been fundamental changes in the ability of homebuyers in emerging countries, but also in Europe, to access housing finance. Of course in some countries, notably in Eastern Europe, there is also a cultural bias against indebtedness. However, as one noted housing advisor and economist explains, “the genie is out of the bottle. In the last eight years, roughly $9 trillion in new mortgage debt has been created. There have been fundamental changes in the ability of the middle class to access housing finance.”  Professional brokerage, including cooperation, listing systems and other tools, are still lacking in most non-U.S. markets. One of the greatest roadblocks restraining the growth in cross-border real estate transactions is the lack of professional brokerage in many foreign markets. Exclusivity simply does not exist reliably outside the U.S.—a fact that quickly becomes evident, in some markets, by the number of listing signs posted on one lawn. Broker cooperation, much less split commissions, is also rare. Lacking cooperation, these markets are far from developing multiple listing services or other related tools, so common in the U.S. To help mitigate cross-border risks and improve cooperation in these types of transactions, the International Consortium of Real Estate Associations (ICREA) continues building its Transnational Referral System (TRS), which also provides a forum for arbitration. Currently, 26 countries participate in the TRS with over 3,200 agents who have earned the Transnational Referral Certification (TRC). Exclusivity simply does not exist reliably outside the U.S. The GLOBAL Neighborhood  IV. Forces Driving International Real Estate While any number of factors influence real estate markets on a local level, the impact of the following three trends are currently being felt on a global scale. The effect of urbanization. Urbanization, or the redistribution of populations from rural to urban settings, is occurring at an accelerating rate. In fact, by 2008, it is expected that, for the first time, half the world’s population will live in cities. And by 2030, roughly 60 per cent of the world’s population will be urban dwellers. As cities develop, effects can include a dramatic increase in housing and rent prices, exacerbating the challenges of bringing the working class into these markets. While urbanization is a phenomena experienced throughout the world, growth in populations and housing prices is strongest in major cities. Interestingly, five of the world’s six most expensive cities are located in Asia, according to a leading consulting firm. The 2006 top-10 list includes (in rank order) Moscow, Seoul, Tokyo, Hong Kong, London, Osaka, Geneva, Copenhagen, Zurich, and (tied) Oslo and New York. By 2008, it is expected that, for the first time, half the world’s population will live in cities. The need for yield. In several mature markets, price run-ups have attracted large amounts of institutional money out of the stock market and into commercial real estate, which has, in turn, driven real estate investment yields to new lows. The maturity of many established markets is making emerging countries more attractive. However, some analysts are concerned that the current fervor in emerging real estate markets, largely stimulated by the search for yield, has caused investors to ignore inherent risks. New wealth creation. Real property purchasing demands will come from new and previously unexpected sources, as substantial wealth creation has emerged from the booming economies of China and India, as well as oil-rich economies such as Russia. These new sources of demand can be expected to make a stronger appearance in the U.S. and other international real estate markets.  V. Current Snapshot: World Real Estate Markets Today’s real estate markets are flourishing as never before, although the picture varies considerably from one region to the next. Recognizing that a complete assessment of the world markets is beyond the scope of this report, following are several of the more significant current developments, as reported by the various subject matter experts. The U.S. situation is mixed. With 40 to 50 percent of the global real estate market, the U.S. remains prominent on the world stage, and yet today’s situation is a varied story. While the U.S., in the aggregate, is currently experiencing a housing recession, it continues to be a magnet for foreign investment. This country still offers dynamic markets with plenty of absorption. And given the security of private property rights, the U.S. has always been considered a premier market for low-risk real estate investment. These drivers are currently supplemented, for most foreign investors, by a favorable exchange rate environment. On the flip side, however, one international real estate investment expert noted that U.S. tax rules and finance structures haven’t been as friendly to foreign investors as in many other countries, adding that prices (for commercial properties) are still a little expensive relative to earnings. Also, strict foreign visa limitations are acting as a deterrent, in many cases, to increased foreign investment in U.S. properties. With 40 to 50 percent of the global real estate market, the U.S. remains prominent on the world stage, and yet today’s situation is a varied story. Europe’s markets are generally viewed as mature. Throughout Europe, there is limited space for new development, which translates into high prices and few bargains in residential properties. Many European buyers, facing mature markets at home, are interested in finding better values overseas for second homes. They figure largely in the U.S. market, particularly in Florida, but are also shopping in Central America and other regions. The GLOBAL Neighborhood  China—and India—are in expansion mode. China is currently the world’s economic juggernaut, with all aspects of its economy, including housing and commercial development, in expansion mode. India is not far behind. The unprecedented growth in China and India has also stimulated U.S. real estate purchases by buyers from these countries. In fact, India and China currently rank number 4 and 5 respectively (after Mexico, the U.K., and Canada) as the country-of-origin for international buyers in the U.S. India and China currently rank number 4 and 5 respectively as the country-of-origin for international buyers in the U.S. Central merica is experiencing a real estate boom. Price run-ups in the U.S. have made this region more attractive to U.S. buyers, as well as foreign investors from around the world. One leading economist believes that over the next five years, forces may drive more purchases to Central America over the U.S. While there’s prestige and safety in the U.S. housing market, he notes, prices and policies are more attractive in Central America.  VI. Future Expectations: Successful Business Models As the real estate industry expands across borders and evolves to accommodate international transactions, there will undoubtedly be changes in how business is conducted. In particular, the PAG discussed and explored the following developments regarding potentially-successful business models. The importance and influence of the Internet cannot be overstated. The Internet is clearly the connective thread that ties the world together. Further, its powerful influence in reshaping the landscape of the U.S. real estate industry—including every aspect of how properties and agents are marketed, how clients are engaged and served, and how referral networks are built—will undoubtedly play out and continue to evolve throughout the world. While the complexity of building an effective global property-listing platform has made this goal extremely elusive and nearly prohibitively expensive, it is difficult to ignore the potential benefits of meeting this challenge. In the mean time, numerous smaller and more-achievable steps can be taken to improve foreign buyers’ ability to shop for U.S. properties, including offering listing information in metric equivalents and in various language translations. Beyond property listings, the Internet also plays an important role in presenting new models for facilitating international transactions. For example, a representative from Prima Panama explained how they act purely as an Internet-based intermediary, providing a bridge between largely-U.S. buyers and Panamanian property developers. The goal is to use the Internet to harness U.S. buying power by providing extensive, highly-transparent information on the market that facilitates and hopefully shortens buyers’ research process. Travel incentives are also offered, but the real key is matching buyers and sellers through an online venue, which could be applied to any market that wants free exchange of property rights. For this reason, Internet-based models such as this may figure largely in future international real estate transactions. Beyond property listings, the Internet also plays an important role in presenting new models for facilitating international transactions. The role of U.S. brokerage franchises overseas. U.S. real estate brands have expanded their overseas franchise networks by leaps and bounds. For example, Realogy alone now has 41 percent of their offices (for all four Realogy brands) outside the U.S. in 83 countries, for a total of well over 15,000 offices worldwide. While such a company’s primary The GLOBAL Neighborhood  motive is to expand their brand through a master franchise model, clearly this development also ushers in the possibility of greater transnational referral activity and possibly even collaboration in exporting U.S. real estate business practices, in order to advance market transparency and encourage more transnational business. It’s also important to point out, however, that U.S. expansion is not always welcome by stakeholders in certain markets and that such efforts could potentially backfire, especially in areas with well-established property markets of their own and/or markets where local customs and practices conflict with the franchise business model. Still, the expansion of U.S. real estate franchise brands overseas is an important development that must be included in any conversation about future international real estate business models. Realogy alone now has 41 percent of their offices outside the U.S. in 83 countries. 0 VII. Future Expectations: Foreign Participation in U.S. Real Estate Markets As noted earlier in this report, foreign participation in U.S. real estate is strong and expected to grow. Foreign buyers have played a key role in cushioning the fall of the current U.S. housing recession, providing much-needed price support and stimulating real transaction volume. Buyers of U.S. real estate span the world. While the majority of foreign buyers come from Europe (33 percent), there is also a strong presence from North America (Mexico and Canada) and Asia, at 24 and 23 percent, respectively. Latin America represents 16 percent of foreign buyers in this country. NAR members are increasingly feeling the presence of these global participants. In fact, in a survey conducted earlier this year, 18 percent of all U.S. REALTORS® indicated that they had at least one client involved in an international transaction within the prior year; an additional 14 percent had prospects that didn’t lead to closing. This means that roughly a third of all NAR members experienced an actual or potential international transaction within a recent one-year time frame. In Florida, the numbers are considerably higher, where 65 percent of REALTORS® had foreign clients over the prior year. In fact, 15 percent of all home sales in Florida now involve foreign purchasers. Roughly a third of all NAR members experienced an actual or potential international transaction within a recent one-year time frame. Factors supporting growth The strength of foreign interest in U.S. real estate is evident, but what’s fueling this activity? In part, interest in the U.S. stems from the fact that more and more people in different nations recognize the value of owning real property—and the U.S. represents one of the best and safest places to make such an investment. The Internet has also provided a vital conduit to potential buyers around the globe, making property details and related market information one click away for anyone with interest and an Internet connection. And if softer housing prices have tempered some U.S. homebuyers’ enthusiasm to move forward with a transaction, quite the opposite could be said for many foreign buyers, who are witnessing even better deals when weak-dollar prices are converted into their currency equivalents. For example, the British Pound Sterling, worth $1.44 in 2001 rose to nearly $2.00 in mid-2007, allowing a U.K investor to buy considerably “more house,” simply through favorable exchange rates. The GLOBAL Neighborhood  Barriers to continued or expanded growth. While the scenario for continued foreign investment in U.S. real estate appears positive, it’s also important to note that several factors are inhibiting the full potential of this growth. Ironically, one of these barriers stems directly from our current immigration policies, particularly visa restrictions, which limit foreign residents to six-month stays in the U.S. This is especially contentious among buyers who are no longer working. The pool of potential buyers could be enlarged considerably through some sort of extended retirement visa. Less-than-favorable tax treatments are another inhibitor, especially among commercial and institutional investors. A recent smaller survey of NAR members also acknowledged that tax issues—including taxation of profits, repatriation of funds, vacation home/investment tax treatment, rental rules, etc.—played an inhibiting role in the conclusion of a real estate transaction for roughly one-quarter of respondents. In this same survey, however, financing was cited as a larger barrier, contributing to an unsuccessful conclusion for half the respondents. While the scenario for continued foreign investment in U.S. real estate appears positive, several factors are inhibiting the full potential of this growth.  VIII. Conclusion VI. Future Expectations: Foreign Participation in U.S. Real Estate Markets Without doubt, the international real estate market is large and complex. But it also presents REALTORS® with many real and growing opportunities to expand their business—both at home and abroad—and capitalize on changes that will occur regardless of whether they choose to get involved. The National Association of REALTORS®, recognizing the significance of this opportunity, has played a leading role in the formation of various global alliances and related advocacy efforts, all designed to support the advancement of viable real estate markets across the world and to improve foreign access to our markets. NAR also offers its members a wealth of resources and business tools that can help you understand and identify niche opportunities of particular interest to you, including information, education, and international networks. Any member wishing to learn more is strongly encouraged to begin by visiting NAR’s online international headquarters at www.realtor.org/international. Here you’ll be able to access countless resources, but are encouraged to start by reviewing our general guide to programs, products and services, called Everything You’ve Wanted to Know About International But Were Afraid to Ask. (To download this document, click on International Talking Points in the International Essentials section.) You can also contact NAR’s International division at 1-800-874-6500, extension 8412 or NARGlobe@realtors.org. The GLOBAL Neighborhood