Real Estate Business Gets Less Good

Brendon Wilson

by Brendon Wilson

TINZ Director

Writing for Employers and Manufacturers Association

BusinessPlus Magazine

Transparency’s New Zealand Chapter, TINZ, has frequently commented on our strong positive rating in Transparency International’s World Corruption Perceptions Index (TI-CPI). This is a key factor behind the reputation for integrity that our public, private and non-profit organisations enjoy, contributing to New Zealand’s trade and business success. Latest figures show an alarming change in the direction of travel. Not only has our rank on the TI-CPI fallen from 1st to 4th between 2013 and 2015, but now the latest figures out for transparency in the Real Estate Industry show a fall from 4th place 2 years ago to 6th place now.

Proven transparency and integrity in markets around the world are now seen as very important, and Transparency International is not the only organisation to study and report on it. This reflects the now widely-held belief that these principles are critical to business, peoples, and governments in order to create stability, trust, and faith in the systems we all need to use every day to do business and live our lives. The areas of the world where daily life can’t be lived and business performed without costly, humiliating and dangerous unethical practices are those in the lower or ‘red’ corruption-integrity rated countries. Let’s not go there!

So it is interesting to have a brief look at other Transparency Indices to see how New Zealand fares by comparison. With the recent focus on homelessness, housing affordability and the existence of previously unseen levels of speculation in the housing market, the Real Estate market’s importance in the New Zealand economy has never been higher with fierce current focus on its ups and downs.

The 2016 JLL Real Estate International Transparency Index report was recently announced.

The JLL Index looks at 109 countries and markets by their data availability, governance, transaction processes, property rights, and their legal and regulatory environments – all from the point of view of transparency, good governance and public good. This index is updated every two years and has charted real estate transparency internationally for 17 years. JLL noted that institutions, governments and businesses are now demanding greater integrity and clarity, and the general public are seeking the same assurances.

Top in this index is the United Kingdom, Australia is second, then Canada, USA and France. New Zealand is sixth, followed by The Netherlands, Ireland, Germany and Finland making up the top ten.

JLL’s report notes

  • The Panama Papers revelations bringing a marked increase in pressure for greater real estate transparency, putting the fight against corruption decisively onto the international political agenda
  • Widening recognition of the crucial role of market transparency as a facilitator of new investment and business activity and significantly in community well-being and inclusiveness
  • Demands for further improvements in transparency by investors as capital allocations to real estate grow, even among the world’s most transparent real estate markets
  • Technology’s improved ability to allow a more detailed assessment of real estate market patterns

Concerns

TINZ’s observations on the New Zealand Real Estate market stem from the hothouse climate which the overheated house market here has generated. This brings the possibility that funds can be brought into New Zealand and delivered in a suitcase to buy a house, evading normal banking channels and regulatory scrutiny, raising the same serious issues which have now led to legal change to trusts. These concerns will be addressed by the implementation of Phase 2 of the Anti-Money Laundering Bill. Another concern is the negative economic and social impacts of ‘land-banking’ which is a growing practice in current conditions.

New Zealand’s international real estate transparency ranking is still fairly high, but our slide from fourth to sixth is a concern – exactly the same situation as with Transparency International’s wider corruption index. For exactly the same critical reasons we should be improving, not slipping - the effort to make that improvement is worth it.

For a country which has consistently held top position, any slip is notable and negative – would fans be happy if the All Blacks’ world rugby standing similarly slipped to fourth? Given the importance of reputation to business success, this is more than a matter of pride, it is also a matter of dollars and cents. Increasing evidence shows that reputation contributes to a greater proportion of company returns than any other factor.

An Aviation Sector Outrage

Now a brief item from another market: the commercial pressures and difficulties to succeed in the international aviation sector are probably as hard to negotiate as any, so the temptations to take short cuts in integrity to get a result are high. United Airlines in USA has agreed to pay a penalty of US$2.25million for its role in a federal bribery case – David Samson, former chairman of the body running airports and ports in New York and New Jersey, pleaded guilty to approving construction of a hangar for United Airlines at Newark Airport only after the airline agreed to operate twice-weekly flights between Newark and the airport in South Carolina adjacent to his holiday home. Despite assessing that the route would lose money and did not fit any standard economic model to become a route for the airline, United Airlines started operating the route from September 2012 because they needed the hangar built. They kept operating the route until March 2014, during which time the airport controlling body’s chairman used the service 27 times. Samson will be sentenced in October, facing a penalty of up to 10 years’ imprisonment. Another result has been the abrupt resignation of United Airlines then CEO Jeff Smisek. United Airlines are ‘enhancing their compliance, anti-bribery and anti-corruption program policies and procedures’, .... ‘and will make annual reports of their compliance efforts.’

The outrageousness of this case, where true life is worse than drama, should not blind us to the serious risks in looking for a business win-win which fails the integrity test. The fact that no money apparently changed hands is immaterial. Could it happen here? Possibly not, but let’s check our commitment to company anti-corruption and integrity policies, processes, training and audits. Real integrity is worth it.

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