FOR SUSTAINABLE REAL ESTATE MARKETS · might promote long-term solutions for sound real estate markets in dif-ferent enforcement frameworks (ac-cording to the level of development

FOR SUSTAINABLEREAL ESTATE MARKETSPrinciples and guidance for the development of a country's real estate sector

United Nations Economic Commission For Europe(UNECE)

Working Party on Land Administration (WPLA)

Real Estate Market Advisory Group (REM)

UNITED NATIONS

POLICY FRAMEWORK

Printed as a contribution to the work of the United Nations

www.tecnoborsa.org

Geneva, 2010

United Nations Economic Commission for EuropeWorking Party on Land Administration Real Estate Market Advisory Group

POLICY FRAMEWORK FOR SUSTAINABLEREAL ESTATE MARKETSPrinciples and guidance for the development of a country’s real estate sector

UNITED NATIONS

NOTESymbols of United Nations documents arecomposed of capital letters combined withfigures. Mention of such a symbol indicatesa reference to a United Nations document.The designations used and the presentationof the material in this publication do notimply the expression of any opinion what-soever on the part of the Secretariat of theUnited Nations concerning the legal statusof any country, territory, city or area, or of itsauthorities, or concerning the delimitationof its frontiers or boundaries.

ECE/HBP/147

Copyright © United Nations, 2010All rights reservedPrinted at United Nations, Geneva, Switzerland

UNITED NATIONS PUBLICATION

UNECE Information ServicePalais des NationsCH-1211 Geneva 10Switzerland

Phone: +41 (0) 22 917 44 44Fax: + 41 (0) 22 917 05 05E-mail: [email protected] site: http://www.unece.org

POLICY FRAMEWORK FOR SUSTAINABLE REAL ESTATE MARKETS

A fully functioning and well regulatedreal estate market can be an importantfactor to enhance the economy of coun-tries in the UNECE region, both throughupgrades in the housing stock andbuilding capacities as well as the devel-opment of mortgage finance. The realestate sector also plays a fundamentalrole in the transition and consolidationof green economies, with the relatedgeneration of employment and growth.Finally, a solid real estate economy isnecessary to guarantee mobility of thelabour force and improve adjustment tomigration flows within countries. Analyses of the current global eco-nomic crisis have shown that unclearregulatory frameworks in the financialand real estate sectors were among itsmain causes. The crisis brought up arange of problems and demonstratedthe urgent need for UNECE to re-spond by providing guidance andpromoting sound real estate marketsin the region.The present Policy Framework com-plements current efforts by authoritiesin the region to stem the effects of thecurrent economic downturn. The crite-

ria defined for sound real estate mar-kets should not only help accelerate theeconomic recovery in the short run, butalso promote long-term sustainable de-velopment and green economies. Thestudy offers institutional advice on is-sues such as the establishment of fi-nancial markets backed by real estateas collateral, harmonized valuationstandards for real property and trans-parency in investment risk assessment.It also advocates a more integrated andholistic approach towards the estab-lishment and management of real estateorganizations, especially for economiesin transition.I trust this work offers a generaloverview of the institutional pre-requi-sites for a solid real estate sector in theregion, which in turn will facilitate theachievement of social and economicobjectives. The principles proposed bythe REM Advisory Group will serve asa permanent contribution to govern-ment authorities as well as private in-vestors, real estate appraisers andconsumers at the time of discussingparticular actions to be undertaken ineach national context.

I

Ján KubišExecutive SecretaryUnited Nations Economic Commission for Europe

PREFACE

Abbreviations ...............................................................................................................III

Introduction..................................................................................................................IV

Background and aims of the study..............................................................................VI

Principles........................................................................................................................1

II


CONTENTS

CENEuropean Committee for Standardization

CHLMUNECE Committee on Housing and Land Management

EurostatEuropean Union statistical office

FAOFood and Agriculture Organization of the United Nations

GDPGross domestic product

GNPGross national product

ISOInternational Organization for Standardization

LTVLoan-to-value ratio

PPPPublic-private partnerships

REMUNECE Real Estate Market Advisory Group

TPACThird-party arbitration courts

UNECEUnited Nations Economic Commission for Europe

WPLAUNECE Working Party on Land Administration

III

ABBREVIATIONS

The Real Estate Market Advisory Group(REM), a subsidiary body of the UnitedNations Economic Commission for Eu-rope (UNECE) Working Party on LandAdministration (WPLA) was establishedby the Executive Committee of UNECEin December 2007 with the goal of as-sisting Member States in the discussionand implementation of policy recom-mendations related to the real estatesector. Over the last two years the REMAdvisory Group has contributed to thework of the Working Party through ca-pacity-building activities and the dis-semination of information, goodpractice and know-how related to thereal estate sector. The involvement ofexperts and professional real estate or-ganizations through REM aims to enrichsignificantly ongoing policy debates.

One initiative of the UNECE Real EstateMarket Advisory Group (REM), with thesupport of the International Real EstateFederation (FIABCI), was the organiza-tion of a high-level roundtable discus-sion at the United Nations Headquartersin New York in December 2008. Speak-ers debated causes, effects and impactsof the financial crisis, with a particularfocus on the real estate sector. A follow-up forum of experts took place in June2009 in Rome, hosted by Tecnoborsa,where the draft of this publication andits major contents were the subject of in-depth discussions. The outcome is a setof principles that can serve as guidance

for policy action. Each of the principlesdeserves more in-depth development,and will be the subject of future studiesby REM. The present framework in its currentform is intended to give policymakersand other interested parties a referencefor their future work relating to the realestate sector and its underlying marketstructures. REM will also use this docu-ment as a reference for its own futureactivities. The document is meant to bethe starting point for in-depth investi-gation of a variety of aspects related tothe real estate sector.

The principles take into account thelong-standing experience and work ofthe UNECE Committee on Housing andLand Management (CHLM) and itsWorking Party on Land Administration(WPLA). The framework was developed byREM under the chairmanship of Mr.Giampiero Bambagioni, and with thecooperation of WPLA representativesand experts from across the region, in-cluding economists, legal experts andreal estate market scholars from inter-national organizations.

The task force consisted of Mr. Bambagioni(Chairman of the Task Force), Mr. Wolf-gang Amann, Mr. Enrico Campagnoli, Mr.Peter Creuzer, Mr. David Egiashvili, Mr.Brian Emmott, Mr. Jonathan Harris and Mr.Damir Pahic.

IV


INTRODUCTION

The drafting of the framework was sup-ported by the UNECE secretariat: Ms.Christina Von Schweinichen, Ms. PaolaDeda and Mr. Ariel Ivanier.

Additional support to the preparationof this study was provided by:• Tecnoborsa and its related Technical–

Scientific Committee (Tecnoborsa isthe Organization of the Italian Cham-bers of Commerce for Developmentand Regulation of the Real EstateEconomy)

• The International Real Estate Federa-tion (FIABCI)

V

INTRODUCTION

The origins of the present study traceback to the high-level roundtable dis-cussion organized at United NationsHeadquarters in New York on 16 De-cember 2008, on “The Real Estate andthe Financial Crisis: Causes, Effects andImpacts on Development”. Speakers atthe round table underlined that the cur-rent global financial crisis was the resultof inadequate regulation of real estateand financial markets. Real estate bub-bles were allowed to inflate, mortgagelending was inadequately supervised,the financial markets were allowed todevelop complex financial instrumentsthat few understood, credit risk was in-adequately modelled and credit ratingagencies failed to carry out their funda-mental role. Investors also failed toproperly understand the instrumentsthey were buying and consumers failedto evaluate the risks they were under-taking when buying inflated property.As a consequence, recessionary effectsspread to the real economy worldwide.

At the meeting, experts also agreed onthe need to develop a framework forpromoting sound real estate markets aswell as improved financing for the sec-tor. Both could help promote stabilityand sustainability of the region’seconomies and minimize the effects ofthe crisis. Subsequently, REM preparedthe present draft document with 10principles as the key components of aPolicy Framework. These were dis-

cussed at a forum in Rome on 3 and 4June 2009, organized by WPLA andREM and hosted by Tecnoborsa.The present study incorporates thecomments received during the Romeforum, the sixth session of the WorkingParty (Geneva, 18–19 June 2009) andthe public consultations that followedthese two events. Its findings should betaken into consideration in the contextof a wider spectrum of other tools de-veloped by CHLM and WPLA, such asthe guidelines for housing finance, spa-tial planning, social housing and con-dominium management1.

The document is structured as follows:each of the 10 principles and its under-lying rationale is briefly explained, fol-lowed by a number of key indicatorsthat should be considered by relevantauthorities when implementing relatedpolicies. The study also advocates im-proved harmonization of national urbanplanning and building laws which, insome countries, are often regulated bydiverse and contradictory legislation.

VI


BACKGROUND AND AIMS OF THE STUDY

(1) See, for instance, Restrictions of ownership,leasing, transfer and financing of land andreal properties in Europe and North Ameri-ca”(UNECE: Geneva, 2003), ECE Guidelineson Real property Units and Identifiers (UNE-CE, New York and Geneva, 2004) and LandAdministration in the UNECE Region – Deve-lopment trend and main principles (UNECE,New York and Geneva, 2005).

Good governance should also comple-ment appropriate and harmonized reg-ulations in the building and real estatesector.

In summary, the main aims of this docu-ment are:

1. To promote the understanding ofsome critical issues of the real estatesector, in order to better developmanagement tactics and strategiesthat might assist (depending on thelevel of development of nationaleconomies) with the identification ofsolutions to the current economic cri-sis worldwide;

2. To define rules and principles thatmight promote long-term solutionsfor sound real estate markets in dif-ferent enforcement frameworks (ac-cording to the level of developmentof the national real estate markets)and in compliance with the respec-tive legal systems, so that economicand social benefits will ensue.

The proposed principles should bebased on widely accepted concepts, asfollows:

a. Sustainable development: develop-ment that “meets the needs of thepresent without compromising theability of future generations to meettheir own needs”2;

b. Good governance: effective deci-sion-making and policy implementa-tion as well as smooth interactionbetween different sectors of society.Good governance applies to legisla-tive authorities, public administra-tion, judiciary, private sector, andcivil society in general;

c. Transparency: the possibility of hav-ing full access and knowledge of rel-evant information, of the criteria bywhich data is being used, and disclo-sure of the different aspects of deci-sion-making processes;

d. Accountability: the extent to whichpolitical actors are responsible to so-ciety for their actions;

e. Fairness: the degree to which rulesare equally applied to everybody;

f. Efficiency: the extent to which limitedhuman and financial resources are usedwithout waste, delay or corruption.

VII

(2) United Nations (1987). “Report of theWorld Commission on Environment and De-velopment.” General Assembly resolution42/187, 11 December 1987.

1


PRINCIPLES

RATIONALE

Norms and regulations, together with the systems set up by everycountry to control and legally protect the rights of possession anduse of real estate, provide the necessary foundations on which to cre-ate and develop efficient and integrated markets. Without an inte-grated national legal system, all activities that involve management ofand investment in the value of a property—and which in turn con-tribute to increase employment opportunities and the overall eco-nomic development of a nation—are considerably jeopardized.

KEY INDICATORS

1. The right of ownership is a real right that allows persons to enjoy—fully and exclusively, within the limits provided for by the legal sys-tem—a given asset or property. A real property is defined by lawas private, State or public according to the status of the legal entitywho holds title to the right of ownership.

2. A clear, harmonized set of laws (i.e. civil code, land law, con-struction code, law on spatial planning) should be in place orestablished in order to enable investment in and exchange ofreal estate property by legitimate owners.

3. An efficient legal system and a well-trained, independent judici-ary with a solid experience in real estate litigation, which is fullyavailable to the poor and vulnerable people, should be set up toadjudicate on private property rights and contractual disputes(i.e. third-party arbitration courts (TPAC)).

4. Court rulings related to such adjudications should be enforce-able.

5. Laws on property guarantees should be aimed at speeding upcredit recovery whenever loans are not repaid. The systemshould be based on clear, efficient and rapid legal proceedings

2


PRINCIPLE 1INTEGRATED LEGAL FRAMEWORK

An integrated national legal system should be established and harmonizedwith the existing regional and international norms for the real estate sector.Technical reference frameworks should be set for the application of regula-tions in order to promote the proper functioning of the real estate market. Inaddition, a legal framework for land and land use should be available at thenational level.

and the awareness that long enforcement times may be espe-cially costly in economic terms (as the free exploitation of theguarantee estate is prevented) and in social terms (as the per-sonal or third-party use of the attached assets is prevented).

6. Legal barriers that are arbitrarily established to the ownership ofreal estate by individuals, groups or legal entities should be elim-inated in those countries where they still exist. However, the le-gitimate possession and productive exploitation of public realestate should be permitted, regulated and protected, includingthose cases where it is leased or rented to private individuals orlegal entities. These rights of use should be freely negotiable andtransferable either for free or after compensation payments.

7. An effective and harmonized set of national urban planning andbuilding laws should be developed to minimize differences inlocal legislation (when diverse and contradictory), thus con-tributing to more transparent development and administration.

8. Urban planning and building laws should give special attentionto social housing and to the creation of an efficient and equitablerental/leasing market.

9. There should be a comprehensive set of laws for agriculturallands to allow transparent trade, legitimate property and pos-session rights, so that land use is not a source of disputes.

10. A comprehensive set of regulations should be developed andmade available to regulate construction activities.

11. Legislation that strengthens the real estate sector and ensures ef-ficient administration, operation and maintenance of buildingsand lands should be key elements of the national policy.

12. Given the management responsibilities for preservation, ordi-nary and extraordinary repairs and maintenance that propertiesrequire in order to maintain their economic function over time,the following categories are specified for public ownership byState or local governments:a. Real properties instrumental for the management and admin-

istration of government institutions;b. Various categories of properties (such as buildings, lands, wa-

tercourses, roads, infrastructures, etc.) for used generally andthat are of strategic value for the country;

c. Real properties recognized as being of special historic, arche-ological or artistic interest.

3

PRINCIPLES

RATIONALE

The identification and protection or property rights are based on se-cure data and information that are available to all parties. This nec-essarily implies the existence of an efficient cataloguing andclassification system as well as ready access to information on titling,to which third parties can always refer to obtain proof of the legiti-macy of the title of ownership over time. Secure private land own-ership and security of tenure are integral part of good governanceand a key condition for functioning real estate markets. For this pur-pose, regularly updated public registers and cadastral systems areneeded to minimize risk of fraud in transactions and at the sametime provide legitimacy to the lawful possession of an asset, whichin turn will facilitate access to bank loans and insurance.

KEY INDICATORS

1. An efficient, integrated system of identification, cataloguing andclassification of real estate and property rights should be estab-lished so that every asset is associated with information on theirlegitimate owners/title holders.

2. The land cadastre and land registry should cover the entire coun-try. To be accessible to third parties, and hence enforceable toanyone (including state authorities), all transactions affecting realestate property or use rights should be recorded in a public reg-ister. The signatures set on the relevant acts should be verifiedand authenticated by a public officer.

3. All public restrictions existing on properties should be well doc-umented in public registers.

4. The identification and protection of property rights should beensured as a prerequisite for the granting of real estate as guar-antee, and hence as a key element for the access to mortgageloans and financing.

4


PRINCIPLE 2EFFICIENT LAND REGISTER AND CADASTRE

The security of real estate transactions should be enhanced by identifying andprotecting property rights through the establishment of an efficient systemfor the registration, cataloguing, classification and updating of real propertydata, based on up-to-date land registry and cadastre records.

5. Security in legal transfer of property rights must be ensured by aclear system. The full legality of legal transactions regarding thesale of real estate must be guaranteed by clear identification ofthe parties carrying out the transactions. For this reason, it mustbecome mandatory to have the signatures of the contracting par-ties verified and certified by a notary public or any other au-thorized official.

6. The information recorded in land cadastre/land registry shouldbe open for public access at reasonable cost, however, personaldata protection must be guaranteed according to existing na-tional legislation.

7. The registration or recording of property rights for buildings andland should be comprehensive, accurate and up to date.

8. Ideally, the land registry/cadastre should be maintained digitallyand should be based on a uniform spatial reference also usedfor all spatial planning purposes. All relevant public actors op-erating in the real estate market should also be able to access itelectronically, authorized through digital signature.

9. The creation and registration of mortgages should be undertakenin a way that can be consulted electronically.

10. In addition, the public should have electronic access to infor-mation held by the central and local government concerningpublic planning and environmental policies.

11. Security of tenure, for each form whereby land rights are held,should be ensured.

5

PRINCIPLES

RATIONALE

To encourage economic development and contribute to social well-being, real estate markets should be efficient. This means that dataand information on market trends should be accessible and basedon clearly documented sources (e.g. Eurostat data). These require-ments are essential to make purchases and sales safer and attract in-vestments, as markets that are not transparent and have little dataand information available are usually riskier. Riskier real estate mar-kets also determine higher costs in mortgages and loans. Real estatemarkets should be in line with international standards and best prac-tices as far as possible, as shared operational methodologies andprocedures contribute to efficient, high-quality processes and pro-fessional services.

KEY INDICATORS

1. A culture of good-quality, professional service, satisfying cus-tomer expectations, should be promoted.

2. Good practices should be promoted to improve the quality ofprojects, construction, and legal and customary rules for trans-actions.

3. A modern construction sector should be promoted, one which sat-isfies the new demand for properties (for residential, professionaland production uses) that are of high qualitative standards and aretechnologically innovative. Efforts should be made to promote agreen real estate sector and energy efficiency in buildings.

4. All services and skills required for the smooth operation of the realestate sector should be adequately developed, in particular forlawyers, surveyors, brokers, appraisers, asset manager, facilitymanagers, consultants, fund administrators, managers of complexreal estate services (i.e. in banking/credit sector, including non-performing loans and securitizations) and other professionals.

5. The skills and characteristics of various professionals should bewell identified and the qualifications required to exercise a spe-

6


PRINCIPLE 3EFFICIENCY OF SERVICES

An efficient and transparent real estate market has to be consistent with legaland voluntary regulations, international standards, ethical rules and bestpractices.

cific profession and any additional specializations should be de-fined. A culture of continuous professional development (seeprinciple 10) should be encouraged for professional perform-ance whose quality is acceptable from the customer’s point ofview.

6. Services should be based on high performance standards and oncivil and professional liability rules. The strengthening of ethicalstandards and the adoption of specific codes of conduct (to bedrawn up with the help of all stakeholders involved) should bepromoted.

7. National methodologies should be integrated and harmonizedwith international professional standards and international bestpractices.

8. Voluntary, international norms that are specific of the buildingand real estate sector, such as those embraced by the Interna-tional Organization for Standardization (ISO), or developed ona regional scale such as those embraced by the European Com-mittee for Standardization (CEN) should be fostered. Nationalregulatory organizations should acknowledge international stan-dards at the national level.

9. Codes of conduct and monitoring of activities from all sectoralorganizations should be encouraged, to measure the efficiencyand quality of processes and services by the various professionalcategories.

10. Services should be competitive. More comprehensive informa-tion on the professional characteristics (e.g. required to compareservices rendered, costs/fees, etc.) should be promoted.

11. The interests of the consumer should also be better promotedand protected in the real estate sector. The awareness should becultivated that improved efficiency of the real estate market willgenerate a clear understanding of and ability to stimulate inno-vation and quality in services. The education of the consumer isessential for an innovative and productive real estate economy.

12. Real estate consumers/investors should be made more aware oftheir rights, which will consequently allow them to make betterinformed decisions.

13. Helping the consumer’s/investor’s capacity to make well-in-formed decisions in the real estate market is not only in the in-terest of professionals, but also helps ensure a more open,transparent and productive real estate economy.

7

PRINCIPLES

RATIONALE

Academic studies have stressed that the real estate sector can be adriving force for development in both emerging economies and in-dustrialized countries due to its close interconnection with manyother sectors of the economy. There are basically three levels of de-velopment of real estate markets: developed real estate markets,emerging real estate markets and non-existent (or informal) real es-tate markets. The development of the real estate sector (and relatedjobs), real estate financing (mortgages), management and land ad-ministration can decisively contribute to a country’s developmentand hence produce effective social and economic benefits. Glob-ally, these factors can assist in reducing poverty levels and contributeto improved employment opportunities everywhere.

KEY INDICATORS

1. Spatial plans can be a key instrument for territorial development.They should be based on clear and unambiguous land recordsand uniform spatial reference. Efficient use of resources that en-courages respect for landscape and the quality of the environ-ment should be developed. These plans thus have both aregulatory and development function.

2. Effective and harmonized sets of urban plans and building reg-ulations should be in place at local level by local authorities.

3. An integrated land administration system contributes to the fol-lowing: a. Developing and monitoring the correct operations of land and

real estate markets; b. Improving urban planning and development of infrastructure;c. Supporting more equitable land and property taxation;d. Guaranteeing ownership and security of tenure;e. Supporting environmental management;f. Providing property guarantee for credit;

8


PRINCIPLE 4PREREQUISITES FOR DEVELOPMENT OF SOUND REAL ESTATE MARKETS

A well-developed real estate sector contributes to the conversion of unused orunderused resources into productive capital, hence increasing employmentopportunities and reducing poverty.

g. Protecting publicly owned land and facilitating land reform;h. Providing sustainable transactions and control of land use as

well as measures to prevent and manage land disputes.4. Energy efficiency and investments in renewable energy sources

should be promoted for both the construction of new buildingsand existing buildings’ refurbishment. This will reduce energyconsumption and contribute to reduced maintenance costswhich in turn will affect the value of property, as high manage-ment costs greatly reduce market opportunity.

5. Widespread private ownership of agricultural land allowslandowners to make strategic long-term investments, with ac-cess to credit, aimed at modernizing agricultural production thatis economically viable, while preserving the characteristics of theland.

9

PRINCIPLES

RATIONALE

Good governance will contribute to making the real estate marketmore environmentally sustainable and more socially responsive tothe need for adequate housing for all. It is necessary to develop poli-cies for short-term actions to boost the real estate markets, whichmay stimulate more structural institutional reforms in the long term.This will minimize the recurrence of financial crises and their socialimpacts.

KEY INDICATORS

1. An inter-sectoral approach to land policy and reforms should besupported and actively encouraged at the highest governmentallevels.

2. Prospective buyers/tenants of any type of real estate should have norestrictions on their choice of tenure options, including sale, lease ormortgage.

3. No arbitrary price restrictions should be imposed by regulationson real estate-related markets (e.g. labour, capital land, con-struction materials), or related real estate services (e.g. brokers,surveyors, valuation experts) or real estate products (e.g. rents).

4. E-government and customer-friendly proceedings should re-move substantial unnecessary delays in the administrative ap-proval of procedures for real estate development.

5. The costs of real estate transactions in countries where they arepresently too high should be reduced, to improve access toproperty and allow for greater housing mobility for relocationpurposes (e.g. labour, study).

6. Additional legal constraints that inhibit (in part or in total) thefreedom of private individuals to enter into private contracts asregards land should be removed.

7. All laws and procedures affecting property rights and transac-tions should be well documented.

10


PRINCIPLE 5GOOD GOVERNANCE

Governments need to develop integrated policies for decision making. Inorder to create sound business climate and foster more stable real estate mar-kets, these should be based on unambiguous financial and investment rules.

11

PRINCIPLES

8. Property rights should be protected and fair compensation bepaid to affected asset owners in the case of expropriation forpublic reason.

9. Instruments such as urban redevelopment procedures and landconsolidation during land reform should be promoted.

RATIONALE

Credit policies directly influence real estate market dynamics in thesense that real estate assets form the collateral on which mortgagesand loans are allocated. Competitive and affordable mortgage ratesfacilitate the purchase of real estate and have a direct influence onliving standards. Competitive and affordable mortgage rates witheasier repayment installments are increasingly an essential for bothyoung couples and first-home family buyers. Competitive and af-fordable mortgages and loans, to provide access to private owner-ship or partial ownership for a growing number of citizens, wouldcontribute to solving housing problems in the long run.

KEY INDICATORS

1. Private investment in the real estate sector should be encour-aged.

2. All relevant financial procedures affecting real property transac-tions should be developed and well documented.

3. Alternative forms of funding based on micro-credit should bepromoted, first and foremost in economies in transition.

4. Average returns on investments in real estate and other invest-ments in the industrial and financial sectors should be similar.

5. Small to medium loans may be secured on real estate to facilitateaccess to credit for vulnerable sectors of the population, espe-cially in economies in transition.

6. There should be no arbitrary restrictions on regulated financialintermediaries allowed to engage in real estate financing.

7. Bankers should be given legal certainty to be able to recoverloans with land and real estate as collateral, including perform-ing and non-performing funds.

8. Insurance coverage against fire, standard risks and natural dis-asters should be available at internationally competitive rates.

9. All insurance companies operating in the jurisdiction of a specificcountry should be covered by an adequate regulatory regime.

12


PRINCIPLE 6SUSTAINABLE FINANCING

Access to credit and mortgages as well as microfinance for low-income earn-ers are essential elements of a healthy real estate market.

10. There should be State incentives for helping young couples topurchase homes, through indirect aid (i.e. tax benefits to reduceinterest payments) or direct aid (capital subsidies for the pur-chase/construction of homes).

11. A clear and efficient set of laws should be promulgated to con-tribute to fostering and protecting the investment of citizens’ sav-ings in real estate. Savings invested in real estate contributes tothe creation of real GDP value. If resources are invested in thissector (either by the State or private individuals includingthrough public-private partnerships (PPPs)), this increases op-portunities for housing, infrastructure and utilities. Also, leasinghelps meet the needs of those citizens who cannot afford buyinga house, and thus contributes to greater housing mobility forlabour relocation purposes.

13

PRINCIPLES

RATIONALE

The financial crisis has highlighted a key factor in the relationshipbetween the real estate and financial worlds. The lack of trans-parency in the assessment of the value and the risk of investmentsin real estate assets, especially when it has been used to back fi-nancial products, appears to be one of the causes for the current cri-sis. The problem is exacerbated by the absence of compatibleregulations at a global scale. The lack of harmonized legislation af-fects not only financial institutions and their financial products, butalso the collateral and other warranties backing these products,which are often real estate assets. Consequently, any discrepancy inthe assessed property value and the actual market value will increasethe risks attached to real estate, as potential investors may be pur-chasing titles of uncertain value.

KEY INDICATORS

1. The valuation and rating of the warranty-backed financial prod-ucts must have a direct and transparent connection with thevalue and the risk of the real estate asset under warranty andthey have to be assessed by an independent appraiser.

2. There should be a minimum capital reserve required to meet out-standing risk (i.e. solvency ratio).

3. There should be adequate transparency, research, publicity andmonitoring of the criteria for financing real estate transactions,especially when real estate assets are used to back securitiza-tions and/or advanced financial products.

4. The knowledge of market dynamics and access to informationsources should be fostered (e.g., data on the number of transac-tions and leasing contracts signed in a given period of time, newconstruction permits issued, average times required for the con-clusion of a selling/purchasing transaction, cost of loans). In thisway, trend analyses may be developed in an objective and reli-

14


PRINCIPLE 7TRANSPARENCY AND ADVANCED FINANCIAL PRODUCTS

Transparency and appropriate valuation of real estate assets used as collateralfor advanced financial products can produce social and economical benefitsand reduce the probability of future financial crises.

able way and be comparable at the national and internationallevels.

5. Objective and reliable periodical monitoring of real estate pricetrends (i.e. of sales and rental/leasing) should be performed.

6. Data have to be available and impartial statistics must be pre-pared. Analyses are necessary to provide information and aware-ness on the market dynamics to define appropriate economic,financial and credit policies.

7. Transparency of registrations and information on data of all dif-ferent real estate transactions (sales and rental/leasing) shouldbe ensured.

8. The more a market is open and transparent (and also accessibleto foreign buyers), the more numerous the opportunities to havea functioning real estate market and realistic selling prices.

9. Loan-to-value (LTV) ratio has to be considered a basic pruden-tial criterion for providing financing to private borrowers.

10. A prudential loan-to-value (LTV) ratio and the real estate ratingmust be considered basic criteria for real estate assets to be usedas guarantee of advanced financial products.

11. Financial institutions should operate a credit scoring systemwhen assessing lending in a standard format.

12. LTV is not the only valuable standard for providing financing tothe private borrower seeking mortgage credit: a steady income(guaranteeing regular debt repayments), and a good repaymentrecords are also relevant.

13. Banks and other financial institutions, real estate appraisers andrisk evaluations must be conducted by independent experts andbe transparent and public to the investors.

15

PRINCIPLES

RATIONALE

In order to contribute to the creation of more efficient and devel-oped markets, it is necessary on the one hand to improve the relia-bility of valuation processes for transaction purposes or forlanded-property financings based on prudent LTV ratios. On theother hand, developing and fostering the introduction of a real es-tate rating systems may reduce sector investment risk and encourageloans at lower interest rates. In addition, modern mass-appraisal sys-tems contribute to tax equalization by avoiding very different taxrates being applied to assets with similar economic and technicalcharacteristics.

KEY INDICATORS

1. Property valuation for tax purposes should be based on trans-parent asset appraisal criteria according to international stan-dards that are implemented at the local/national level.

2. Property valuation for mortgage or loan-granting purposesshould be based on transparent criteria, according to interna-tional valuation standards that are comprehensible and repro-ducible also by third-party appraisers.

3. There should be sufficient transparency in data recording for in-formation regarding comparable sales transactions to be readilyavailable to all appraisers. Also, statistical data on the develop-ment of real estate markets should be obtained from the data ontransactions and should be published on at least an annual basis.

4. The number and amount of taxes on land and/or transactions inland should not be disproportionate to the value of transactionsin land that trigger the tax charge.

5. All market operators should have easy access to all the relevantinformation required to engage in a property transaction, ac-cording to existing national legislation.

16


PRINCIPLE 8PROPERTY VALUATION

Property appraisal criteria based on commonly shared valuation standardsshould be promoted, as it is essential to purchasing and selling activities, ac-cess to loans and the application of equitable taxation.

17

PRINCIPLES

RATIONALE

Social housing can offer development opportunities for the real es-tate market and housing sector, and it can be a stabilizing factor foreconomic development. An innovative social housing policy cancontribute to recovering and reconverting crumbling or underusedbuildings as well as stabilizing housing production by the under-taking of multi-year plans for construction of new housing units. Itcan also facilitate urban development and regeneration, contributeto ecologically sound standards in new construction and refurbish-ment, stabilize migration flows and reduce social tensions. In severalWestern countries, social housing has been implemented as part ofnational housing plans. Also, an excessive percentage of privateownership (i.e. over 80 per cent) may be a disincentive to housingmobility for labour relocation or study reasons. Basic preconditionsfor successful social housing policies are multi-year strategies, theestablishment of institutions and an economic environment thatstimulates policy continuity and long-term investments.

KEY INDICATORS

1. A home is a basic investment for everyone, one which may not al-ways be fulfilled by direct access to the real estate market. How-ever, access to homeownership may be supported by governmentdirectly or through very-long-term loan opportunities. Every coun-try should develop social housing policies that can respond to therequirements of all segments of the population.

2. National and local administrations should, in line with localhousing requirements, implement long-term plans for soft-loanhouse leasing either through the recovering of the existing hous-ing stock or through new construction. Early planning is recom-mended, as the implementation of social housing plans usuallytakes four to eight years from the first initiative to the time build-ings are actually let.

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PRINCIPLE 9SOCIAL HOUSING

Social housing should be considered as an integral part of the real estate mar-ket, as means to promote economic growth, urban development, reduction inhousing pressure, and as a policy option to address the problem of informalsettlements.

3. Awareness should be raised about the importance of the State’scommitment and intervention to promote social housing, andalso to respond to the demand of poor and vulnerable groups.Awareness should be also raised on the fact that the provision ofsocial housing for those in need is an obligation of government.

4. Rental and leasing policies should, on the one hand, favour themobility of people for reasons of work and study and, on theother, make it possible to give concrete answers (e.g. throughtax breaks by the State or State-supported social rents) to low-income groups.

5. A comprehensive, harmonized set of laws regulating rents, con-dominiums, management and maintenance, subsidies and socialhousing should be adopted.

6. PPPs in housing have showed convincing results in many coun-tries. Initiatives should be developed in compliance with theUNECE Guidebook on Promoting Good Governance in Pub-lic-Private Partnerships (New York and Geneva, 2008).

7. Social housing (through public housing, PPPs, cooperatives, etc.)should be developed as integral part of a housing market. Itshould compete with private markets to stabilize housing costs.

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PRINCIPLES

RATIONALE

Training at every level in the real estate sector should be consideredas a strategic factor, and therefore as a key element for the devel-opment and implementation of adequate economic policies and arange of professional services in line with the ever-growing expec-tations of consumers. Updated know-how and technological re-sources that contribute to the continuous redefinition of theplanning, realization and management of building projects and serv-ices require specific skills. This includes not only basic training atthe managerial level, but also continuous professional developmentand refresher courses for all actors in real estate and related profes-sional services. These should be in line with international standards.

KEY INDICATORS

1. Training of adequately prepared higher qualified, up-to-dateprofessionals in the real estate sector is needed.

2. Access to various levels of training on the job is needed andshould be guaranteed and encouraged to support the transitionfrom university and post-graduate training to the professionalreal estate world.

3. Professional refresher courses should be encouraged not onlyas a prerequisite for top-quality professional services, but alsoas a driver of mobility within the sector.

4. Adequate training is essential for achieving — and in some casesto reinforcing — a culture of high standard service, top-qualityproduction and efficient management and maintenance of realestate. Successful policies will contribute to innovative con-struction processes and to the evolution of real estate products.

5. The implementation of the standardization of methodologies anduniform technical language should be promoted.

6. A broader community of experts in the real estate supply chain

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PRINCIPLE 10TRAINING AND CAPACITY-BUILDING

To guarantee an efficient real estate market with high quality professionalservices and building products, investment should be made in training, up-grading and continuous professional development for all those who, in theirvarious functions, are involved in the housing supply chain.

should be involved. This would be in line with efforts to promotethe greening of real estate markets, through developing innovativesolutions for the sector.

7. The planning and design of effective systems to monitor andevaluate activities related to real estate, their implementation andresults, should be fostered.

8. The interests of the consumer in the real estate sector should bebetter promoted and protected, pursuing improved efficiency ofthe real estate market and stimulating innovative and qualitativeservices. On the other hand, the education of the consumer isalso essential.

9. Real estate consumers/investors should become more aware oftheir rights, which would increase their awareness and enablethem to make more informed decisions.

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PRINCIPLES

Printed in ItalyApril 2010

FOR SUSTAINABLEREAL ESTATE MARKETSPrinciples and guidance for the development of a country's real estate sector

United Nations Economic Commission For Europe(UNECE)

Working Party on Land Administration (WPLA)

Real Estate Market Advisory Group (REM)

UNITED NATIONS

POLICY FRAMEWORK

Printed as a contribution to the work of the United Nations

www.tecnoborsa.org

Documents

FOR SUSTAINABLE REAL ESTATE MARKETS · might promote long-term solutions for sound real estate markets in dif-ferent enforcement frameworks (ac-cording to the level of development