Asia/Pacific and International Real Estate. Instructor Manual. Certified International Property Specialist Network

Transcription

1 Asia/Pacific and International Real Estate Instructor Manual Certified International Property Specialist Network National Association of REALTORS ext US & Canada International Operations Division Internationally 430 North Michigan Avenue Fax: Chicago, IL USA

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3 Table of Contents Notes to the Facilitator...Notes - 1 Introduction... Intro - 1 Chapter 1:Review Globalization Review Exercise Converting Foreign Currencies and Measures Chapter 2:The Asian Market Pacific Rim Overview Key Nations Trade Agreements.2-14 Chapter 3: Trends and Opportunities 3-1 Economic Trends National Snapshots Chapter 4:Cultural Influences Introduction Religions and Beliefs 4 4 Social Values 4-18 Legal Systems Chapter 5: How to Look at a Country International Market Knowledge The Country Assessment Model Sample Analysis of a Country Profile: Malaysia Chapter 6: Working with Japanese Getting Beyond the Basics Networking and Relationships Cultural and Business Differences Elements of a Transaction Business Protocol Guidelines Continued on next page. Copyright 2006, National Association of REALTORS Table of Contents-1

4 Chapter 7: Country Profiles Appendix... Appendix - 1 Glossary...Glossary - 1 Index...Index - 1 Resources... Resources - 1 Table of Contents-2 Copyright 2006, National Association of REALTORS

5 Notes to the Facilitator Each CIPS course manual is organized to help you present the material. Each chapter begins with an overview, objectives and application section which introduces the material and explains how the lesson learned will apply directly to an international practice. The chapters contain some presentation notes and indicate when to use an overhead. The exam questions are indicated next to the content to be covered. Key point reviews and discussion questions are listed at the end of each chapter. Information that is subject to frequent updates is placed in the appendix. Materials for the course include a PowerPoint presentation, a final exam and an exam answer sheet. General Notes Your introduction of the class sets the stage for the day. Introduce yourself and establish a relaxed, friendly environment so that learning can take place. Welcome students not only to class but to the NAR International Section. Begin by asking students to introduce themselves and explain what they expect or hope to learn from the course. Capture the answers on a flip chart (a student may assist with the writing). At the conclusion of the class, review the expectations with the class to make sure students have received the information they wanted. Be prepared to offer suggestions and/or resources for material not covered in class. Also ask students to define international real estate. Emphasize that you do not have to visit another country to learn about international real estate you can learn a lot just by working with foreign investors in your own country. Emphasize networking. Allow time for students to meet each other and network. Suggest that students exchange business cards during class breaks. Also suggest that they note their specialties on their cards. Use the overview, objectives and application sections to introduce the topic of the chapter. Read these with the students. Use the transparencies as an aid to develop and lead discussions, but feel free to use additional materials (i.e., Copyright 2006, National Association of REALTORS Notes-1

6 recent articles, sample advertisements, etc.) to help you teach. Ask students to share their personal experiences. This adds extra depth to understanding as well as interest. Let students know that they do not have to master technical, theoretical or detailed material in order to pass the examination. The course aims only to develop awareness of the topics discussed. Anyone who is attentive and participates will be able to pass the exam. Allow students time to complete the self-review section at the end of the chapters. This will enable them to put together a personalized learning action plan, which will be helpful after the course is over. Teaching Tools The following tools and exercises will facilitate learning and interaction in the classroom. Many of these have been suggested by current CIPS instructors and have been found to be particularly helpful in conveying the course material. Feel free to incorporate those that you feel are appropriate for the particular course you are teaching. Keep in mind that students from some cultures may be uncomfortable participating in certain exercises, so be sure to select exercises that are appropriate for your student population. Periodicals Distribute newspaper and magazine articles (with copyright permission) to present current information. Involve class in discussions about current events and situations. Make students aware of widespread financial resources, such as The Wall Street Journal (all versions), The Financial Times, The Economist and The International Herald Tribune. It may be helpful to show students a copy of each so that they know what the periodicals look like. You may also want to have copies of periodicals available for class exercises. Maps When you are discussing different sections of the world, post a blank map on the overhead. Provide the class with a list of countries and ask them to indicate the location of the countries on the map. If time permits, you may want to ask for capital cities as well. Notes-2 Copyright 2006, National Association of REALTORS

7 International Name Tents or Flags Use name tents with international flags. Award a prize to the first person to name the most countries. Or you may purchase a set of international flags or other props to place around the classroom. Use these props to encourage questions and discussion. Foreign Consulates Whenever possible, invite representatives from foreign consulates to address the class. Question Collection Pass around index cards and have participants write down any questions they have. Pass the cards around the room and ask participants to put a checkmark on the card if they, too, have that question. Collect the cards and answer the questions or pass them back to the students and have them answer one another s questions. Identify Subject Experts At the beginning of class, have participants write their names on an index or flipchart with the statement, I can answer questions about. Toward the end of class, have participants respond to the question, I still have questions about. Use the subject experts in the room to help you answer the questions. The Who Cares Question When presenting information to the class, stop and ask, Who cares about knowing this information? Allow students to raise their hands, then explain WHY certain information is important for them to know. This will enhance both learning and retention. Good Luck Tokens For fun, and to encourage and show support, tape a dollar bill under each attendee s seat with a note that says, Good luck making your first dollar in international real estate. At some point during the class, ask students to look under their seats. Buzz Groups Form small groups to learn any parts of the course, particularly those concepts you feel are more difficult, and have the group Copyright 2006, National Association of REALTORS Notes-3

8 report back to the class. Be sure to assign specific time guidelines. Share Experiences Periodically ask a participant to stand and share details of an international transaction and what he or she learned from that transaction. The participant can then call on another student. You may have time to progress to a third person. If you do this throughout the day, it will allow participants to teach each other from their own experiences and it will break up the lecture. Cultural Role Play Use role playing to demonstrate cultural behaviors, such as greeting, exchanging business cards, etc. Be sure to allow time for all students to practice afterward. International Companies Divide class into small groups representing international companies. Allow each group to select a CEO, create a mission statement, set goals and create a logo. Each company then presents its investment goals to the class. Market Analysis Ask students to close their books. Conduct a market analysis (CMA) and post the list on a chart or overhead. Then allow class to open their books again, and point out that they already know how to do it. Speak Another Language If possible, speak in another language for a minute or two. This is a graphic demonstration of how people feel when they are dealing with language barriers. Telephone Books Ask attendees to list three countries in which they have an interest. Pass telephone books among the class and have them locate at least one that represents their areas of interest. Once they are in a group, suggest that they use telephone books as a resource for finding information, networking opportunities, or potential clients. Then allow them to talk among their groups as to any other suggestions for finding information. If time permits, have them share these suggestions with the entire class. Notes-4 Copyright 2006, National Association of REALTORS

9 Top 5 Lists Have students get in pairs and discuss the top five things a real estate professional must know to facilitate an inbound or outbound transaction. Have them report these back to the class record them on the flipchart. (This technique can also be used for other subject matter.) Pose Key Questions Pose three or four questions before or after lunch. The questions should be similar to the more complex exam questions. Write them on a flipchart. Then ask students to circulate throughout the room to discuss the answers to the questions with other students. (This can also be done over lunch.) When the group reconvenes, have students provide answers they came up with, then provide them with the accurate responses. This technique can also be used prior to your lecture on a particular subject. Ask a question that students do not know the answer to. Allow them to respond, then provide a lecture that includes the information that answers your question. Gallery Walk Write down four or five key questions or subject areas on flipcharts and situate them throughout the room. (For example, What I am taking away from this course:. ) Ask students to get up and take a gallery walk. During the walk, they should record the information on each flipchart. At the end of the exercise, have volunteers read what is on each flipchart. Key Point Searches At the beginning of a chapter, write key points or terms on a flipchart. Divide the class into small groups, assign them to specific terms, and have them search through the chapter for the definition(s). Have the groups report their answers and how the terms relate to real estate back to the rest of the class. (This exercise can also be used at the end of a course as a review in which students search for terms throughout the entire manual.) Small Team Review After you have covered several difficult chapters, ask the class to break into teams of two or three to: 1) clarify the content, 2) create examples or illustrations that support the concept, and 3) identify areas that are still unclear. Have the group report back to the class, then respond to any areas that are still unclear. Copyright 2006, National Association of REALTORS Notes-5

10 Goal-Setting Toward the end of the class, ask students to write down their personal goals for international real estate. Select one or two goals and have the entire class brainstorm about possible steps to take to reach each goal. Ball Toss Review At the end of the course or of each chapter toss a soft ball to a student. The student must then share something he or she learned in class (preferably something they didn t know before) and toss the ball to another student. Notes-6 Copyright 2006, National Association of REALTORS

11 ASIA Introduction Copyright 2006, National Association of REALTORS

12 Intro-2 Copyright 2006, National Association of REALTORS

13 Introduction Countries of the Far East have been full of mystery for centuries. Religions, wars, political positions, art and a sense of beauty have intrigued civilizations around the globe. Their history is filled with stories we have all read in our World History classes. These stories brought us closer to cultures we never imagined touching first-hand. Now, that is happening every day. In this new world of globalized business, we are in contact with people from Australia, China, Indonesia, Japan, Taiwan, Korea and the Philippines. Their economies count on countries of the Americas and the Pacific Rim to provide access for their goods to our markets. We count on them supplying us with quality merchandise at reasonable prices and providing new markets for the products of the Americas. One such product is real estate. This course provides information, insights and skills for working with Asian investors seeking overseas properties and for investors from the Americas seeking investments in Asia. Course Objectives Upon successful completion of this course, a real estate professional will be able to: Discuss the social, economic, political, and geographical characteristics of major countries in the Asia/Pacific region. Identify important characteristics of the real estate market in certain Asia/Pacific markets, including influential laws and real estate and brokerage practices. Evaluate opportunities in certain Asian markets by analyzing significant investment patterns, investor profiles and real estate activity. Discuss ways to develop a business network to start or enhance an international practice with Asian clients or properties. Discuss techniques to promote properties, markets, and professional services. Time: 30 minutes 1. Welcome students to the course and the NAR International section. Set the tone so learning can take place. 2. Introduce yourself and give a brief summary of your experience. 3. Outline the schedule for the day, including lunch and break times. 4. Indicate the location of bathrooms and telephones. Copyright 2006, National Association of REALTORS Intro-3

14 Course Overview The Asia/Pacific region is very active both as a source and as a target of international real estate investment. Since it is potentially larger than most other markets, the region has become one that real estate professionals cannot afford to ignore. Knowledge and awareness of basic cultural, political and economic conditions in Asia will enhance a real estate professional s ability to represent, interact with, and command the respect of clients. This course addresses the economies, real estate practices and markets of the countries that are the most active and attractive investment markets. The course also includes information on skills and procedures for finding potential clients and properties for conducting international real estate business in the region. Activities and Class Procedures The course incorporates a variety of activities, such as work group assignments, group presentations, exercises, critiques and discussions. Participants are encouraged to ask questions and participate in class discussions and exercises. Because of the range of experience among students, there is a wonderful opportunity to learn from one another. Your involvement will enrich your learning experience. Final Exam At the end of the course, participants will be given an open-book, multiplechoice exam to test and reinforce achievement of the course's learning objectives. Upon successful completion of the course, each student will receive a packet containing a certificate, a press release from NAR, and other items. Intro-4 Copyright 2006, National Association of REALTORS

15 Chapter 1 Review Copyright 2006, National Association of REALTORS Chapter 1

16 Chapter 1 Copyright 2006, National Association of REALTORS

17 Chapter 1: Review Time: 60 minutes Overview A quick review and summary of the fundamental ideas of conducting international real estate will be discussed. Objectives 1. Confirm students ability to conduct basic computations. 2. Demonstrate an understanding of fundamental concepts. Application To analyze the potential of an international real estate investment, a real estate professional must have a solid understanding of conducting business in world real estate markets. Copyright 2006, National Association of REALTORS Chapter 1-1

18 Answers 1. True 2. True 3. False [direct underlying cause] 4. False 5. True 6. True 7. True 8. False [less] 9. False [less] 10. True 11. Strengthened 12. Weakened 13. More 14. Less 15. Less 16. More 17. True 18. True 19. True 20. False [need experience in international] 21. True 22. True 1. Read each question aloud, give students time to answer then ask class as a whole for the answer. 2. Follow-up with any necessary information to clarify each concept. 3. This information has been in previous courses. 4. This is just a review. Review Exercise A. Read each question and answer True or False or fill in the blank. B. If the answer is false, write the correct answer. Questions: 1. The impacts of globalization on real estate are that global investors now freely enter and leave local markets to create business opportunities and seek investments. 2. Globalization, in an economic sense, is the movement by countries, companies, organizations and people toward a single market environment. 3. Supply and demand and investment return are not involved in the process of capital flow. 4. Because they are so knowledgeable, international investors do not expect real estate professionals to have knowledge of international markets, economies and business transaction processes. 5. Capital flow is a complex interplay of foreign exchange instruments that move currency, assets, credits and debt around the world almost instantaneously. 6. If one country outpaces another in growth of gross domestic product and positive trade, that country s unit of currency will be worth more than the other s. 7. When a currency improves or gains against another, its exchange rate falls. 8. If the Australian dollar strengthens against the Japanese yen, it will take more Australian dollars to buy yen. 9. If a stronger currency is worth more, it takes more units to purchase the weaker ones. 10. If a currency weakens, its exchange rate increases. 11. If it takes fewer units of a currency to buy goods today than it did yesterday, the currency has. 12. When a currency exchange rate increases it has. 13. A stronger currency is worth 14. A stronger currency takes more or less units to purchase a weaker currency? 15. A weaker currency is worth 16. A weaker currency takes more or less units to purchase a stronger currency? Chapter 1-2 Copyright 2006, National Association of REALTORS

19 17. Investors often buy real estate because of a favorable trend in the investor s local currency against a foreign currency. 18. Favorable aspects of an investment climate could include stability, population equilibrium, free market philosophy, social harmony, democratic institutions, adequate infrastructure or underlying economic strength. 19. In international real estate it is important to build a relationship without making any assumptions about investment objectives. 20. Most banks and financial institutions can help you with an international transaction. 21. In terms of the actual tasks that must be done to complete a transaction, international practice is much the same as domestic practice. 22. Good risk/return ratio positively affects the flow of capital into a market. Exam Question #1 Which of the following is the most important reason for following currency exchange rate patterns? International investors may invest because of a favorable trend in the foreign currency compared to the domestic currency. Exam Question #2 On a global scale, investment capital is most likely to flow into the markets that exhibit: The best risk/return ratio. Copyright 2006, National Association of REALTORS Chapter 1-3

20 Activity If copies of The Wall Street Journal or other resource are available, ask students to identify current exchange rates for specific currencies, and convert the currency. Discuss the importance of tracking rates over time to assist clients in taking advantage of trends and opportunities. Reciprocals If you know the exchange rate of the domestic currency, you can determine the exchange rate of a foreign currency by using the reciprocal. The reciprocal is simply 1 divided by the foreign amount. In this example the reciprocal is 1/124.63, which equals Answer US$ X = US$ 105, Answers 1 US$ = X = US$6.82 Converting Foreign Currencies and Measures{ XE "currency conversions" } Properties are listed in terms of local currency and measurements. A real estate professional must be able to convert foreign and domestic currencies to help clients understand prices and measurements in their own terms. There are three elements in a real estate transaction which need conversion. Currency Area Time Convert the Currency Currency exchange rates are reported in two basic forms: the number of foreign units that equal one domestic unit the number of domestic units that equal one foreign unit These numbers are known as reciprocals. Example You are leaving on a business trip to Japan and want to convert US$850 to yen before leaving. You find on XE.com that the exchange rate today is US$1 = Does this means your US$ is stronger or weaker than the yen? You will get for every dollar you exchange. To find how many yen you will receive multiply US$850 X = When you return to the USA you have 850 to convert to US$ Now you want to know how many yen equal 1 US$. To find this number you divide 1 by the current yen exchange rate. For this example we will say it is the same as when you left. [1US$ = ] 1 US$ = [This is the reciprocal] 850 X = Chapter 1-4 Copyright 2006, National Association of REALTORS

21 In Summary: If you are converting: Then (conversion factor): USA dollars to Japanese yen US$1 = Japanese yen to USA dollars 1 1 = US$ (or ) This is known as a reciprocal. What if? If you are converting: Then (conversion factor): USA dollars to Chinese Yuan US$1 = CNY 8.06 Chinese Yuan to USA dollars CNY1 = US$.123 or [1 8.06] There s that reciprocal again! Convert US$850 to Chinese Yuan US$850 X CNY = CNY CNY850 to US$ Answers US$850 X CNY8.06 =CNY6, CNY850 X US$.123 = US$ CNY850 X US$ = US$ Copyright 2006, National Association of REALTORS Chapter 1-5

22 Convert Area and Price Per Unit of Area The most commonly used unit of space measurement is the square meter. In the USA properties are measured in square feet. Visually, the conversion looks like this: 1 sq. ft. =.0929m² [Not to scale] 1 square meter = square feet If you are converting: Square meters to square feet (Multiply m² X ) [More square feet than square meters] Square feet to square meters (Multiply sq. ft. by reciprocal.0929) [Fewer square meters than square feet] Area Conversion Factors 1 square meter = square feet 1 1 square foot = (or ) m Here s another reciprocal! Answer 1250 m² X = 13,455 sq.ft. A table of square measures is available in the appendix. Example How many square feet are in a space that is 1,250 square meters: 1,250 m 2 X = sq. ft. Chapter 1-6 Copyright 2006, National Association of REALTORS

23 Example If an office space is 20,000 square feet, what is the equivalent in m²? 20,000 sq. ft. X = Answer 20,000 sf X.0929 = 1,858 m² Convert Rent Formula Price X Area Conversion Factor Example An apartment rents for 4000 / m² / month What would be the rent in square feet? 4000 X.0929 = / sq. ft. / month [Where did we get.0929?] Example An apartment rents for US$50 / sq. ft. / month What would be the rent in square meters? US$50 X = US$ / m² / month Answer =.0929 Convert the Time Period Simplest of all conversions is the conversion between months and years. If a price is quoted per month, multiply the currency amount by 12 to get the price per year. If a price is quoted as an annual amount, divide by 12 to get the price per month. Copyright 2006, National Association of REALTORS Chapter 1-7

24 Exam Question #3 Industrial property in Taipei rents for NT$720 / m 2 / month. One m 2 = sq ft The exchange rate is New Taiwan dollars = $US 1.00 What is the rental price in US dollars per square foot per year? $24.32 Exam Question #4 A Korean client wants to purchase a free-standing 5,000 square foot retail building in a strip center in your market. The asking price is $350,000. Putting It Together: Currency, Price per Area, and Time Conversions Using the three forms of conversion, it is possible to change a price denominated in Japanese yen per square meter per month into a price denominated in USA dollars per square foot per year. To do this, consider the following example. The rental rate on an apartment in Kobe, Japan is quoted at 4,000 per square meter per month. Your client would like to know the equivalent price in dollars per square foot per year. Exchange rate: 1= US$ Conversion rate: 1 square foot =.0929 square meter 1) Convert the currency: 4,000 X = US$32.08 /m 2 / mo. 2) Convert the price per unit of area, meters to square feet: $32.08 X.0929 = US$2.98 / sq.ft. / mo. 3) Convert the time period: $2.98 / sq. ft./ mo. X 12 = US$35.76 / sq.ft. / yr. How many South Korea Won (1,172 Won = US$ 1) would the client have to exchange to meet this price in dollars? 410,200,000 Chapter 1-8 Copyright 2006, National Association of REALTORS

25 Key Point Review A successful international real estate practice requires an understanding of the economic effects of globalization on world markets, how foreign cultures influence transactions, and how to assess markets. The ability to convert foreign and domestic currency and area measures is a skill that benefits your clients. Copyright 2006, National Association of REALTORS Chapter 1-9

26 Chapter 1-10 Copyright 2006, National Association of REALTORS

27 Chapter 2 Copyright 2006, National Association of REALTORS Chapter 2

28 Chapter 2 Copyright 2006, National Association of REALTORS

29 Chapter 2: The Asia/Pacific Market Time: 60 minutes Overview This chapter discusses the dynamics of the Asia/Pacific market - particularly the most prominent countries and the economic ties that influence capital flow in the region. Objectives Define the Asia/Pacific region Evaluate its importance as an international real estate investment market. Identify major countries in the regional economy. Discuss major trade connections in the region. Analyze investment patterns and trends that unify the region. Application The economies of the Asia/Pacific region continue to be among the most dynamic in the world. The accumulation of investment capital and the high level of both real estate development and investment activity provide great business opportunities for the international real estate professional. Copyright 2006, National Association of REALTORS Chapter 2-1

30 Asia/Pacific Overview Asian Flu 1. Provide an overview of the Asian crisis, including causes and effects. 2. Explain or ask class how this crisis affected the global economy. 3. How did this crisis affect real estate investment? 4. How will recovery affect real estate investment? Real GDP growth for the Asia/Pacific region, has now recovered from a severe economic plunge in 1998 known as the Asian Flu. This downturn in their economies followed a long and prosperous era of investment inflows from around the world. The region was substantially over-invested, not only in real estate but in numerous industry sectors as well, which resulted in supply far exceeding demand. Investment values and returns plummeted causing loan defaults and an outflow of funds that put downward pressure on currencies. The large drop in exchange rates caused the value of foreign currency debt to increase to a dangerous level. During 1997, Thailand allowed its currency to float freely on the market. As a result, the baht suffered a severe devaluation. For export dependent Asia, a devalued baht meant cheaper Thai exports compared to those from Malaysia, Indonesia, Korea and Hong Kong. To remain competitive, many countries devalued their currencies, which caused a lack of confidence in the entire region and ultimately, a withdrawal of foreign investment. Corporations found themselves unable to meet financial obligations and non-performing loans proliferated. In 1998, Japan s Finance Ministry announced that Japanese banks held more than $575 billion in bad loans, much of which resulted from real estate investments made in the 1980s. Companies in the region did not have the working capital needed to operate normally, and banks were unable to extend additional financing. Sixteen banks in Indonesia, 14 merchant banks in South Korea, and 56 finance companies in Thailand suspended operations in January Several countries negotiated and received aid from the International Monetary Fund. The IMF insisted that business and bank reforms be made for these institutions to receive financial assistance. Governments lowered interest rates and increased spending. Countries who are members of various economic pacts, such as the Association of Southeast Asian Nations (ASEAN) and the Asia Pacific Economic Cooperation group (APEC) renewed efforts to lower and eliminate tariffs to increase trade. Higher export volume increased cash inflows, which, increased employment levels and led to higher consumption and spending. With the Asian Flu a fading memory, Asia, mainly China, is exploding. In the Key Countries section you will see just how much is happening in this once closed nation. The opening of China has had a positive impact on its neighbors as well as its own economic positioning. The populations ability to move around the country as well as their new-found opportunities to make money, is having a huge impact on the rest of the global economy. Chapter 2-2 Copyright 2006, National Association of REALTORS

31 What Makes the Asia/Pacific Region So Dynamic? Nations in this region exhibit several characteristics that support recovery and growth. Personal Savings Rate Most Pacific Rim countries have a savings rate of 18-25% while Western countries average 5-10%. Money saved instead of spent on cost of living and consumer goods is money available for investment. Labor Supply There is an abundance of labor at all skill levels for a variety of economic sectors. Work Ethic The labor force is prepared to work hard to improve their personal position and that of the groups with which they are associated. Government Policies Growth in the region has been aided by the pragmatic economic policies of many of the Asian governments. In these countries, capital generated through growth has been reinvested to expand infrastructures. The result has been higher employment levels and the subsequent generation of more capital. Increased economic cooperation among the nations in the region will also increase trade, create capital, stabilize the region and fuel economic growth. The Asia/Pacific Economic Approach As an economic bloc, the Asia/Pacific region is unlike the European Union or the North American market. The region is tied together and influenced by several unique factors: Economics, rather than political forces, bind the countries together. Pragmatism rather than ideology motivates cooperation. Exam Question #5 One of the underlying strengths of the Asia/Pacific economy is: Pragmatic economic policies of governments. Copyright 2006, National Association of REALTORS Chapter 2-3

32 Exam Question #6 The Asia/Pacific economies have been able to exploit technologies and economic patterns that other countries have already pioneered. This has enabled them to: Concentrate on marketing and export trade. The vast expanses of land and sea that separate the countries have traditionally made trade a necessity. With some notable exceptions, the region has maintained peaceful and cooperative relationships. People of the region are able to exploit technologies and economic patterns pioneered elsewhere, avoiding many of the costs associated with basic research and allowing them to concentrate on bringing products quickly to market. Trade barriers that limited foreign trade in the past actually contributed to a high level of foreign investment because they forced foreign firms to create joint ventures with local firms, buy real estate, and hire local employees. Today, these barriers are under increasing pressure by the forces of globalization to be lowered or eliminated. Foreign ownership status is being expanded and tax incentives are encouraging investment. Exam Question #7 The trade barriers, which limited foreign trade in the Asia/Pacific region in the past, have actually contributed to the high level of foreign direct investment in the region. This is because: They have forced foreign firms to form joint ventures with local firms, buy real estate, and hire local employees. Chapter 2-4 Copyright 2006, National Association of REALTORS

33 Many people refer to the Asia/Pacific region as the Pacific Rim. The Pacific Rim actually incorporates ALL countries that border the Pacific Ocean, which makes it a particularly large and diverse region. Copyright 2006, National Association of REALTORS Chapter 2-5

34 Key Nations Of the many nations that make up the Pacific Rim, the following countries are examined in this course because they have significant investment activity and are particularly involved in international real estate: China Japan South Korea Malaysia Indonesia Singapore Hong Kong Taiwan Thailand Australia New Zealand The People s Republic of China GDP T China 2004/5 Economic Data GDP GDP/Capita Inflation Unemployment Exports Imports Growth 9.2% 6, % 20% B B China is: o the world's most populated country [1,300,000,000] o the second largest energy consumer, after the USA o the third largest country behind Canada and Russia. China's real GDP increased to 9.2% in The Chinese mainland recorded US$1.4 trillion in foreign trade volume in 2005 keeping it as the third largest trader in the world. This was almost triple their 2001 volume. o China had a trade surplus in excess of US$100 billion with the United States in Chapter 2-6 Copyright 2006, National Association of REALTORS

35 o China s largest trading partner in 2005 was the European Union with bilateral trade of US$217.3 billion, up 22.6 per cent year-on-year. o In 2005, the United States was China's second largest trading partner with US$211.6 billion in bilateral trade, followed by Japan with US$184.4 billion. Major trading partners include U.S., Hong Kong, Taiwan, Japan, South Korea, Germany, Singapore, the Netherlands, and Russia. More than 100 million internet users at the end of The Chinese government has struggled to o Sustain adequate job growth for 100 to 150 million surplus rural workers who were laid off from state-owned enterprises, migrants and new entrants to the work force. o Reduce corruption and other economic crimes. o Contain environmental damage and social strife related to the economy's rapid growth. Foreign Direct Investment Since joining the World Trade Organization in 2001, foreign direct investment in China has grown at a rate exceeding 1 billion dollars/week. o Following their acceptance into the World Trade Organization, the Chinese government allowed the establishment of Special Economic Zones (SEZ), and Economic and Technological Development Zones that offered incentives to foreign investors. Just Imagine! This figure is NOT a typo! That s 1 billion dollars/week of FDI! China is now the #1 foreign direct investment destination in the world. FDI exceeded 60 billion dollars in This did not include increased amounts of foreign capital flowing into China s banks, to investment brokers or insurance companies. o Total foreign direct investment to China decreased by 0.5% in 2005, the first year that FDI has fallen since Foreign owned companies account for 60% of Chinese exports. Cheaper, educated labor, relatively developed infrastructure, a stable political environment and vast market potential are the main factors contributing to the significant amount of foreign investment. The China State Commission of Economics and Trade has declared that overseas investment is encouraged in the following areas: Copyright 2006, National Association of REALTORS Chapter 2-7

36 o New technology to assist agriculture o Construction of infrastructure facilities o Investment in base industries, such as machinery, electronics, petrochemicals and automobiles o Projects that increase foreign exchange earnings through export o New technologies to use resources and recycled resources o Technologies and equipment for pollution control and environment protection o Bio-chemical, telecommunication networking systems o Consulting services and after-sale service of precision instruments o Projects that make good use of the labor force and natural resources Product Data More vehicles were sold in China in 2005 than in Japan making it the #2 market in the world behind the USA. One third of global growth in automobile sales is coming from China. Chinese and foreign automakers have invested $12 billion over the last decade in building automobile factories with half of that amount spent just since China surpassed the USA in 2004 to become the world s largest exporter of IT products including mobile phones, notebook PC s and digital cameras. Real Estate Acceptance into the World Trade Organization served as a stimulus for the real estate market. Incoming foreign firms needed buildings and their employees needed housing. During the past 5 years China s real estate investment has been growing three times as fast as the GDP growth. Foreign investors may obtain the right to use state-owned land in China. The allotted time for the right to land use is 40 to 70 years, depending on the purpose of use. Foreign investors are encouraged to develop and reconstruct the old residential districts, high-grade residences, industrial buildings, commercial, tourist and recreational facilities. Chapter 2-8 Copyright 2006, National Association of REALTORS

37 Real estate developed by foreign investors may be sold or rented to enterprises, organizations and individuals both inside and outside China. The number of real estate professionals including developers, brokers, appraisers, consultants and property management is estimated at over five million. Beijing: o Property boom expected to last until o The Olympics are bringing new landscapes, a subway network and business opportunities expected to increase real property values. o The Beijing Municipal Land and Resources Bureau said that new land available for commercial development in the first half of 2005 was about 700 hectares compared to a demand for 4,000 hectares. In some urban areas there are over 5,000 foreign funded real estate companies, including China-foreign joint ventures (JVs) or cooperative enterprises, and over 1,000 wholly foreign-owned companies currently operating in China. In Shanghai, a city of 20 million residents, one million homes are now under construction according to Andy Xie, Morgan Stanley's Hong Kong-based chief Asia economist. By comparison, the National Association of Home Builders said that in 2005, 2 million homes were under construction in the entire United States, for a population of 296 million. Investments by Asian-Americans are helping fuel the real estate markets o Foreign developers are marketing directly to USA buyers. o San Francisco Bay area ethnic newspapers and radio stations now advertise real estate projects in China. o Developers and area brokers hold weekend seminars to sell properties. o In October 2005, in just three weeks, bay area agents received deposits for 230 condos near Shanghai, averaging $80,000 each. The Chinese middle class, a group expected to spend heavily on real estate, will soon top 100 million. Copyright 2006, National Association of REALTORS Chapter 2-9

38 Japan GDP T Japan 2005 Economic Data GDP GDP/Capita Inflation Unemployment Exports Imports Growth 2.1% 30, % 4.3% B B Important Points 1. Japan has considerable influence on the global economy because of its trade and foreign investment. 2. The Japanese bond market affects the USA s mortgage rates 3. Japanese exports of automobiles affect European markets 4. Export of agricultural products affects markets such as Brazil. Japan, is considered a very stable economy. Historically, inflation has been low and well-controlled at a 2005 rate of -0.2%. Japan s economy exerts considerable global influence. Because of its large volume of exports and imports, fluctuations of the Japanese economy influence the economies across the globe. o Changes in the Japanese bond market affect mortgage rates in the USA. o The development of luxury car lines by Japan has eroded the profits of European car manufacturers. o The opening of Japan s agricultural markets has benefited Brazilian orange growers and Argentine cattle ranchers. Japan s economy is influenced by large industrial alliances known as keiretsu. o These alliances grew out of a nineteenth century system of business alliances known as zaibatsu. o Keiretsu were encouraged after World War II as a way to speed industrial recovery. o Today many perceive the keiretsu as a hindrance to the entry of foreign companies into the Japanese market. Foreign Direct Investment Japan has a well-established record of foreign investment due to large trade surpluses and a high savings rate. It has invested abroad in overseas manufacturing plants, foreign government bonds, securities in foreign countries and real estate. Though Japan suffered severe economic problems during the Asian Crisis of 1997, including the bank sectors accumulation of 50 trillion yen of bad debts, Japanese companies continue to invest outside Japan. Chapter 2-10 Copyright 2006, National Association of REALTORS

39 In March 2003, Prime Minister Koizumi announced the Program for the Promotion of Foreign Direct Investment in Japan with a goal of doubling cumulative inward FDI (6,600 billion yen in 2001) by the five-year period ending in The Four Tigers South Korea GDP B South Korea 2004/5 Economic Data GDP GDP/Capita Inflation Unemployment Exports Imports Growth 3.7% 20, % 2.8% B B South Korea s economy revolves around a system of conglomerates, or chaebol. These conglomerates span most sectors of the economy and lack clear separation between businesses. A collapse in one particular sector can send the whole conglomerate into bankruptcy. South Korea was deeply harmed by the Asian Crisis but has been a leader in economic recovery. Current political tensions with North Korea could cause problems if uncertainty reduces confidence levels. South Korea, along with Hong Kong, Taiwan, Singapore and seventeen other nations, is a member of the Asia-Pacific Economic Cooperation (APEC). Hong Kong GDP B Hong Kong 2004/5 Economic Data GDP GDP/Capita Inflation Unemployment Exports Imports Growth 7% 36, % 0.9% B B Exam Question #8 The so-called four tiger include: Korea, Hong Kong, Taiwan and Singapore. Hong Kong s economy prospered in the 1970s when there was a vast influx of capital from entrepreneurs who were fleeing the political and social upheaval of the communist-ruled mainland. Hong Kong was officially returned from the United Kingdom to China in July Copyright 2006, National Association of REALTORS Chapter 2-11

40 o Hong Kong s 6.5 million people continue to enjoy a high degree of economic independence. o China has promised that, under its "one country, two systems" formula, China's socialist economic system will not be imposed on Hong Kong and that Hong Kong will enjoy a high degree of autonomy in all matters except foreign and defense affairs for the next 50 years. Real estate plays a major role in the Hong Kong economy. Property related activities employ 12.5% of the workforce and contribute approximately one-third of GDP. About half of all loans in Hong Kong banks relate to property. Hong Kong looks to exports to generate additional income. Since the mid-1980s, the value of the Hong Kong dollar has been pegged at HK$7.8 to the US dollar, This may be difficult since the Hong Kong currency is pegged to the USA dollar and considered overvalued. This may reduce Hong Kong s competitiveness in areas such as tourism, retail, business services and manufacturing as compared to other economies in Asia. Singapore Singapore 2004/5 Economic Data GDP GDP GDP/Capita Inflation Unemployment Exports Imports Growth 131.3B 4.5% 29, % 0.3% B B Singapore is one of the most solid economies in Asia. Singapore operates within a distinct free-market philosophy. The economy depends heavily on exports, particularly in electronics and manufacturing. Remarkably open and corruption-free economic environment, stable prices, and a per capita GDP equal to that of the Big 4 West European countries. The government hopes to establish Singapore as Southeast Asia's financial and high-tech hub. Chapter 2-12 Copyright 2006, National Association of REALTORS

41 Taiwan Taiwan 2004/5 Economic Data GDP GDP GDP/Capita Inflation Unemployment Exports Imports Growth B 3.6% 26, % 1.8% B B Taiwan has a dynamic capitalist economy. Large government-owned banks and industrial firms are being privatized. The Taiwanese trade surplus is substantial, and foreign reserves are the world's third largest. Taiwan is a major investor throughout Southeast Asia. China has overtaken the US to become Taiwan's largest export market. Growing economic ties with China are a dominant long-term factor. Due to major earthquakes on Taiwan, the structural safety of buildings remains a major concern for buyers. Other Key Nations Australia GDP B Australia 2004/5 Economic Data GDP GDP/Capita Inflation Unemployment Exports Imports Growth 3.5% 30, % 2.3% B 98.1 % Australia and New Zealand have traditionally associated themselves with Europe because of their colonial and ethnic origins. Today they consider themselves as part of the Asia/Pacific economy, and are actively engaged in trade and support of the region. Australia has a Western-style capitalist economy, with a per capita GDP well above the levels in highly industrialized West European countries. Australia s developed market economy is dominated by its services sector, 70% of GDP. Australia s advantage in primary products is a result of the natural wealth of the continent and its small domestic market. Copyright 2006, National Association of REALTORS Chapter 2-13

42 The government is actively working to reduce import protections, privatize government assets and implement tax reforms to welcome foreign investment. The rapid increase in domestic housing prices has finally cooled with the number of private homes approved for development in New South Wales plummeting 23% in With stable interest rates and income tax cuts, first-home buyers should start buying in New Zealand GDP B New Zealand 2004/5 Economic Data GDP GDP/Capita Inflation Unemployment Exports Imports Growth 2.5% 24,100 4% 3% B B Over the past 20 years the government has transformed New Zealand from an agrarian economy to a more industrialized, free market economy that can compete globally. This growth has boosted real incomes, broadened and deepened the technological capabilities of the industrial sector, and contained inflationary pressures. Per capita income has risen for six consecutive years and is now more than $24,000. New Zealand is heavily dependent on trade, particularly in agricultural products. Exports are equal to about 20% of GDP. Trade Agreements The Asia-Pacific Economic Cooperation (APEC) APEC, comprised of 21 members, was established in 1989 in response to the growing interdependence among Asia/Pacific economies. It is the primary regional vehicle for promoting trade and practical economic cooperation. Chapter 2-14 Copyright 2006, National Association of REALTORS

43 Its goal is to advance the Asia/Pacific economy and a sense of community. Members include Australia, Brunei, Canada, Chile, China, Hong Kong, Indonesia, Japan, Malaysia, Mexico, New Zealand, Papua New Guinea, Peru, The Philippines, Russia, Singapore, South Korea, Taiwan, Thailand, the USA and Vietnam. APEC economies account for approximately one-half of the world trade and 60% of the global gross domestic product. APEC is the largest market for USA exports, $527 billion in 2004, or 65% of the total USA exports that year. USA imported $947 billion of APEC goods in 2004, about 64% of total USA imports. APEC s 21 member economies have a combined GDP of over US$19 trillion, account for 47% of world trade and 2.5 billion of the world population. The Association of Southeast Nations (ASEAN) Countries ASEAN countries, Singapore, Indonesia, Malaysia, Thailand, The Philippines, Brunei Darussalam, Vietnam, Laos, Myanmar, and Cambodia, joined together to promote economic, social and cultural development of the region through cooperative programs and to safeguard the economic and political stability of the region against larger rivals. ASEAN countries have a combined population of 500 million, GDP of $737 billion, and trade of $720 billion. Exam question #9: Which of the following are members of ASEAN? Malaysia and Thailand. Exam question #10: The goals of ASEAN include: The promotion of cooperative economic, social, and cultural programs to safeguard stability in the region. To regain investor confidence and promote growth, members have committed to the realization of the ASEAN Free Trade Area (AFTA). They are working to lower tariffs and extend special incentives and privileges to attract foreign direct investment. o Brunei allows 100% foreign equity in high technology manufacturing and export-oriented industries. o Indonesia offers wholesale and retail trade up to 100% foreign equity ownership to qualified investors, in addition to 100% foreign equity in all areas of manufacturing. o Malaysia allows 100% foreign equity ownership in most areas of manufacturing. Copyright 2006, National Association of REALTORS Chapter 2-15

44 Exam question #11: Which of the following appears to play the most central role in the trade and growth triangles and the financial services network identified in the course? Hong Kong. Visual: Bring large maps to show areas comprising each triangle. Trade and Growth Triangles Characteristics of trade and growth triangles o Geography o Cultural connections o Historical connections o Economic factors Triangle #1 o Hong Kong acts as a catalyst for growth in the Pearl River Delta and South China. This economic region consisting of Hong Kong, Guangzhou, China and Shenzen, Macau. Triangle #2 o Hong Kong also serves another triangle consisting of Taiwan, Hong Kong and South China. o This triangle serves as a conduit for: Triangle #3 capital and finance from Taiwan into South China for goods and materials into South China for manufactured goods out of South China. o Singapore is the catalyst and conduit for a triangle consisting of Singapore, Malaysia and Indonesia. o These nations are geographically close and cooperate economically and politically. o Singapore aids in technology transfer into Malaysia and Indonesia. o Malaysia provides land and labor. o Indonesia provides land and a large labor pool. o Both Malaysia and Indonesia have abundant natural resources, including self-sufficiency in oil. Chapter 2-16 Copyright 2006, National Association of REALTORS

45 Key Point Review The Asia/Pacific region is a dynamic area due to: o high personal savings rates which provide capital for investment o a large labor pool at all skill levels o a strong work ethic o government policies that promote trade and encourage foreign investment. The nations in the region are motivated by practicality rather than politics, and have a long tradition of interdependence and cooperation. Large associations, such as APEC and ASEAN, provide for social and economic ties that unify and enhance competitiveness and growth. Due to its size and its proportion of the global economy, the Asia/Pacific region is a major world market. Discussion Question How will the Asian market be impacted as China continues to open its economy and increase its global economic activity? Copyright 2006, National Association of REALTORS Chapter 2-17

46 Chapter 2-18 Copyright 2006, National Association of REALTORS

47 Trends and Opportunities Chapter 3 Copyright 2006, National Association of REALTORS Chapter 3

48 Chapter 3 Copyright 2006, National Association of REALTORS

49 Chapter 3: Trends and Opportunities Time: 60 minutes Overview This chapter presents an overview of the economic and real estate trends in Southeast Asia Objectives Identify major trends in the Asia/Pacific region. Analyze the trends in terms of risks and opportunities for a real estate practice that specializes in the Asia/Pacific region. Application Understanding economic trends and being aware of current market developments help determine opportunities for inbound or outbound capital flow and the availability of funds for real estate investment. Real estate professionals who know current market conditions are prepared to facilitate real estate transactions in the area. Copyright 2006, National Association of REALTORS Chapter 3-1

50 Economic Trends Population Population growth is a major factor throughout Southeast Asia. This is a beneficial, but potentially detrimental, trend for real estate. On the plus side: o a strong housing demand o demand for products and services o large pools of labor o growth in industrial markets o influx of inbound foreign investment capital The downside will confront unchecked, rapid growth areas with: o an economy unable to support that growth resulting in poverty, debt, inflation, overused infrastructure and harm to the environment potential for civil strife Rapid change, mass migrations, and uneven distributions of wealth can create political upheaval and social crises. o In 1998 as the better-developed economies in the region began to suffer from the Asian flu: They forced immigrant laborers to return to their home countries This put greater pressure on the employment markets in those lesser-developed economies. Indonesia and Malaysia are among the hardest-hit victims of this pressure. Capital Flows to Asia/Pacific Emerging Markets The U.S. Department of State, Institute of International Finance, released the following information on January 19, The full text is available at USINFO.STATE.GOV. The Asia/Pacific emerging markets are: o China o Indonesia Chapter 3-2 Copyright 2006, National Association of REALTORS

51 o Malaysia o Philippines o South Korea o Thailand Growth is projected to remain above 7% in 2006 for the 4 th consecutive year China GDP is expected to ease from 9.8% in 2005 to 9.5% in 2006 A pickup in activity is expected in Korea and Thailand Foreign direct investment continues to be the most significant segment of capital flows into the region China received over three-quarters of FDI to the region in 2005 and the same is expected for 2006 A minor decline in FDI flows to China in 2005 might signal a leveling off of the trend Due to the apparent slowing of FDI to China, net inflows are expected to decline to $17 billion in 2006 from $24 billion in 2005 GDP growth in Korea is expected to climb to 5.0% from 3.7% in 2005 Malaysia and Thailand are expected to see GDP growth in 2006 China is becoming a provider of direct investment to industrial countries as well as emerging markets China has had a ten-fold increase in GDP since 1978 Economic Trends China and Japan are the two regional economic powerhouses, with Korea a distant third. Japan has been the Asia/Pacific's economic mentor and investment parent. Japan has become an increasingly consumer focused economy o Now a primary customer for regional economies o Especially Australia and New Zealand. China was the number one foreign investment destination in the world in 2002 for the first time and remains so today. Copyright 2006, National Association of REALTORS Chapter 3-3

52 The extremely high GDP growth of so many countries in the region when there were recessionary conditions elsewhere, was a sign of the strength of the Asia/Pacific economic phenomenon Many countries must deal with serious and impending crisis of population growth, environmental depletion, and debt. o 150 million Chinese fall below international poverty lines o The Chinese "one child" policy is resulting in one of the most rapidly aging countries in the world o Another long-term threat to China s economic growth is the deterioration in the environment: air pollution soil erosion the steady fall of the water table, especially in the north loss of arable land due to economic development. China s 11 th Five-Year Plan calls for: o A 20 percent reduction in energy consumption per unit of GDP by 2010 o An estimated 45 percent increase in GDP by Trade APEC and ASEAN member nations have rededicated themselves to: o strengthen ties o lower tariffs o increase trade o enhance competitiveness. Japan has been the model for other developing countries o increase exports o suppress spending and importing o price products to establish market share Chapter 3-4 Copyright 2006, National Association of REALTORS

53 Currency On 21 July 2005 China revalued its currency by 2.1 percent against the US dollar. Recovery from the Asian Crisis has invigorated alliances such as Regional currency trends against the USA dollar, the European euro and the Japanese yen. These currencies are a reflection of a country's comparative economic performance as well as its government s influence on economic activity. Exchange rates that remain relatively stable inspire investor confidence and lead to increased investment. Exchange rate devaluation alone cannot be relied upon to maintain a competitive and healthy economy. Currencies that maintain a peg to the USA dollar or European euro may face a loss of competitiveness. Currencies perceived as being overvalued by investors will discourage foreign investment and reduce competitiveness. Globalization forces exert pressure on currencies around the world Debt The national debt index is a barometer of: o fiscal policy (government spending) o monetary policy o the government's role in the economy National debt is a negative economic factor. High debt levels must be: Exam Question #12 One important advantage the economies of Singapore and Hong Kong have over those of Indonesia and Malaysia is: No internal debt. o reduced over time o may limit growth The economies of Japan, Singapore, Taiwan and Hong Kong are considered healthy due to no net internal debt. The growing economies of Indonesia, Malaysia, Thailand and Korea have significant debt, much of which is attributable to capital spending and start-up costs of development. Chronic debt is not a good sign Copyright 2006, National Association of REALTORS Chapter 3-5

54 o it indicates that consumption and imports are outpacing production o Australia and New Zealand are countries with chronic debt. o spending on social programs is excessive, compared to debt for capital and infrastructure investment. Real Estate Trends Chief barometers of a commercial real estate market are: o vacancy and absorption o rent trends o prices o investment returns. In the residential sector indicators include: o population growth o new construction o prices o appreciation o affordability indices The following analysis focuses on residential and commercial markets in the Asia/Pacific region. Exam Question #13 Among the following, the Asia/Pacific s highest commercial rents are found in: Hong Kong Rental Trends Office, retail, and industrial rents are the highest in the more highly developed and competitive markets of Japan, Singapore and Hong Kong. Japan o Tenants cannot rent enough space at affordable prices in Grade A buildings. o Trading up is the continuing trend in this market. o Potential tenants have postponed relocating until hoping for better availability and pricing. o New lease rents have increased by 10% following a 20 year low in o Buildings constructed after 1995 are most desirable and competitive. Chapter 3-6 Copyright 2006, National Association of REALTORS

55 Singapore o Demand for Grade A properties, coupled with a limited supply, increased rate of occupancy. o Grade A office space increased its growth 3.7% in Q3, Hong Kong o Demand for Grade A offices remained high during 4Q o Average office rent grew by 12% to US$55.31/m²/month at the end of November o Island East saw a dramatic growth of 29%. o Average luxury residential rentals increased 4.3% to US$41.98/m²/month between September and November o Limited office rentals are predicted to grow 30% in o Property prices are forecast to grow 5% in (Colliers International Market Reports [ ) Additional pressure on price levels is due to the limited supply of real estate in those highly developed islands. Lower commercial and industrial rents are found in less-developed countries or in regions where geographical isolation is a factor. The region's lowest commercial rents are in Indonesia, Malaysia, Thailand, and, due to its isolation and small size, New Zealand. Changes in rent levels follow overall economic trends. Rents have increased significantly in the region over the past 10 years. Vacancy and Absorption A market's vacancy rate signals the level of equilibrium between supply and demand. Over the past 10 years, vacancy in the region has been low due to: o rapid economic expansion o limited or delayed supply o government regulations regarding new supply o inadequate infrastructure to accommodate modern features of grade A buildings. Within the developed, island economies, vacancy will always be low because land is limited. Copyright 2006, National Association of REALTORS Chapter 3-7

56 o Only sky-high rental rates will raise vacancy levels as businesses are forced off the islands altogether. o This has happened in prime locations in Singapore and Taiwan. o High rents have also caused vacancy to rise in prime office space in Tokyo, Japan. o Where land is plentiful, vacancy will fluctuate according to: o the ups and downs of supply o varying levels of demand caused by business in general Investment Returns Good investment returns can be found in markets where either the price is low or the rents are high, or both. Investment returns within a market can vary by property type (retail, office, industrial), and each type of investment can have its own economic cycle. Exam Question #14 The dominant international investor in the Asia-Pacific region is: Japan. Major Asian Investors in International Real Estate Wealthy Asians and corporations find real property a natural investment vehicle. Japan remains the dominant international investor in the region. o Europe o Former Eastern Bloc countries o Singapore o Australia Tourist industry Constructed and operated hotels and resorts o Malaysia, Thailand and Indonesia where the Japanese have entered into joint ventures with local development firms. o Hong Kong where investments have fallen short of expectations. Hong Kong has been active in Australian office markets. USA and Canadian residential properties have attracted significant Asian investment. Chapter 3-8 Copyright 2006, National Association of REALTORS

57 The Taiwanese, Singaporeans and Hong Kong Chinese have been more active in Southeast Asia than in Australia. Exam question #15: Japan, Hong Kong and Taiwan are three Asia- Pacific countries that have: Made significant real estate investments in the USA. Copyright 2006, National Association of REALTORS Chapter 3-9

58 National Snapshots Regional Exercise 1. Have students divide into 5 groups. 2. Assign two markets to each group. 3. Give 10 minutes to discuss the economy, real estate and law issues in the assigned countries. 4. Determine if the country is a good investment target and why. 5. Group is to make any necessary currency or area conversions. 6. Encourage students to add any personal knowledge or current events. 7. Have one group member report back to class. Economy The development pattern in Asia/Pacific economies continues to be: Australia Economy o Conversion from agriculture to labor intensive manufacturing and assembly. o Increases in heavy industries. o Use of profits to shift to auto and consumer goods. o Develop high-tech electronics and computer-related products, and scientific and bio-medical industries Western-style capitalist economy Factors fueling the economy o rising output in the domestic economy o rising business and consumer confidence o increased exports of raw materials and agricultural products Economy strength due to: o emphasis on reforms o low inflation o growing ties with China Trade deficit of $16 billion in 2005 due to: o drought o weak foreign demand o strong import demand o trade deficit was $8 billion in 2002, $18 billion in 2003, $13 billion in 2004 Chapter 3-10 Copyright 2006, National Association of REALTORS

59 Real Estate More Australians are now buying their first home than in the past two years. Recently released figures show first time homebuyers, in November 2005, accounted for 18.3% of all housing loans. Increases due to: o high employment levels o relatively stable mortgage finance rates o fear of future rate increases o softer housing market than one year ago (yourmortgage.com.au) Law Foreigners can buy residential real estate within integrated tourist resorts. Deregulation is spreading to more industries China Economy Growth of 9.2% in 2005 Stabilizing foreign direct investment Market oriented economy Social and economic uncertainties Favored investment targets: o Hong Kong o Japan o Taiwan o USA 100 million Internet users at the end of million cellphone users Real Estate Rise in property prices has slowed Government introduced measures in April 2005 to slow growth. Copyright 2006, National Association of REALTORS Chapter 3-11

60 o capital gains taxes o tightening of land transactions o pre-completion sales. The measures have sent prices down in cities that once led the housing boom. Law Investors must form joint ventures to purchase state owned land. Real estate sales in China mean transfer of the right to use land. o length of time permitted for use of land is limited o length depends of the purpose of land utilization A progressive tax rate is used. Contracts must be in writing. Business CBS News correspondent Barry Petersen reports, doing business in China means doing business China's way... and it's not the way most Americans are used to. o When one young Chinese man angered the government by criticizing a local newspaper on his blog, the blog disappeared. o In most parts of the world, the internet is uncensored. In China, if someone types Tiananmen Square into a search engine, a This page is not available sign will appear. Big companies like Microsoft, Google and Yahoo play by China s rules so they can do business there. David Wolf, a media specialist in China says companies that want to do business in China know they must abide by an unspoken set of rules. o If you come to do business in China you are implicitly saying, yes, we will do business by your laws and your rules. Large companies and small acquiesce to rules considered unacceptable almost everywhere else in the world because at this point they need China more than China needs them. Many Chinese are more than disappointed by the fact the American companies are satisfied bringing only their technology and goods and leaving the values the Chinese want to hear about at home. o One young man interviewed for a CBS News piece, Anti, originally thought the companies like Microsoft, Google and Chapter 3-12 Copyright 2006, National Association of REALTORS

61 Yahoo represented freedom and democracy. Now, he says, it s just business. The rules are different in each country and it is critical to the success of an international real estate professional to know the rules where they want to do business, especially in new and/or emerging markets. Hong Kong Economy Free market economy Highly dependent on international trade Limited natural resources Extensive trade and investment ties with China Per capita GDP comparable to the four big economies of Western Europe Severe Acute Respiratory Syndrome (SARS) outbreak battered Hong Kong's economy Strong growth from late 2003 through 2005 due to: o a solid rise in exports o increased mainland tourism due to China's easing of travel restrictions o return of consumer confidence Favored investment targets: o Australia o Canada o USA o Southeast Asia Real estate Commercial o Grade A office market still in high demand o available space becoming scarce o rents grew by 16% to HK$37.37/sq.ft./month in 2005 Copyright 2006, National Association of REALTORS Chapter 3-13

62 Answer HK37.37 X.1289 = US$ How many US$ in HK37.37 if 1 HKD = US$ HK37.37 X = USD Luxury Residential Property o softened at end of August 2005 o sales fell by more than 40% o prices fell by 2% Rental growth may slow to 40-45% by end of 2006 due to: o further revaluation of Chinese currency o potential slow down in US economy Law There is a Stamp Duty Fee of 2.75% on all real estate transactions. Ownership is a leasehold from the British Crown. Leaseholds are conveyed by deed. Land registration is a system similar to Torrens. Licensing system for the estate agency trade became effective 1 January Indonesia Economy Dampened growth prospects for 2006 o High unemployment o Fragile banking sector o Endemic corruption o Inadequate infrastructure o Poor investment climate o Unequal resource distribution In December 2004, the Indian Ocean tsunami caused an estimated $4.5 billion in damages and losses. Terrorist incidents in 2005 have slowed tourist arrivals. Chapter 3-14 Copyright 2006, National Association of REALTORS

63 Indonesia experienced several human cases of avian influenza in late 2005, sparking concerns of a pandemic. Favored target for investment is Singapore. Real Estate A high volume of non-performing loans could provide opportunities for investment. Real estate license not required. Indonesian real estate projects are usually leveraged 70/30 debt/equity ratio. Land ownership is a symbol of social position and economic success. Law Foreigners cannot own real estate personally or through foreign companies. Primary means of ownership is through joint ventures with a local company. Permission to engage in a real estate transaction takes about six months. Property transfers must be done by a notary. Japan Economy Japan has the 3 rd largest economy in the world. o government-industry cooperation o strong work ethic o mastery of high technology o comparatively small defense allocation (1% of GDP) Historic features of the economy: o Keiretsu is the close-knit working together of manufacturers, suppliers and distributors. o a guarantee of lifetime employment for a substantial portion of the urban labor force. o both features are now disappearing. Copyright 2006, National Association of REALTORS Chapter 3-15

64 Japan's industrial sector is heavily dependent on imported raw materials and fuels. The small agricultural sector is highly subsidized and protected, with crop yields among the highest in the world. Japan maintains one of the world's largest fishing fleets and accounts for nearly 15% of the global catch. Two major problems: o Japan's government debt which totals 170% of GDP o aging population Real Estate New condominium supply in the Greater Tokyo region in the second quarter of 2005 was 21,033 units, up by 3.6% from a year ago. Construction starts in the Tokyo Metropolis were weak. o lack of available development sites o resulting land acquisition costs caused developers to release ongoing developments to funds and investors as well as J-REITs to avoid longer holding periods Prices of residential properties were flat. o standard units edged up by 1.1% A large supply of high-end units is expected in 2007 (Tokyo Residential Market) (Jones Lang LaSalle Tokyo Property Index 2005 Q2) Law Abstracts of title and title searches do not exist in Japan. Ownership normally determined from registration record. License not required to practice real estate. Japanese real estate brokers market the properties and are not involved in drafting contracts. Severalty is most common form of ownership. Japanese real estate appraisal system is based on that of the United States. Chapter 3-16 Copyright 2006, National Association of REALTORS

65 South Korea Economy In 2004, South Korea became a trillion dollar world economy. This success was achieved by: o a system of close government/business ties o directed credit o import restrictions o sponsorship of specific industries o strong labor effort. o importing raw materials and technology at the expense of consumer goods o encouraged savings and investment over consumption. Characteristics of this now solid economy include: o moderate inflation o low unemployment o an export surplus o fairly equal distribution of income Real Estate As the transaction amount increases the rate of commission decreases. Korean legal descriptions are similar to those of the USA. Fee Simple or Fee Simple Absolute Fee Simple are the only freehold interests acknowledged in Korea. Residential leases have a minimum term of one year and a maximum term of ten years. o A six month lease will automatically become a one-year lease o A lease for 11 years automatically considered as a tenyear lease. Law Law fixes broker commission rates. Brokers cannot charge more than the law allows but they may charge less. Copyright 2006, National Association of REALTORS Chapter 3-17

66 Korean government does not allow foreign investors to invest for the sake of investment. o only those using the real estate to conduct normal businesses and expatriates can own real property. Real estate licenses are required. o must pass an exam and register with the government agency Malaysia Economy Growth topped 7% in 2004 and 5% in Economic strengths include: o healthy foreign exchange reserves o low inflation o small external debt The economy remains dependent on continued growth in the US, China, and Japan, top export destinations and key sources of foreign investment. Real Estate Registered land is conclusive evidence of title. Agents must be licensed o coursework o exam o secondary education with 3 credits in mathematics and science o three years of work experience o submission of required working papers prior to exam There is no title insurance in Malaysia. Law Land ownership is evidenced a title which gives detailed legal description. Malaysia has capital gains tax on taxable gains from selling of real property. Chapter 3-18 Copyright 2006, National Association of REALTORS

67 New Zealand Economy Free market economy Growth has: o boosted real incomes o broadened and deepened the technological capabilities of the industrial sector o contained inflationary pressures o increased per capita income to more than $24,000 Exports are equal to about 20% of GDP. Labor Government promises that expenditures on health, education, and pensions will increase proportionately to output. Real Estate Real estate commissions range from 3-4% of the selling price. In New Zealand you pay a higher commission on smaller sales. Real estate license is required o 3-5 years experience of practical experience to get license o continuing education to retain license Law Torrens system of land registration In 1991 land taxes were repealed Ownership of certain types of real estate by non-resident foreigners is restricted. Deeds are used to convey ownership Valid contract must be in writing. Singapore Economy Highly-developed, successful free-market economy Open and corruption-free environment Copyright 2006, National Association of REALTORS Chapter 3-19

68 Stable prices Per capita GDP equal to that of the Big 4 West European countries. Depends heavily on exports in electronics and manufacturing. First nine month s of 2005 economic growth exceeded forecasts for the entire year. o manufacturing sector grew by 10% o increase in biomedical manufacturing o services sector maintained 5.1% growth Singapore experienced tough times in o global recession o slump in the technology sector o outbreak of Severe Acute Respiratory Syndrome curbed tourism curbed consumer spending The government wants to establish Singapore as Southeast Asia's financial and high-tech hub GDP was 4.5% (CIA World Factbook 2005) Real Estate In July, 2005, the government announced 13 policy changes affecting the real estate market including: o caps on bank financing for residential property o a limit on use of Central Provident Fund for property purchases o restrictions on foreign ownership of land and property Recovery of residential property prices picked up in 3Q New home sales cooled during the same period. Luxury apartments led the market with a 5% price increase. (Colliers International Quarterly Research Report, Q3 2005) Law Stamp duty is levied on all real estate purchasers as a percentage of the sales price. Real estate license requirements: Chapter 3-20 Copyright 2006, National Association of REALTORS

69 bachelor's degree in real estate Common Examination for House Agents relevant work experience member of SISV/IEA (Institute of Estate Agents) There is no continuing education requirement. (University of Denver Global Real Estate Project) Taiwan Economy Taiwan has a dynamic capitalist economy Some large government-owned banks and industrial firms are being privatized. Trade surplus is substantial. Foreign reserves are the world's third largest. Agriculture contributes less than 2% to GDP, down from 32% in Taiwan is a major investor throughout Southeast Asia. China has overtaken the US to become Taiwan's largest export market GDP 3.6% Per capita GDP $26,700 Real Estate Office space totaled 7,800 pings in January 2006, the lowest level in the past seven years. How many square feet in 7,800 pings if 1 ping = 36 sq. ft.? 7,800 pings X = sq. ft. Vacancy rates improved from 10.4% in 3Q 2005 to 9.4% Answer 7,800 pings x 36 = 280,800 sq. ft. Rental growth is fairly consistent Premium Grade offices have been moving positively with prices of NT$2,517/ping in 4Q The launching of REITs in 2005 has stimulated the investment market. Copyright 2006, National Association of REALTORS Chapter 3-21

70 Answer 80,000 pings X = Total office space transaction amount for 2005 was approximately 80,000 pings. How many sq.ft. in 80,000 pings? 80,000 pings X = sq.ft. 861,112 sq.ft. Vacancy rates fell to 4.51%, the lowest level in the past six years. Law Foreigners may own real estate for their own use Taiwanese citizens are allowed to own real estate in the foreigners' countries. Liberalization of investment laws has made foreign ownership easier. Exercises 1. Calculate the loan growth in USD if 1 THB = USD Answer: 1,016,090, USD to 1,270,179, USD 2. Calculate the 3-5 billion baht price range in USD with same conversion rate above. Answer: 76, USD to 127, USD 3. Round outstanding loan amount down to 457 billion 4. Calculate how many US$ are in 457 billion baht if 1 THB = USD. Answer: 11,609,764, USD Thailand Economy Economy features: o well-developed infrastructure o free-enterprise o pro-investment policies o increased consumption o strong export growth o preferential trade agreements boost exports maintain high growth Growth slowed to 4.6% in 2005 due to: o tsunami in December 2004 o weaker demand from Western markets o severe drought in rural regions o tsunami-related declines in tourism o lower consumer confidence o oil price fluctuation In 2004 Thailand and the United States began negotiations on a Free Trade Agreement. Chapter 3-22 Copyright 2006, National Association of REALTORS

71 In 2006 the economy should benefit from an influx of investment and stronger private consumption. A possible avian flu epidemic could significantly harm economic prospects throughout the region. Real Estate Housing loans continued to grow in Q by billion baht. The Government Housing Bank remains the biggest player in the home mortgage market with the outstanding loans of billion baht, up billion from the corresponding period of the previous year. Loan rates are expected to rise at least 1% in President Khan of Government Housings Bank (GHB) said houses priced in the 3-5 million baht range would continue to gain popularity. By November 2005, GHB had extended billion baht in loans to 172,207 people. (ETNA English News, December 16, 2005) Law The tenures are freehold and leasehold. o 30 years with an option to renew for an additional 30 years o different stamp duties apply Foreigners are generally not allowed to own freehold land Foreigners can own leasehold property Land may be purchased via a joint venture as long as the Thai partner maintains the majority of the joint venture. (Global Real Estate Project, University of Denver) Copyright 2006, National Association of REALTORS Chapter 3-23

72 Key Point Review Real estate trends and investment opportunities in the region exist due to: o most economies are economically sound o foreign direct investment is always welcomed o some economies are still recovering from mother nature s wrath and are in serious need of capital Prime office property is scarce and expensive in major metropolitan areas. Residential real estate is strong in most economies. Secondary markets provide new investment opportunities. Chapter 3-24 Copyright 2006, National Association of REALTORS

73 Chapter 4 Cultural Influences Copyright 2006, National Association of REALTORS Chapter 4

74

75 Chapter 4: Cultural Influences Time: 60 minutes Overview This lesson presents some of the major cultural elements that influence the business behavior of the Asia/Pacific region including religions; civil, common and customary law; feng-shui and numerology. Objectives Identify major religions that influence the Asia/Pacific region. Identify legal processes which impact real estate transactions. Identify and discuss cultural influences that may impact real estate transactions. Application International real estate relies on building personal relationships. Creating and maintaining relationships requires knowing and understanding cultural, religious and legal backgrounds and influences. Copyright 2006, National Association of REALTORS Chapter 4-1

76 Important Points 1. Cultural awareness in international real estate is very important. 2. There is great diversity and complexity among Asian cultures. 3. A few generalizations can be made about the Asian culture in these categories. 4. No generalization applies to each and every member of the Asian culture. 5. This chapter will address these areas and how they affect business transactions. Introduction People in the Asia/Pacific region prefer doing business with those they know and trust. o If there is no relationship, there is no business. They tend to take technical competence in real estate practice for granted. Asian cultures are complex. This is a generalized overview only! Four elements occur widely throughout the region: 1. cultural identity (religion and beliefs) 2. social values 3. business practices 4. legal traditions and systems Cultural identity is based on religious, ethical, and traditional elements and is important in the international real estate business because it: o shapes people's world view o structures social roles o determines interpersonal and business behavior o determines decision-making processes o influences investment objectives o determines how conflicts are resolved o shapes needs, values, and behavioral norms o determines a real estate professional s responsibilities o ultimately determines the completion of a transaction Chapter 4-2 Copyright 2006, National Association of REALTORS

77 Elements directly affecting social and business practices in every aspect of real estate transactions include: o face-saving behavior o nonverbal communication o proper use of personal contacts o protocol and etiquette o decision-making process o use of lawyers, contracts and written agreements o expectations of loyalty o asking questions or for more information o giving investment or transaction advice Regional legal differences affect real estate in the following ways: o expectations regarding rights of ownership o attitudes concerning the role of attorneys o differences between common and civil law Discussion 1. Select 2 or 3 items 2. Ask students how these factors could affect an international real estate transaction. Important Points Do not over generalize. These are world religions, not local or national. The beliefs are well established and widely distributed throughout the region. Copyright 2006, National Association of REALTORS Chapter 4-3

78 Religions and Beliefs Do not to oversimplify or stereotype people in the Asia/Pacific region. As an international real estate practitioner, it is useful to develop an awareness of major cultural patterns, of a religious or ethical nature, that may have a bearing on the way future clients may approach life and business. The following table shows some of the religious and ethical systems in the countries this course examines. Religions by Percent of Population Exam question #16: In which Asia-Pacific countries does Islam have the greatest relative influence? Malaysia and Indonesia Confucian Buddhist Taoist Hindu Muslim Christian Australia 1.9% 1.5% 67.40% China majority 1-2% 3-4% Indonesia 1% 2% 88% 8% Japan 84% (Including Shinto).7% Korea 1% 26% 26% Hong Kong 90% residents are influenced by these 3 religious systems 10% Malaysia 32% 9% 59% N. Zealand 53.5% Singapore 42.5% 28.5% 4% 14.9% 14.6% Taiwan 93% members of 3 systems <1% <1% 4.5% Thailand 94.6% 4.6%.7% Table Interpretation Buddhism is significant in Japan, Singapore, Thailand and Taiwan. Confucianism is most important in Hong Kong and Taiwan. Taoism is significant in China, Hong Kong, Singapore and Taiwan. Islam is most significant in Malaysia and Indonesia. Christianity is most significant in Australia, New Zealand and Korea. What the table does not show is the widespread influence of folk beliefs based on a mixture of Confucianism, Buddhism, Taoism and other local beliefs. Chapter 4-4 Copyright 2006, National Association of REALTORS

79 Confucianism Confucianism is an ethical rather than religious system. Its central teachings are: o The natural order of the universe and the moral order of society make up the greatest good. o Order and harmony are the goals of society o Correct behavior benefits the individual and society o If people know what is expected of them they will behave properly o The fundamental unit of living is the family Exam Question #17 Confucianism is a system of thought which: Defines society in terms of five fundamental relationships. Five principal relationships define the family and society at large. They are: 1. The ruler and his ministers 2. Father and son 3. Husband and wife The ruler is expected to set an outstanding example of social behavior for the inspiration of others in terms of good-heartedness, justness and dignity. The father is to be a worthy model for the son, guide his children's behavior, and develop their character. The father can claim credit or bear the blame for his children's actions. The son's duties are to honor his parents while they lived and respect them after their death. Respect by the son is the highest virtue. The husband is head of the family. His duties are to preserve the good name of the family and see that the ancestors are respected. The wife's duty is to bear sons to ensure that the family name is passed to the next generation. 4. Elder brother and younger brother The older son, as future head of the family, has to be a model for the younger brothers. The younger brothers have to accept the oldest son s position in the family. 5. Community members Other relationships are covered by a Golden Rule: Do not do unto others what you would not want them to do unto you. Question How might these values affect a real estate transaction? Copyright 2006, National Association of REALTORS Chapter 4-5

80 Discussion Question What evidence do we see regarding the challenges of maintaining the ideals of Confucianism? The individual both gains and gives dignity by approaching others ritualistically according to these relationships. o When one does not do so humiliation and loss of face results. Although this system is hierarchical, it is based on the principle that all people are of equal dignity and worth. o It includes a concept of service to the larger social whole rather than to oneself. o It emphasizes that personal effort is virtuous. Confucianism migrated from China to Korea, Japan and Vietnam. It became mixed with local beliefs and other religions. Many features of Asians can be traced to the Confucian influence, such as: o placement of a high value on family o emphasis on education as the path to perfection and status o stress on duty and obligation o preservation of face o pride and self-respect o respect for elders, superiors, authority and ancestors o quiet, modest, humble demeanor o concealment of emotion o importance of status within a group o we vs. I attitude o traditional roles and role-governed behavior o limitations on women s roles o respect for tradition o belief in work ethic: work hard, sacrifice, self-discipline, frugality and commitment to the family As the world becomes more globalized, retaining the commitment to these principles becomes more challenging. Chapter 4-6 Copyright 2006, National Association of REALTORS

81 Taoism Taoism (pronounced DOW-ism) is often mixed with Confucianism and Buddhism. It originated from the teachings of Lao Tzu, a contemporary of Confucius. Point Yin and Yang originated in Taoism. While Confucius emphasized social harmony, Lao Tzu emphasized harmony with nature. Taoism is often called a mystical philosophy. o The Tao means the way things are. It was the first primitive energy preceding creation. This energy gave birth to Yin and Yang. These forces led to the creation of heaven, earth and man. Everything else followed. Taoists believe that man, in his effort to understand the universe, has created divisions in it and overlooked its oneness. o To escape this trap and find peace of mind man must: Reject formal knowledge and rely on sense and instinct. Find the nature and rhythm of the universe. Seek to discover his natural self. Find the way and flow with it. Ignore the legal and moral codes created by government and society. Behave naturally and spontaneously. o To live in conformity with the Tao one must: Be plain and non-aggressive. Accept change. Be content with what one has. Taoism emphasizes a freer life style not bound by duty to family, community and state. Taoism has approximately 20 million believers and widespread influence. Taoism is evident in subtle logic that defies explanation. Copyright 2006, National Association of REALTORS Chapter 4-7

82 Exam question #18: One of the ways in which Taoism has influenced the Asian business environment is: Its influence on negotiating techniques. Exercise 1. Ask for a volunteer to read the excerpt. 2. Ask if anyone recognizes behaviors from personal experience 3. Ask for comments The ideas of Taoism are intertwined with the belief in magic, spirits and forces which must be conformed to to avoid bad luck and ensure good fortune in business enterprises. o A real estate professional might encounter the influence of Taoism in negotiating. The following excerpt reveals the Tao can take an interesting twist that is likely to show up at the bargaining table. "Those who strategize use the Tao of Paradox. Thus, when able, they appear unable. When employed, they appear useless. When close, they appear distant. When distant, they appear close. They lure through advantages, And take control through confusion. When complete, they appear to prepare. When forceful, they appear evasive. When angry, they appear to submit. When proud, they appear to be humble. When comfortable, they appear to toil. When attached, they appear separated. They attack when the opponent is unprepared And appear where least expected." (R.L. Wing, The Art of Strategy: A New Translation of Sun Tzu's Classic. Doubleday. New York: p. 25.) Buddhism Founded in Nepal in 500 BC by Gautama Buddha. Buddha means awakened or enlightened. Buddhism teaches: o That a good person rises through successive births to the ultimate reward of nonexistence and freedom from the pain of life. The stress is on: o Withdrawal from the world o Personal religious experience through meditation Buddha's law repudiates much of Hinduism's emphasis on ritual and caste. Buddhism favors a simple, straightforward approach to salvation through personal interaction with the pain of existence. Chapter 4-8 Copyright 2006, National Association of REALTORS

83 The teachings of Buddhism have changed and modified over the centuries. o Buddhists believe their faith is always subject to further illumination and change. Hinayana Buddhism spread to Vietnam, Laos, Cambodia, Thailand and Burma o Monks became influential and active in national and political affairs. o In Burma and Thailand, most males become monks, if only to have a brief taste of the holy life. o The presence of monks throughout society as models of the possibility of human perfection, and their occasional participation in political affairs, makes Buddhism a potent force in everyday life. Buddhism spread throughout India, into central Asia, and is thriving in China. Another form of Buddhism places greater emphasis on faith and scripture. Precepts of ideal behavior, which influence the behavior of many Buddhists, are: o respect for life o taking only what is given o avoidance of lies and deception o abstention from intoxicants and unchaste behavior o moderation in eating o avoidance of attachment to and favoring of the individual self o emphasis on rightness of purpose, speech, conduct, and means of livelihood o love of all mankind o optimism Zen Buddhism, practiced mostly in Japan, has developed practices such as meditation that lead to enlightenment. The state of perfect peace and happiness is called Nirvana. o Buddhism teaches that every person has the potential to attain Nirvana. If you are invited to a Buddhist temple: Exam question #19: While Buddhism is a significant influence in many nations of the region, it has the highest relative proportion of adherents in Thailand. Evidence that it is a potent force in daily life in this country includes the fact that: Most males become monks at some time, and monks are active in national affairs. Copyright 2006, National Association of REALTORS Chapter 4-9

84 Hinduism o remove your hat and sunglasses o feel free to ask sincere questions o in some places it may be the custom to remove your shoes o when making an offering observe what the others do o bring your hands together in front of your face and bow in front of the Buddha shrine Native to India with over 300 million adherents Hinduism is highly dependent upon historical Indian culture. Exam Question #20 Although Hinduism is highly dependent on historical Indian culture, it is also significant in the cultures of: Cambodia and Bali. It did not spread widely beyond India, but it is significant in Cambodia and Bali. Hinduism maintains that every living thing has a pure self that associates with the underlying energy of the universe, which is in all things. o The individual attains salvation through overcoming the illusion that things are separate and recognizing oneness with the universal energy. o Failure to do so results in repeated rebirths, perhaps in a lower form of life. o Reincarnation continues until a person achieves spiritual perfection. This system of thought is associated with belief in: o the perpetuation of a caste system that focuses on: duty responsibility appropriate action Discussion Question How might Hinduism affect an international transaction? The caste system is: o strictly hierarchical o hereditary o inescapable in this life The caste system has weakened due to the growth of education and the economy, and contact with other countries. Hinduism is resistant to: o social change o revolution Chapter 4-10 Copyright 2006, National Association of REALTORS

85 Islam o disorder Among its influential behavioral standards are these three: o acceptance and patience o respect for all living things o individual responsibility for all acts Hindus worship as individuals, rather than in congregations. Homes have a shrine devoted to a divinity the family has chosen. Many Hindu ceremonies are conducted at home o marriage and rituals connected with pregnancy and childbirth. Founded in the Arabian Peninsula Preaches belief in a single god, as revealed through the last prophet, Mohammed Stresses: o the importance of daily and systematic prayer o donation to the poor o observance of the holy month of Ramadan o basic belief is that the individual must submit to the revealed will of God in all things Islam means submission o one who submits to the will of God is a Muslim Adheres to: o the concept of a last judgment o resurrection into heaven o respect for the Bible and people who follow it Has over 600 million believers making it one of the world s largest religions Represents a complete system of religious, ethical, legal and political behavior. o May serve as a refuge from the onslaught of Western culture and ideas o The resurgence of militant Islam in the Middle East has stimulated similar events in Indonesia and Malaysia, where there are significant Muslim populations. Copyright 2006, National Association of REALTORS Chapter 4-11

86 Influences of Islam on behavior: o abstinence from mind-altering substances o prayer five times a day (Friday is a holy day) o segregation of the sexes (in education, public life and religious observances) o strong separation between public life and family life o modesty o dutiful observance of rituals and religious festivals o respect for commerce and free enterprise o a distinction between legitimate profit (a fair return for risks taken) and illegitimate profit (including speculation or earning undue profit on loaned money) o fulfillment of obligations o recognition of the right to private property and of the responsibility to use it for the benefit of the community o recognition of the right of women to own property and manage their own financial interests Mosque is a place for undistracted prayer. Other Traditional Beliefs Shinto In Japan, about 80 million people follow the native Shinto religion. Shinto is based on Chinese ideas: o reverence for ancestors o belief in the divine origins of the Japanese nation Businesses often use a Shinto priest to help in ceremonies launching a new business venture or for special occasions such as an anniversary. Feng-shui Feng-shui, meaning wind and water, is a belief system that says: o your being and worth are tied up with the fortune of your extended family and your ancestors o man must live in harmony with the elements Feng-shui recognizes five elements: earth, fire, metal, water and wood. These elements make up everything in our world, including ourselves. Chapter 4-12 Copyright 2006, National Association of REALTORS

87 Feng-shui is the art of using features of geography and topography to predict the future. Based on Taoist principles, feng-shui began over 3000 years ago as a way to evaluate how the elements of a man-made building site or burial ground would interact with the forces of nature. Chinese tradition views the universe as a living organism. o Man must structure whatever he adds to the landscape to be in harmony with the forces of this organism. o Structural elements must have a logical relationship to the features of the earth on which they are placed. o The design of a building, which inevitably involves these forces, affects the fortune of the occupant or the owner of the building. Ancestry worship and funeral rituals raised questions about yin and yang or the good and bad elements of the universe. o It was believed that if dead ancestors reposed in conditions of bad feng-shui, their living descendants would also suffer from bad fortune or bad health. o The bones of ancestors had to be treated with great care. o Positioning of the graves had to take into account how every hill, field and body of water affected the course of wind and water in the burial site. o Whole families with their lineages were said to have disappeared because of failure to observe the correct principles of orientation and siting. Feng-shui addresses the balance between the opposing yin and yang forces of the universe. o With the earth as a magnetic sphere, some feng-shui experts use elaborate compasses to relate the yin and yang of the earth and the heavens. The vital energy of the earth, called chi (breath) or qi (life), can be strengthened or diminished by topography and by human manipulation. Certain sites are naturally better than others in terms of this energy. o A stream that flows too quickly may be deemed to drain off the chi, while a slowly meandering one retains and nourishes it. o Stones and rocks, if integrated with the landscape, are good for chi. o A hill deprived of topsoil or foliage allows chi to be weakened. Notes 1. For real estate purposes, feng-shui is the practice of determining the good or bad fortune of a site according to its relationship with the forces of the earth and the universe. 2. Feng-shui grew out of the Taoist principle of maintaining balance between man and nature. 3. Feng-shui and Numerology are two Asia/Pacific cultural traditions that may have a direct bearing on real estate practices and decisions. 4. These may come into play with buyers and sellers from Chinese, Japanese or Korean cultures. Exam Question #21 What is feng-shui? A Chinese traditional art of using features of geography and topography to divine the future. Copyright 2006, National Association of REALTORS Chapter 4-13

88 o Undulating terrain which is characteristic of a dragon site has an abundance of chi. Houses built on dragon sites have superior chi. There are two basic approaches to feng-shui. o One is to construct a diagram revealing the forces of a location according to yin and yang. o The other, more intuitive approach relies on the expert's skill in recognizing how the configuration contributes to the flow and accumulation of chi. The feng-shui expert must also consider site layout and orientation in relation to the precise moment of birth of the owner/occupant. These ideas still appear in the attitudes of people of Chinese origin toward the development, purchase or occupancy of real estate. o A building's site, design, appearance and height must be in harmony with its surroundings, or its owner/occupants may suffer from bad fortune. o Before digging a well or a tunnel, before buying or constructing a building, many Chinese consult an expert on the location of earth spirits. In cases of illness, business failure or calamity, people often ask for a feng-shui expert's assessment. o they examine dwellings of the living and those of the dead o some people choose to select their own burial grounds with the assistance of a feng-shui expert to assure the prosperity and happiness of future generations. Feng-shui experts attributed the financial troubles of an Australian real estate tycoon to negative feng-shui caused by the sharp edges of the Bank of China that impinged on the chi of the Bond Centre building in Hong Kong. Chinese feng-shui consultants are in high demand by Chinese businesses and throughout Asia. o In modern Hong Kong, feng-shui disputes often enter into local politics, such as where to locate homes and buildings. o Real estate contracts often have a contingency clause subject to feng-shui evaluation. o Feng-shui experts consult on everything from placement of office furnishings to the orientation of doors on buildings. Chapter 4-14 Copyright 2006, National Association of REALTORS

89 Desirable Feng-shui 1. A house with windows facing south has good fengshui. 2. Your bed should face south. 3. Kitchen on east side of house. 4. Living room in the center. 5. Study should face north. 6. Dining room should face east. 7. Water features such as streams, water fountains and fish tanks promote a sense of abundance. 8. Wind chimes slow down fast moving chi. 9. Offices, storage areas, kitchens, bedrooms and baths should be organized and uncluttered. 10. Silver elements in your bedroom enhance your connection to other lifetimes and relationships. 11. Angels in the bedroom invite protection from unseen things. 12. Uncut crystals in the bedroom are a constant reminder of mother earth and provide stability and support. 13. Display ancestor s possessions. 14. Share ancestor s stories with family and friends. 15. Bamboo lifts energy upward. 16. Stoneware pots increase the association with Mother Earth. Undesirable Feng-shui 1. A building towering above those around it. 2. A building surrounded by others much taller. 3. Locating a commercial building or hospital next to or opposite a temple or church. 4. A house located on a hill with a yard sloping down to the road. [the wealth of the owner flows away instead of accumulating] 5. A house with a front door that lines up with the back door may allow good fortune to slip through. 6. A stairway in the lobby go to the front door allows the chi to escape. 7. A house facing a hill may be blocked from receiving good fortune. 8. A house located at a T intersection invites evil spirits to enter. 9. A pie-shaped lot is bad because triangles are an unlucky shape. 10. Clutter in any form is negative feng-shui. 11. Sharp corners 12. Glass front doors create instability. Notes Read through the examples of good and bad feng-shui. Ask for questions. Use examples from personal experience. Copyright 2006, National Association of REALTORS Chapter 4-15

90 Notes Numerology is the practice of predicting fortune from numbers. Review examples Discussion Question What other numbers might be an unforeseen problem in a real estate transaction? (Dates, dollar amounts, agent s license plate number) Numerology Forecasting by numbers also comes to play in real estate sometimes unexpectedly in areas such as building addresses, phone numbers and office numbers. o odd numbers are considered to be male o even numbers are considered female Note: odd and even are not defined the same way in Asia as they are in the West. For example, 13 is even because 1+3=4, which is an even number. Similarly, 14 is odd because 1+4=5, which is an odd number. o Some numbers are considered lucky while others are unlucky. Double-digit numbers are considered lucky because good luck comes as a double blessing. A single-digit number suggests loneliness and separation. The number 5 is a good number because it is associated with the Five Loves, Five Colors, Five Directions, Five Metals and Five Elements. The numbers 3 and 8 are also good numbers because they signify ever-growing and prosperity. The number 4 signifies death. o If one of the unlucky numbers appears in the address of a commercial building or home, an Asian buyer may refuse to consider the property, no matter how much it appears to suit his or her stated objectives. Chapter 4-16 Copyright 2006, National Association of REALTORS

91 Social Values As the foregoing sketches indicate, the ways of thought expressed in religious, ethical and traditional systems are complex and varied throughout the Asia/Pacific region. They interact with the institutions of agriculture and family life, which have dominated Asian cultures for thousands of years, and continue to influence how people behave in business. Some of the resulting behavior, which might be important in an international transaction, is suggested in what follows. Family Loyalty Love of family and loyalty to relatives are traits that run throughout Asia/Pacific culture. o In China, the family is the basic social unit. o The traditional Chinese family extends across five generations, from an individual's great-great-grandparents to his great-great-grandchildren. The center of authority is the oldest male in the direct line. The patriarch makes all important decisions for the family. Most of the eldest members of the household have a voice in the decision. Old age is highly respected. Where possible, all living generations shared the same household. o With changing individual financial growth opportunities, the traditional families are changing throughout Asia. Children no longer feel obligated to live with parents. Jobs and the growth of available housing provide opportunities for children and young families to live on their own. These practices are resulting in family elders being alone with no one to care or help provide for them day to day. The aging population is facing loneliness and financial hardships. These are the social values referred to at the beginning of the chapter. Ask the following questions. Question Why is family loyalty important to the real estate process? Discussion Topics Deference to elders in decision-making Concern for extended family welfare underlies investment motives Suspicion of outsiders Importance of land ownership in family status Copyright 2006, National Association of REALTORS Chapter 4-17

92 Social Classes and Roles Traditional Confucian society was divided into four classes: 1. Scholars 2. Peasants 3. Craftsmen 4. Merchants The social order was not rigid. People could move from one class to another. The wealthy avoided manual labor and attached status to: o Literacy o Education o Land ownership o Public service Discuss: 1. Deference to proper authority 2. Placement of group needs above those of the individual 3. Lack of defined status for outsiders China never had a caste system, and lower classes were not excluded from attaining those goals. In today's Asia/Pacific region, there remains a strong consciousness of rank and hierarchy. o The senior person in a group generally sets the tone, and juniors do not contradict. o Controversial discussion and debate in public are rare. The Individual vs. the Group The Confucian emphasis on family and on role behavior, the Western concept of the individual is not strongly developed in the Asia/Pacific. An individual's status is determined by generation, sex and age within the family, and by family status in the community. The Chinese appear to be astonishingly rude to strangers. Strangers have no fixed place in the Confucian hierarchy of relationships. Many Asians tend to identify one person in a group as the leader. Personal Conduct Emotions and private relationships are kept private in Asian culture. It is important not to make a point at the expense of any individual. Chapter 4-18 Copyright 2006, National Association of REALTORS

93 If an Asian is publicly humiliated, through his own actions or through those of someone else, he "loses face." If he behaves correctly, his status rises and he "gains face." Business Philosophies Due to the range of cultural origins, it is dangerous to generalize about investment and business philosophies, especially since there are major differences between the aims of institutional investors and those of individual investors. However, a few cultural generalizations may be useful: Motivation The Asian investor is not necessarily motivated by the desire for lowest cost and greatest profit. Asian investors place extraordinary importance on the broker or agent, and on the willingness and ability of that person to undertake the obligations of a sound relationship. If the person and the relationship are not sound, the investor may consider it to be a bad investment. Question How can attitudes toward class and role affect interaction in international real estate? Discussion 1. Hierarchies of authority in decisionmaking 2. Respect for status prescribed role behavior 3. Limitations for women 4. Avoidance of public disagreement Goals The Asian investor, whether individual or institutional, is likely to have goals you will not be allowed to discover. A Taiwanese or Hong Kong investor may be interested in buying a house, not as a residence, but as a family base from which to conduct further residential and commercial investments. Attitudes Asian cultures stress, to some extent, the general good over that of the individual. The Japanese place a great emphasis on loyalty to the group at the expense of the individual. Koreans and people of Chinese origin are not so averse to the idea of individual advancement. The Chinese business culture is much more supportive of the individual profit motive than is the Japanese. Exam Question #22 The Asian investor is not necessarily primarily motivated by the desire for lowest cost and greatest profit. A more important motivation is often: The long-term benefit of the family or group. Women in real estate practice in the Asia/Pacific region are rare. The tendency of the Confucian, Islamic and Buddhist traditions is to hinder the participation of women in business. Copyright 2006, National Association of REALTORS Chapter 4-19

94 Note Differences in profit motives make it unwise to volunteer standard investment advice. A woman may encounter the greatest resistance from Korean and Japanese businessmen. Japanese are more willing to deal with Western women on a professional level once a woman's role in the business transaction is made clear. Exam question #23: A woman seeking to broker real estate investments in the Asia-Pacific region can expect to encounter the greatest resistance in dealing with: Korea and Japan. Chapter 4-20 Copyright 2006, National Association of REALTORS

95 Legal Systems The various legal traditions in the Asia/Pacific region have an impact on the conduct of an international real estate transaction. The real estate professional should have a general awareness of the different legal backgrounds from which clients may be operating. This is important in: o anticipating a client's expectations o knowing what not to take for granted about the client's understanding of another country s legal practices. Legal scholars have identified three basic factors that have shaped the legal practices of the region: o customary law (laws based on local religious beliefs and cultural values) o world religions (particularly Islam) o colonial legacies A general understanding of these factors will be useful in working with Asian clients. Customary Law A basic theme runs through the application of customary law in the region, whether it concerns: o land ownership and use o inheritance o interpersonal disputes Members of each local group are connected to the land and to each other by religious beliefs and rituals that relate to life in the cycle of the seasons. Village officials may have a role in resolving disputes that concern land needs of the community. Chinese customary law is important in at least two areas: o informal settlement of disputes at the local level o legal processes in a common law setting (or in other foreign jurisdictions). During the imperial period in China o a sophisticated system of legal code was developed Copyright 2006, National Association of REALTORS Chapter 4-21

96 Important Notes 1. It is imperative to seek the advice of legal experts. 2. Real estate professionals should have an awareness of the regional legal system because: An international transaction may involve the law of an Asia/Pacific nation. 3. The legal environment from which a client comes influences the client s understanding and expectations for a transaction. Discuss how each point may affect an international transaction. Use an example if possible Exam Question #24 A leading reason for the typical reluctance of Asian businesspeople to deal with lawyers in a real estate transaction is: The regional influence of customary law. o local leaders and communities were given extensive responsibility for dealing with disputes o traditional distrust of authorities prevented most Chinese from seeking formal legal process Since 2001, when China joined the World Trade Organization, cultural as well as economic changes have undergone rapid change. o Harmonious family relationships no longer carry the importance they once did. o Parents and household heads are rapidly losing control of children s marriage and divorce decisions. o Public displays of affection are now commonplace. o Children no longer are choosing to stay in their parents home. o These changes are signs of the deteriorating dependence on Chinese customary law. Customary law extended to contracts, transactions and other business arrangements. o Avoid the intervention of state or formal legal process. In Hong Kong, Malaysia and other foreign jurisdictions, authorities have enacted measures to regulate for their Chinese residents how customary law will interact with the official legal system. o Avoidance of official involvement in contractual matters. o Distrust of formal law and lawyers. o Deferral to family or community leaders to resolve disputes. o Distrust and dislike of written contracts. o Reliance on principles of correct behavior as defined by relationships. Influence of Religion In Indonesia and Malaysia, the role of religion is expressed through a separate court system (Islamic). Catholicism is also recognized in the court systems of Indonesia and the Philippines. Buddhist countries, such as Thailand, while not formally incorporated into religion in the legal system, base the legitimacy of their systems on Buddhist values system. Chapter 4-22 Copyright 2006, National Association of REALTORS

97 o The claims of government on the individual are transcendent and unchangeable. o Man is responsible for his own conduct and for his own good or bad fortune. o Judicial abuses cannot be changed by the popular will. o The hierarchy of power, from the village level up to the highest levels of government, is confirmed. o Disputes leading to formal legal action are viewed as inviting the application of a cosmic and immutable process. Colonial Influences in the Legal System Most Asia/Pacific countries have legal systems that are influenced by Western legal traditions. Note Though religion is discussed in-depth earlier in chapter, you may want to mention some of its influences on legal systems. There are two types of influences from the colonial systems civil law and common law. These traditions stem from the European continental civil codes or the Anglo-American common law or a combination of the two. Civil law systems rely on detailed codes of law. Common law countries use accepted practices, legal interpretations, and court precedents to modify legislated law. Singapore, Malaysia, New Zealand, Australia and India systems are based in British traditions. Indonesia has a Dutch-inspired system. The Philippine system is based on both European civil law and USA common law. Japan s system grew out of German origins. Korea became a protectorate and colony of Japan after o The Japanese legal system was imposed on Korea until the end of WWII. o In 1946, Korea adopted the Japanese civil code and system for itself. o Although greatly influenced by USA law, much of the Korean law can still be traced to Germanic codes via Japan. Thailand maintains a codified system of law based on the French and German codes. Copyright 2006, National Association of REALTORS Chapter 4-23

98 Notes Civil law relies on legislated codes to cover any and all situations. Common law uses accepted practices, precedents and interpretations in addition to established codes. Exam Question #25 What is the basic difference between a legal system based on civil law and one based on common law? Common law systems use accepted practice, interpretation and precedent to modify legislated law. Exam Question #26 The real estate professional who wishes to carry out a real estate transaction with someone from the Asia-Pacific region is well advised to: Take nothing for granted in explaining the legal process in a transaction. Common Law vs. Civil Law Systems with law originating from civil law or common law have significant differences that affect the attitudes of officials, administrators, and others whose occupations are linked with the legal systems. Common Law Lawyers o Draft longer contracts o Matter at hand may not be covered by written law o They need to implement challenges o Cautious in giving a legal opinion Officials and courts are affected by precedents Laws subject to interpretation Legal Tips Civil Law Apply rules in abstract based on situation Go by the book Lawyers: Common Law Civil Law Both Australia India Indonesia Hong Kong Malaysia New Zealand Singapore Macao Taiwan Japan o Draft shorter contracts o Rely on written codes o Give legal opinion quickly o Applicable code easy to access Philippines Korea Thailand Real estate professionals should not assume understanding of the legal environment in any Asian country. When working with an Asian client on an inbound transaction: o do not take anything for granted o be sure to fully explain the domestic legal process o use lawyers discreetly and carefully. Chapter 4-24 Copyright 2006, National Association of REALTORS

99 Key Point Review 1. Confucianism, Taoism, Buddhism, Hinduism, Islam and Christianity are among the major religious systems in the region. 2. Love of family, class and role expectations, emphasis on the group, modes of personal conduct, and investment philosophy are some of the areas where cultural values are likely to affect real estate transactions. 3. China is a country where the concept of customary law is rapidly changing. 4. Interactions between customs, religions, and colonial heritage have produced various forms of legal attitudes and systems in the region, all of which affect real estate transactions. Quick Review Facilitate discussion of these topics by asking follow-up questions such as: 1. With which cultural group is this characteristic most evident? 2. How can a practitioner appropriately handle such situations? Discussion Question How do the following characteristics affect the work of an international real estate practitioner? 1. Concealment of individual opinions and emotion 2. Avoidance of conflict 3. Importance of face 4. Difficulty in getting client to reveal true objectives 5. Time required to establish trust 6. High expectations of an agent by client 7. Agent differences in profit motives Copyright 2006, National Association of REALTORS Chapter 4-25

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101 Hong Kong Apartments Chapter 5 How to Look at a Country Copyright 2006, National Association of REALTORS Chapter 5

102 Chapter 5 Copyright 2006, National Association of REALTORS

103 Chapter 5: How to Look at a Country Time: 90 minutes. Overview This chapter discusses: how to interpret important data and trends within a market assessing a market potential for real estate investment brokerage activity within specific markets Objectives Identify a countries social, economic and political characteristic. Identify attractive market characteristics for real estate investment. Analyze a sample country. Application Real estate investment trends and brokerage activity, particularly in the commercial arena, follow trends of an economy as a whole. In order to assess the potential of a real estate market, professionals must understand the country's economy and culture in considerable detail. Copyright 2006, National Association of REALTORS Chapter 5-1

104 Note Knowledge about international markets allows a real estate professional to: 1. Add value to their services 2. Increase their competitive edge International Market Knowledge Real estate markets can vary widely in different areas of the same city, state or country. An agent s knowledge of their own market adds value to their service and recommendations. They must understand the effects of related events such as: o construction of a new factory o government funding for home ownership programs o impacts of development decisions made many years ago o characteristics that make their market unique Successful real estate professionals never assume that what is true of their own markets is true of markets abroad including: o the view of real estate as a commodity o the real estate transaction process International real estate professionals must know the markets within their chosen specialty area. o The more the agent knows, the more value they provide. o This knowledge is valuable for buyers and sellers from region. Your knowledge will increase your chances of getting the listing, or buyer, in the first place. Knowledge and interest in client s home market helps build the all-important relationship. International transactions often lead to long-term business relationships. International transactions can be an exciting specialty, with opportunities for personal growth through travel and exposure to different cultures. Chapter 5-2 Copyright 2006, National Association of REALTORS

105 International real estate professionals must have comprehensive knowledge of a country in order to: Advise outbound investors. - The professional must guide and advise capital investors about local economic conditions, practices, norms, opportunities, returns, market projections, alternative levels of risk and potential pitfalls. Advise outbound users. - The professional must identify market opportunities for businesses operating abroad in terms of market trends, site selection, infrastructures, facilities costs, regulatory channels and cultural barriers. Work with inbound foreign investors and users. - The professional must meet the needs and requirements of foreign investors in such a way that cultural differences do not impede a satisfactory relationship. Network effectively - The professional may need to seek information, advice or assistance from professionals in other countries. The more he or she knows about a market, the better the evaluation and selection of these people will be. Global real estate professionals should be familiar with more than just real estate market data. To have a good understanding of a market, a real estate professional should also be aware of more in-depth information, such as: sources of capital government structure and attitudes the economy market landmarks local culture Copyright 2006, National Association of REALTORS Chapter 5-3

106 The Country Assessment Model The country assessment model is used to assess a market s potential for investment. It is impossible to know all there is to know about a country. However, a real estate professional should have a working familiarity with certain overall aspects of a market. These characteristics are summarized below in the country assessment model. This model was introduced in the International Real Estate for Local Markets course as a guide for evaluating market potential. The model is expanded here with suggestions regarding interpretation of the market data. Applying this model to any market-specific data you collect should help you determine how attractive a given area is as a target for real estate investment. It is up to the real estate professional to decide how much detail to seek and how much time to spend pursuing it. Following are the factors for consideration and what they may mean in terms of a particular market. Note 1. Discuss how each element of the Country Assessment Model helps evaluate real estate markets. 2. All major facets of a market must be evaluated before a composite rating of potential can be developed. Geography Factors to consider Accessibility to other markets and countries Intramarket accessibility Unique features Natural resource market potential such as mining, agriculture, forestry, and fisheries Potential for intensified use of natural resources, dams, irrigation canals, building materials, to enhance the existing economy What the data can mean The area can provide a relative measure of potential market size when compared to other known markets. The size of the capital city is another clue to market size. The capital city is typically, buy not always, the major market in a country, and is usually the one for which real estate data is reported. Import/export access and costs reveal a great deal about the accessibility of a market, as can the existence of convenient trading partners Ease of infrastructure development provides a good look at intramarket accessibility. Chapter 5-4 Copyright 2006, National Association of REALTORS

107 Ease and degree of social and economic interaction provides insight into market accessibility for internal and external markets. Topographical influences on development can reveal which are the market s national resources. Favorable characteristics Easily accessible from other markets and countries Unique natural resources People Factors to consider History Demographic aspects Population growth rate Consumption-to-savings ratio Per capita income trend Education levels What the data can mean Absolute size corresponds directly to total demand for real estate, particularly for residential properties. Population growth rates determine increases or decreases in housing and retail demand. Rates of population growth can also help determine good vs. bad growth in terms of the overall economy. o One to 3% is considered healthy and the economy can keep up with the needed changes such as housing, schools and jobs. o More than 3% is considered too rapid for sustainable growth. Population density can influence the makeup of an economy and the types of real estate properties that service the economy. o The higher the density, the higher the real estate prices. Copyright 2006, National Association of REALTORS Chapter 5-5

108 Favorable characteristics Stable rate of population growth Reasonable consumption-to-savings ratio Increasing per capita income High literacy and education rates Government Factors to consider Type and age of present form of government General economic philosophy and policy Influence of business on policy and law Trade restrictions Capital inflow/outflow restrictions Wage controls and price controls Asset ownership by foreigners Monetary policy Fiscal policy/budget ratio to GDP Tax laws and rates for citizens and foreigners Trade agreements and alliances What the data can mean The varying powers, attitudes, structures and relative stability of a government can determine the success or failure of the economy. Democracy, open markets, structural stability, tax incentives and minimalist regulation are positive characteristics. Memberships in agreements and alliances can indicate a country s approach to international trade and foreign investment. Chapter 5-6 Copyright 2006, National Association of REALTORS

109 Favorable characteristics Laws that preserve free markets through minimal restriction of foreign-owned assets Minimal legal restrictions on ownership, capital flow, wages and prices Anti-inflationary monetary policies Conservative fiscal policies and balanced budgets Reasonable tax laws and rates on income, gains, sales, imports/exports, corporations, for domestic and foreign parties Positive promotion of trade agreements and alliances History of stability Economy Factors to consider GDP trends Trade balance and current account trends Inflation rate trends Unemployment rate trends Capacity of business infrastructure including communication systems, corporate structures, and distribution systems Survey of base industries, their level of development and the potential of untapped industries Base product competitive standing Availability, costs and mobility of labor and management supply Historical periods of depressions or hyper-inflation Exchange rate trends Structure and regulation of banking Personal savings rate Status of equity and money exchange markets Copyright 2006, National Association of REALTORS Chapter 5-7

110 What the data can mean Inflation rates measure the loss or gain of consumer purchasing power in a market. o The higher the inflation rate, the more products and services cost. o If wages cannot keep pace with inflationary trends, purchasing power declines along with the standard of living. The size of the labor force is another real estate market indicator. o It also indicates a market s potential attractiveness to foreign companies who would need to hire local labor. The unemployment rate is an indication of the economy's actual output vs. its potential output. Exchange rates indicate a country's level of economic performance when compared to other countries in terms of balance of trade, inflation and per capita GDP. GDP is a measure of a country s economic magnitude. o GDP per capita measures the economic output per unit of population o GDP growth measures the trends in overall output. The resources, products and industries of an economy describe its unique character and convey its level of advancement. o More advanced economies typically specialize in manufacturing, technology, financial services and communications. o Less advanced economies are engaged in agriculture, export of natural resources, and labor-intensive industries. Exports reveal the economy's strengths and base industries. Imports reveal the country's shortcomings, needs and wants. Trading partners can reveal the country's economic alliances and dependencies. Trade balances compare the net difference between total imports and total exports. o A positive trade balance means the production of exports has outpaced the cost of imports. o A negative trade balance indicates consumption has exceeded production. Chapter 5-8 Copyright 2006, National Association of REALTORS

111 Favorable characteristics Internationally traded currency Stable banking system Controls on liquidity and/or the money supply Increasing exchange rates against currencies of other countries Steadily growing GDP Positive trade balance History of stable inflation rates Low unemployment Stable, competitive base products and services Availability of adequate labor and management Technological advancement Sophisticated, mature business infrastructure including communication systems, corporate structures and distribution systems. Infrastructure Factors to consider Status of transportation Power, water and sewer systems Communications (telephones, mail, etc.) Technological sophistication Status of residential neighborhoods: proximity to commercial, medical, religious and educational facilities Status of educational institutions and medical facilities What the data can mean Infrastructure is essential in sustaining economic growth. Without adequate infrastructure systems, a country cannot expand or prosper. Favorable characteristics Water, power and sewer systems operating below capacity Copyright 2006, National Association of REALTORS Chapter 5-9

112 Real Estate Factors to consider Property issues Land use regulations Sophistication of real estate business Status of support: title, finance, property management, construction, insurance, engineering, architectural, appraisal, brokerage and professional organizations Ownership laws Landlord-tenant relations and leasing practices Availability of mortgage financing Disclosure requirements What the data can mean Notary fees, commissions, stamp duties, land registration fees, transfer taxes, acquisition taxes and value-added taxes can all determine the cost of acquiring a property in a particular market. o Acquisition costs vary from country to country. The commission rate indicates what cooperating brokers may expect to earn from a transaction. Rental rates provide a picture of the market's occupancy costs by type of property as well as a means of comparison to other markets. Patterns in leasing rates are direct insights into local supply and demand conditions. Size of the real estate market can determine the volume of transactions, the sophistication of the market, and the potential commission/fee income to expect in the market. Vacancy rates quantify the difference between the market's supply and corresponding demand for properties. o Increasing rents and decreasing vacancy rates reveal a landlord's market. Chapter 5-10 Copyright 2006, National Association of REALTORS

113 Favorable characteristics Intelligent land use regulations Adequate number of support organizations: title, finance, property management, construction, insurance, engineering, architectural, appraisal, and brokerage organizations Laws favoring private, unrestricted ownership practices Reasonable landlord-tenant relations and leasing attractive climate for mortgage finance Trends Investment return trend Types of properties available Absorption and vacancy rates Capitalization rates What the data can mean Lease terms, like acquisition costs, provide general local data for the purposes of familiarization and comparison. o By quantifying other occupancy costs, this information also enables reasonable cost comparisons with other markets. Yields reveal a general relationship between property sale prices and net income, assuming a property is fully rented. o As demand for properties goes up, yields begin to fall. (Higher prices divided into net incomes produce lower returns.) Favorable characteristics History of attractive investment returns Availability of high-quality properties Positive absorption rate Competitive capitalization rates High occupancy rates Copyright 2006, National Association of REALTORS Chapter 5-11

114 Cultural Issues Factors to consider Effect of religious and cultural norms on trade with other countries Cultural attitudes toward business, industry, work, competition, world events, and other nationalities and cultures What the data can mean A country's ethnicities, languages, religions, arts and history create a country's unique identity. Understanding a nation's identity facilitates working with its people. Favorable characteristics Favorable cultural attitudes toward business, industry and trade Sophisticated views of world events, and other nationalities and cultures Note To sum up this section, review some of the points that make a market attractive. Religious and cultural norms that do not preclude open trade with other countries Adequate educational institutions and medical facilities Chapter 5-12 Copyright 2006, National Association of REALTORS

115 Sample Analysis of a Country Profile: Malaysia The following analysis applies the country assessment model to selected data about Malaysia. Helpful information can be accessed through the country profiles database can be found at the following sites: CIPS Network site at U.S. State Department CIA Factbook at The International Consortium of Real Estate Associations (ICREA) at The Global Real Estate Project at Denver University at burns.dcb.du. Information for the sample analysis in this chapter was taken from all of the above sites. It is important to keep information as current as possible. For that reason, look for a date the information was last updated. If you have detailed knowledge about a particular country and would like to assist with the country profiles, please contact the CIPS Network. This example illustrates what an international real estate professional can learn from various sources of information about a targeted market or country. You can expand or modify the model and its interpretations to suit your specific objectives. Note Present the application of the country assessment model to Malaysia. Review the interpretations of the data. Assessment Model: Malaysia Geography Location Total Area Coastline Southeastern Asia, peninsula bordering Thailand and northern one-third of the island of Borneo. Also bordering Indonesia, Brunei, and the South China Sea, south of Vietnam 329,750 sq. km land area: 328,550 sq. km comparative area: slightly larger than New Mexico 4,675 km Copyright 2006, National Association of REALTORS Chapter 5-13

116 Interpretation Centrally situated in the region, Malaysia is very accessible to northern markets as well as to Australia, providing good potential for transportation-oriented industry. In the past 3 years there has been a 7 ½% rise in permanent crops. The reason for this large increase is not clear. One possibility is the desire to decrease the country trade deficit by providing more of the food products they need instead of depending on imports as heavily. West Malaysia is situated on a peninsula while East Malaysia is separated by water and located on an island 300 miles away. This could be a disruptive factor in future economic and/or political events. Climate Terrain Natural Resources Land Use Environment Tropical; annual southwest (April to October) and northeast (October to February) monsoons Coastal plains rising to hills and mountains Tin, petroleum, timber, copper, iron ore, natural gas, bauxite Arable land: 3% in 2002, 5.4% in 2005; irrigated land: 3,420 sq. km (1989 est.); permanent crops: 10% in 2002 and 17.61% in 2005; other: 76.91% Air pollution from industrial and vehicular emissions; water pollution from raw sewage; deforestation; smoke/haze from Indonesian forest fires; and the natural hazard of flooding. Interpretation Chapter 5-14 Copyright 2006, National Association of REALTORS

117 People History United States maintained friendly relations with Malaysia since independence in Its contribution to stability in Southeast Asia, the growth of U.S.- Malaysian economic and cultural ties, Malaysia's role in the Association of Southeast Asian Nations, its self- reliant drive to develop its economy and preserve its independence, its participation in the Five- Power Defense Arrangement, and its strong commitment to the suppression of narcotics trafficking are in harmony with U.S. policy and form a solid basis for U.S.-Malaysian friendship. U.S. support in narcotics enforcement, cultural exchanges, and a Fulbright educational exchange program initiated in Malaysians, numbering about 16,000, represent one of the largest foreign student groups enrolled in American colleges and universities. Defense efforts are supported by participation in U.S. military education training programs and purchases of equipment under the foreign military sales program. The United States also actively promotes American trade and investment in Malaysia. Copyright 2006, National Association of REALTORS Chapter 5-15

118 Exam Question #27 The population growth rate reported for Malaysia is 1.8%/year. This rate of growth suggests: That demand and prices for residential real estate will stabilize. Demographics Population Population Growth Life Expectancy Ethnic Divisions Religions Languages Literacy 22,662,365 (2000) 23,953,136 (2005) 1.9% (2000) 1.8% (2005) Total population: 71 years (2000) years (2005) Males: 68 years (2000) years (2005) Malay and other indigenous 58% (2000), 61.4% (2005) Chinese 24% (2000), 23.7% (2005), Indian 8% and 7.1% (2005), Others 10% and 7.8% (2004) Muslim, Buddhist, Daoist, Hindu, Christian and Sikh with Shamanism being practiced in East Malaysia Bahasa Melayu (official), English, Chinese dialects (Cantonese, Mandarin, Hokkien, Hakka, Hainan, Foochow), Tamil, Telugu, Malalalam, Panjabi, Thai; and in East Malaysia several indigenous languages are spoken, the largest of which are Iban and Kadazan Total literate population: 83.50% and 88.7% (2005) Male Literate Population: 89.10%, 92% (2005) Female Literate Population: 78.10% and 85.4% (2002) Chapter 5-16 Copyright 2006, National Association of REALTORS

119 Labor Force 9.9 million with increase to million in 2005 Labor force details: agriculture 14.5%, industry 36%, services 49.5% (2000 est.) Interpretation Interpretation Compared to its Asia/Pacific neighbors, Malaysia is not densely populated. This will keep industrial and agricultural real estate prices down. Population growth rate is slowing, if only slightly. This trend needs to continue to alleviate a rise in real estate prices. Size of the labor force is increasing as is the literacy rate. These are positive signs for labor intensive industries. Copyright 2006, National Association of REALTORS Chapter 5-17

120 Government Type Administrative Division Capital Independence Constitution Legal System Constitutional Monarchy Federation of Malaysia formed 9 July 1963; nominally headed by the paramount ruler (king) and a bicameral Parliament; Peninsular Malaysian states - hereditary rulers in all but Melaka, where governors are appointed by Malaysian Pulau Pinang Government; powers of state governments are limited by federal Constitution; Sabah - self-governing state, holds 25 seats in House of Representatives, with foreign affairs, defense, internal security, and other powers delegated to federal government; Sarawak - selfgoverning state, holds 28 seats in House of Representatives, with foreign affairs, defense, internal security, and other powers delegated to federal government 13 states and 2 federal territories Kuala Lumpur 31 August 1957 (from UK) 31 August 1957, amended 16 September 1963 Based on English common law; judicial review of legislative acts in the Supreme Court at request of supreme head of the federation; has not accepted compulsory ICJ jurisdiction Chapter 5-18 Copyright 2006, National Association of REALTORS

121 Chief of State Head of Government Cabinet Elections Paramount Ruler Prime Minister Deputy Prime Minister Appointed by prime minister from members of Parliament with consent of paramount ruler Paramount ruler and deputy paramount ruler elected by and from the hereditary rulers of nine of the states for five-year terms; election last held 12 December 2001 (next to be held NA 2006); prime minister designated from among members of the House of Representatives; following legislative elections, the leader of the party that wins a plurality of seats in the House of Representatives becomes prime minister. HOR elections last held 3 November 2004 Interpretation Stable government Gained independence in 1957 Interpretation Copyright 2006, National Association of REALTORS Chapter 5-19

122 Exam Question #28 The 4-year, import/export activity of Malaysia shows: A positive trade balance Exam question #29: A rising GDP per capita is a sign that: There is a rise in the standard of living, probably leading to sustained demand for real estate of all types. Economy Overview Malaysia, a middle-income country, transformed itself from 1971 through the late 1990's from a producer of raw materials into an emerging multi-sector economy. Growth was almost exclusively driven by exports - particularly of electronics. As a result, Malaysia was hard hit by the global economic downturn and the slump in the information technology (IT) sector in 2001 and GDP in 2001 grew only 0.5% because of an estimated 11% contraction in exports, but a substantial fiscal stimulus package equal to US $1.9 billion mitigated the worst of the recession, and the economy rebounded in 2002 with a 4.1% increase. The economy grew 4.9% in 2003, notwithstanding a difficult first half, when external pressures from SARS and the Iraq War led to caution in the business community. Growth topped 7% in 2004 and 5% in Healthy foreign exchange reserves, low inflation, and a small external debt are all strengths that make it unlikely that Malaysia will experience a financial crisis over the near term similar to the one in The economy remains dependent on continued growth in the US, China, and Japan, top export destinations and key sources of foreign investment. Economy GDP Real Growth GDP Per Capita Inflation Rate Unemployment Rate Budget Exports $200 billion (2001) $248 billion (2005) 0.3% (2001) 5.1% (2005) $9,000 (2001) $10,400 (2005) 1.5% (2001) 2.9% (2005) 3.7% (2001) 3.7% (2005) revenues: $20.3 billion (2001) $30.57 billion (2005) expenditures: $27.2 billion (2001) billion (2005) (9.4 billion in capital expenditures) $94.4 billion (2001) $147.1 billion (2005) Chapter 5-20 Copyright 2006, National Association of REALTORS

123 Economy (cont) Export Commodities Export Partners Imports Import Commodities Import Partners External Debt Industries Agriculture Electronic equipment, petroleum and liquefied natural gas, chemicals, palm oil, wood and wood products, rubber, textiles US 20% 18.8% Singapore 17% 15%, Japan 14% 10.1%, Hong Kong 4.5% 6%, Thailand 4% 4.8%, China 6.7% (2005) $76.9 billion (2001) billion (2005) Electronics, machinery, petroleum products, plastics, vehicles, iron and steel products Japan 20% 16.1%, US 17% 14.6%, Singapore 13% 11.2%, Taiwan 5% 5.6%, Thailand 4% 5.6%, China 4% 9.9%, Germany 4% 4.5%, South Korea 5%, Indonesia 4%(2005) $44.7 billion (2001) billion (2005) Peninsular Malaysia - rubber and oil palm processing and manufacturing, light manufacturing industry, electronics, tin mining and smelting, logging and processing timber; Sabah - logging, petroleum production; Sarawak - agriculture processing, petroleum production and refining, logging. Rubber, palm oil, rice; Sabah - subsistence crops, rubber, timber, coconuts, rice; Sarawak - rubber, pepper; timber Exam Question #30 An examination of the base industries of Malaysia indicates that the country is in transition from a commodities-based economy to an industrialized, technology-oriented one. What does this fact suggest about the demand for real estate in Malaysia: There will be an increase in demand for urban office and industrial properties. Copyright 2006, National Association of REALTORS Chapter 5-21

124 Interpretation Strong GDP growth in 2005 Steadily increasing per capita GDP Manageable inflation and unemployment Currency Exchange Rates Ringgit (M$) or (MYR) (M$) per US$ US$1 = 3.72 (February 2006), 3.78 (2005), 3.8 (January 2003), 3.8 (January 2002), 3.8 (January 2001), 3.8 (January 2000), 3.8 (1999), (1998), (1997) Strong budget figures with 9.4 billion allotted for capital expenditures Positive trade balance Growing strength in neighboring export partners Strong increase in Chinese imports, steady reduction with other partners Stable currency Interpretation Infrastructure Railways Highways Waterways 1,801 km Total: 64,672km (2001) 65,877 (2005) Paved: 48,707 km (2001) 51,318 (2005) Unpaved: 15,965km (2001)14,559 (2005) 7,296 km 7200km (2005) Ports/Harbors Kota Kinabalu, Kuantan, Kuching, Kudat, Labuan, Kelang, Sandakan, Sibu, Tanjong Berhala, Tanjong Kidurong, Tawau Chapter 5-22 Copyright 2006, National Association of REALTORS

125 Merchant Marine Airports Telephone System 346 ships (1,000 GRT or over) 5,389,397 GRT/7,539,178 DWT by type: bulk carrier 45, cargo 109, chemical tanker 38, container 47, liquefied gas 26, livestock carrier 1, passenger 1, passenger/cargo 6, petroleum tanker 62, roll on/roll off 6, vehicle carrier 5 foreign-owned: 77 (China 1, Hong Kong 12, Japan 3, Singapore 61) registered in other countries: 59 (2005) Total: 116 Paved runways total: 32; Over 3,047 m 5 2,438 to 3,047 m: 4 1,524 to 2,437 m: to 1,523 m: 6; under 914 m: 6 (1999) Airports with unpaved runways: total: 83 1,524 to 2,437 m: to 1,523 m: 8 under 914 m: 74 (1999) Heliports: 1 (1999) general assessment: modern system; international service excellent domestic: good intercity service provided on Peninsular Malaysia mainly by microwave radio relay; adequate intercity microwave radio relay network between Sabah and Sarawak via Brunei; domestic satellite system with 2 earth stations international: country code - 60; submarine cables to India, Hong Kong, and Singapore; satellite earth stations - 2 Intelsat (1 Indian Ocean and 1 Pacific Ocean) (2001) Copyright 2006, National Association of REALTORS Chapter 5-23

126 Infrastructure Television Broadcast Stations Radio Internet 1 plus 15 high-power repeaters (2001) AM 35, FM 391, shortwave 15 (2001) Hosts: 107,971 (2003) Users: 8,692,100 (2003) Interpretation Real Estate: Property Issues and Trends Property Issues The Malaysia legal system is divided into three levels, Federal law, State law and Local Government law. According to Malaysian Constitution, land is a state matter. The National Land Code (NLC) 1956 governs property transactions. Each state has its own registry and land office and hence there may be variations in the rules and procedures in the application of the NLC. Acquisition costs: Commissions in Malaysia are paid the seller. The commission can be fixed by the Institution of Surveyors, Malaysia ( an association of valuers, appraisers and estate agents). Alternatively, the commission can be negotiated between the relevant parties involved in the negotiation. Legal fees are usually one percent of the property (for sale and purchase agreement). Property and ownership information: Property and ownership information can be found at the appropriate Registry or Land Office. Most information is registered with the appropriate registry or land office. Registered land is a conclusive evidence of title. Transaction information: Open listings for agents are: Available. Exclusive listings for agents are: Available. There is no current record of information relating to selling prices and the terms of specific transactions in Malaysia. The Ministry of Local Government and Housing is proposing Chapter 5-24 Copyright 2006, National Association of REALTORS

127 an establishment of a comprehensive data system on all aspects of real estate in Malaysia. In general, implied and explicit information about the transaction is provided by the "middleman" such as a lawyer or a broker. Real estate trade association: name: Institution of Surveyors Malaysia Address: 64-66, Jalan 52/4, Petaling Jaya, Selangor. Malaysia. Phone: Fax: The Board of Valuers, Appraisers and Estate Agents Malaysia ( The Board of Valuer, Appraisers and Estate Agents Malaysia was set up in 1981 under the purview of the Ministry of Finance, Malaysia. The setup and operation of this Board is governed by the provision of Valuers, Appraisers and Estate Agents Act of Its primary function is to regulate the valuers, appraisers and estate agents practicing in Malaysia. License requirements: Valuers, appraisers and estate agents in Malaysia are regulated by law to ensure that only those who are registered can engage in real estate brokerage business. The Valuers, Appraisers and Estate Agents Act 1981 (Amendment) and its rules of 1983 (Amendment) states that only registered valuers and appraisers who have been licensed can be involved in real estate private practice in Malaysia. License is granted after a taking a coursework and passing an examination. Other requirements are: secondary education with 3 credits in mathematics and science papers, 3 years of work experience (in order to take Part I and II of the written examination) and submission of required working papers set by the Board prior to the examination. Land description metes and bounds survey system: For registration purpose, land description in Malaysia an important part of real estate transactions. Land ownership is evidenced by possession of a document known as a title which gives details about the land. It is, therefore, vital that land is precisely described in any land transaction. Rights and interests in land: Most land laws in Malaysia are substantially based on the British legal system and the principle of common law. Therefore there exist some similarities with some of the US land laws. Similar to US, Malaysia has capital gains tax levied on taxable gains from disposal of real property and shares in real property companies by residents and non-residents. The tax is governed by the Real Property Gains Tax Act (Act 169). The taxable gain is the difference between acquisition price and disposal price of real property with appropriate allowances given in the transaction. The Stamp Duty Act 1948 (Amended 1994) states that in any transaction of property, buyer/purchaser/transferee will pay stamp duty to the government according to the market value of the property. For example, land conveyance duty is payable at progressive rate up to 4% of value; on sale of stocks and shares, 0.3% of value; and on stockbroker s contract note, 0.5%. There is no estate duty payment on an estate of a deceased who died on or after November 1, The real estate tax (similar to US) is payable by property owners in accordance with applicable rates set by local or municipal authorities. The Copyright 2006, National Association of REALTORS Chapter 5-25

128 tax is usually levied as a percentage of either the capital value or of the taxable value of property. Land tenure in Malaysia is divided into three categories namely in perpetuity, freehold and leasehold. Normally the state or government holds land in perpetuity with no limitation of time constraints. The state can provide a state grant of land to individuals for a certain number of period. State grant of land is normally for a period of 99 years and this is regarded as a freehold in Malaysia. Leasehold terms can vary from 30, 60, 90 years depending, or the term remaining from the freehold interest. Forms of ownership: The National Land Code of 1956 has established uniform land laws for all of the individual states of West Malaysia, which continue to have the responsibility for controlling land ownership. There is no basic restriction on land ownership in Malaysia. Land may be acquired by persons or companies domestically or outside Malaysia provided they conform in all respects to existing land laws. Similar to the US, tenancy in common in Malaysia involves a case where persons or bodies are co-owners of the property. In this case, there is no right of survivorship. The co-owner of tenancy in common can dispose of his or her interest in the property freely without the consent of the other co-owner. In case of death, the interest of that co-owner goes to his or her heirs. Joint tenancy does exist in Malaysia with some similarities with that of US. Only trustees and personal representatives may hold land as joint tenants with right of survivorship in Malaysia. Joint tenants have a concurrent ownership of the whole property. Common ownership in Malaysia can be created by partnership agreement. Partnership subsists between person carrying on business in common with the other person. Partnership of more than 20 members is forbidden if purpose is for acquisition of gain. For taxation purpose, individual partners will be assessed on their respective shares of income. In Malaysia, the only collective ownerships are partnerships (as stated above), joint ventures, corporations and trust ownerships. These types of ownerships are similar in character to those of US. Transfer of title: A valid deed in Malaysia must be signed in the presence of a witness by parties involved in the agreement. It is not necessary for a deed to be sealed, so long as the deed makes it clear on the face of itself that it is intended to be a deed. Section 26 of Contracts Act (Act 136) set down the required elements of a deed and also the agreement under seal. Most of the requirements of the deed are similar to those of the US. Generally, no attestation clause is required unless the deed contains Power of Attorney. Property conveyance after death depends on whether there is presence of the will or not. If a will exists for that property then the property will pass Chapter 5-26 Copyright 2006, National Association of REALTORS

129 to the beneficiary. In most cases the property is transferred by inheritance through the family generations. There is adverse possession in Malaysia as does exist in US. No information was obtained as to the required occupation time to qualify as the owner of adversely possessed land. Recordation and evidence of title: The issuing authorities for titles in Malaysia are the Registry of Titles and the District Land Office. Registry titles are issued in the case of town land or village land, any lot of country land exceeding 10 acres in area or any part of foreshore or seabed. Land office titles are issued in the case of any lot of country land not exceeding 10 acres. One copy, called the issue document, is held by the owner and the other copy, the register document, is kept at either the Registry of Titles or the District Land Office. The transfer of the property to the purchaser is effected when a Memorandum of Transfer is signed by the seller and buyer and is duly stamped and presented to the relevant land office or registry, which will register the transfer. The strata form of title used for each floor or part of a floor in a multi-story or condominium development is known as a strata title in Malaysia. The Strata Titles Act 1985 provides all statutory guidelines on the use of strata titles. Unlike US, there is no title insurance in Malaysia. It is therefore necessary to do a thorough title search during any real estate transaction. Both recording and Torrens systems are used in Malaysia which is similar to the US. Contracts: Contracts are governed by Contracts Act (Act 136) which is based on English law. There is a standard agreement (the Sale and Purchase (S&P) agreement) which set out all the terms and conditions agreed between the seller and buyer. These conditions include property description; price; terms of payment; method of payment; transfer of title and the handing over of the property plus provisions to accommodate the requirements of the financial institution granting the loan facility if loan is required to complete the transaction. Four sets of S&P agreement are prepared by the seller s lawyer to be signed by both parties to the land deal. Damages may be stipulated in the contract in the event of breach and aggrieved person is entitled to the remedies stated in the agreement. Mortgages: In Malaysia, mortgages are created in a form of charge. The NLC states that one may create legal charge in a prescribed form over: (a) whole, but not part only, of alienated land; (b) whole, but not part only of undivided share in alienated land; (c) lease of alienated land, as security for repayment of debt or payment of annuity or other payment. Legal or statutory charge is effected by registration at appropriate land registry. The financial institution in Malaysia may give a loan amount of up to 80% of the property price (or up to 90%, provided that the property is less than RM100,000). The lenders or banks will, in turn, take the property as a Copyright 2006, National Association of REALTORS Chapter 5-27

130 security for the loan. The bank will then administer the property on behalf of the mortgagor. In case of payment default, the bank can sell the property to recoup its unpaid dues. If the property price is less than the amount of the loan outstanding, then the mortgagor is still liable to pay the difference. The above procedure is somehow similar to that of the US. Financing and lending practices: the financial structure in Malaysia has some similarities to that of the US. There are several loan types including housing loans, commercial loans for property development and some short term loans normally provided as working capital. Both primary and secondary mortgage markets exist in Malaysia. The primary mortgage markets are provided mostly by commercial banks and finance companies. On the secondary mortgage markets, CAGAMAS seems to dominate the market. CAGAMAS is a national mortgage corporation which was set up to mediate between various primary lenders and investors. In other ways, it plays the role of an issuer of secondary mortgage securities. Loan-giving agencies such as the banks and financial institutions can sell their housing mortgages to the corporation. Malaysia homebuyers are also allowed to withdraw 30% of Employees Provident Fund (EPF) savings to buy houses. Property taxes: There is RM100, 000 levy on houses costing more than RM250, 000 allowed to be sold to foreigners as well as the flat 30% rate of property gains tax that they have to pay, if they decide to sell the properties. The International Real Estate Federation s (FIABCI) Malaysia Chapter president has publicly objected to this type of levy. The levy seems to be discouraging foreign investment into the country. Closing and escrow: Information on this item is in the process of being compiled. Appraisal: Similar to the US, appraisal in Malaysia involves all three approaches to value, namely, cost, income and market valuation. Valuation reports normally have to comply with several guidelines. The valuation guidelines are set out by the Board of Valuers, Appraisers and Estate Agents, Malaysia. The report should include among other things the following: (a) the purpose of valuation (b) the date of valuation (c) the evidence of value (d) valuation assumptions (e) details of valuations with methodology (f) signature by the registered valuer. Insurance: Malaysia has several insurance options available to cover real property risk. These options include fire insurance, "all risk" builder s insurance, liability insurance and others depending on the type and use of the property. Most of the insurance available in Malaysia are similar to those in the US. Land use controls: Town and Country Planning Act 1973 is the main governing legislation in planning of Malaysian land use around the country. This Act has policies on the country planning, zoning, provision of amenities and some buffer zone. There are different categories of uses of land namely: (a) agriculture, (b) building (i) commercial, (ii) residential, (iii) industrial. Chapter 5-28 Copyright 2006, National Association of REALTORS

131 Land can be converted from one purpose to another namely agriculture, building or industry. The Malaysian physical planning system involves the preparation of structural plans for various urban areas. Different local planning authorities have different land-use guidelines to be followed by those who are in land conversion processes. Sub-division of land is allowed in Malaysia. Land sub-division involves land held under one title is subdivided into two or more portions. [Certain items in Section 8 have been drawn from Martindale Hubbell International Law Digest, Reed Elsevier, Inc. with permission from the publisher. All rights reserved.] Copyright 2006, National Association of REALTORS Chapter 5-29

132 Cultural Issues Personal Appearance Greetings Gestures Most people wear Western-style clothing with a few wearing traditional dress. Muslim women wear head covers, veils, and long dresses Special headdresses, wraparound skirts, jackets, tunics, and sashes vary between regions and ethnic groups. Many traditional costumes have intricate designs. Batik fabric (traditionally hand colored with a hot-wax process) is popular for traditional dress. A handshake is used between men. A slight bow or nod of the head is common when greeting an older person. Women and elderly persons seldom shake hands, but may offer verbal greetings. When greeting close male friends, men use both hands to grasp the hand of the other. Business cards are often exchanged after an introduction. Salamat pagi (Good morning) Halo (Hello). It is not polite to beckon adults Beckoning is done by waving all fingers with the palm facing down. Individual fingers are not used for gesturing. Giving and receiving gifts with both hands shows respect. Objects should not be moved with the feet. The bottom of a foot should not be pointed at another person. Chapter 5-30 Copyright 2006, National Association of REALTORS

133 Objects are generally not passed with the left hand. When yawning or using a toothpick the mouth is covered. A slight bow when leaving, entering, or passing by a group of people acts as an nonverbal "excuse me." Copyright 2006, National Association of REALTORS Chapter 5-31

134 Visiting Eating Visiting relatives and friends is an important part of Malaysian life Dropping by without prior arrangement is common, although more urban dwellers call in advance. Guests are often invited to the home for a meal or socializing. When invited, persons are generally not expected to arrive on time. Punctuality is not as important in Malaysia as in Western nations because Malaysians value people over schedules. Shoes are removed when entering a home. The host will normally serve tea or coffee to guests. Drinks are offered and received with both hands. Eating customs differ among ethnic groups. Malays and Indians eat with their hands and with spoons. Chinese eat with chopsticks and spoons. Muslims do not eat pork or drink alcoholic beverages. Hindus and some Buddhists do not eat beef. Tipping is not expected in restaurants because service is usually included in the bill. Some waiters may expect tips from Westerners based on past experience. Chapter 5-32 Copyright 2006, National Association of REALTORS

135 Interpretation (Refer to Demographics Section for helpful information) Interpretation In 2000, Malays were increasingly concerned about erosion of their social status by the Chinese and other ethnic groups. There had been a huge increase of ethnic groups, especially Chinese and since most Malays are Muslim and the Chinese are not, this was considered a flashpoint for social problems. In the past 5 years there has been an increase of 3.5% of Malays and other indigenous groups within the population. During the same period there has been a slight decrease of Chinese (.3%), a larger decrease of Indian (.9%) and a 2.8% decrease of other ethnic groups. The cause is unclear but the immigration trend seems to be reversing. Malays are quite social and enjoy visiting. Punctuality is not as important as people. There are multiple social customs within Malaysia and vary depending on the ethic group you are with. Copyright 2006, National Association of REALTORS Chapter 5-33

136 Working With an Inbound Residential Investor Exercise 1. Divide the class into two groups. 2. Assign one group the outbound transaction and the other group the inbound transaction. 3. Have each group read their assigned scenario 4. Give each group 25 minutes to complete the accompanying worksheets and prepare their presentations. 5. A brief overview is necessary at the beginning of each presentation. 6. Suggest the groups divide into smaller groups to research certain information, then reconvene to prepare their presentations. 7. Give each group five minutes to present their report to the class. 8. Moderate any discussion or debate regarding the presentations. Scenario A banker with whom you have worked with previously refers a foreign client to you. The client is from: Group A: Group B: Group C: Group D: Taipei, Taiwan Bangkok, Thailand Seoul, Korea Brisbane, Australia The client wishes to purchase a residence in the USA and is considering your market. In addition to the client s origin, you learn that the client is: a professional married and has two children accustomed to living well wants a high-quality home with all the modern conveniences home to be located in a good residential area client s salary, financial resources and price range for a home are not known. Instructions 1. Using the information in chapters 4 and 5, prepare a five-minute presentation. o the client is considering you as a potential agent o they are interested in the USA and your market o there may be other client objectives o topics of the presentation may include: client investment objectives attributes of the selected market costs quoted in both currencies sizes quoted in metric and square feet current currency trends favorable? Chapter 5-34 Copyright 2006, National Association of REALTORS

137 unfamiliar aspects of purchasing and legal process preparations to get the client s business 2. Select a local market to represent. o consider a market familiar to the whole group 3. Select a spokesperson to give your presentation, or use role play. o all members of the group should be prepared to answer questions o you are teaching about working with a client from a foreign country, so try to be thorough and accurate 4. You have 25 minutes to prepare and may use the following worksheet to organize your presentation. Copyright 2006, National Association of REALTORS Chapter 5-35

138 Worksheet Cultural and social dimensions: Client qualification: Market features and benefits: Cost of residence (both currencies): Currency trend recommendations: Potential client educational needs for purchase process: Key elements for getting client s business: Other considerations: Chapter 5-36 Copyright 2006, National Association of REALTORS

139 Working With an Outbound Commercial Investor Scenario The president of a USA manufacturing business has informed you their company is working to establish operations in the Asia/Pacific region, to gain access to the Japanese, Korean and Chinese markets. He has asked you to conduct market assessments for Hong Kong, Taiwan, Singapore, Indonesia, Korea, Japan, Australia and New Zealand, and would like know your recommendation. Instructions 1. Select a market and industry for the hypothetical client. Using information from this course, prepare a five-minute presentation that covers the following: o reasons why the country is the best choice o cost to buy or lease a 10,000 square foot office/warehouse facility o how to find a site o available financial resources o acquisition process o forms of ownership and taxation o political environment o government attitude and regulations about foreign investment in real estate o infrastructure o availability and costs of labor quality of life o social and cultural issues 2. Select a spokesperson to give your presentation, or use role play. o All group members should be prepared to answer questions. o You are teaching the class about working with a client from a foreign country. Be as thorough and accurate as possible. 3. You have 25 minutes to prepare and may use the following worksheet to organize Copyright 2006, National Association of REALTORS Chapter 5-37

140 Worksheet Location: Evaluation of targets' ability to meet client's concerns: Government/taxation/ownership: Acquisition costs/other costs/financing: Labor availability/costs: Infrastructure/quality of life issues: Other considerations: Chapter 5-38 Copyright 2006, National Association of REALTORS

141 Key Point Review It is important to know as much as possible about a country to understand its potential for real estate investment. The country assessment model is a valuable tool for organizing and assessing information on markets where you conduct international business. Discussion Questions 1. What economic trends are present in a country whose currency exchange rate falls against that of its largest importer? 2. How would you use the country assessment model to assist you in a transaction in which a foreign national is buying in your home market? Copyright 2006, National Association of REALTORS Chapter 5-39

142 Chapter 5-40 Copyright 2006, National Association of REALTORS

143 Chapter 6 Working with Japanese Copyright 2006, National Association of REALTORS Chapter 6

144 Chapter 6 Copyright 2006, National Association of REALTORS

145 Chapter 6: Working with Japanese Time: 60 minutes. Overview The Japan practicum presents some cultural, business and real estate insights in more detail. It is an illustration of the type of information one needs to develop for each country in an international practice. Objectives Review country-specific cultural information. Discuss Japanese business protocols. Identify crucial aspects of developing relationships. Demonstrate key elements of meeting a Japanese businessperson. Review elements of a Japanese transaction by analyzing a case study. Application In order to conduct an international real estate practice with Japanese clients, it is important to understand some specific approaches appropriate to the country. A closer look at Japan, as a leading economic power and one of the most active international real estate investors, provides insights into doing business with people from the Asia/Pacific region in general. Copyright 2006, National Association of REALTORS Chapter 6-1

146 Beyond the Basics Imagine yourself in one of the following situations: A visiting Japanese investor comes to you for help in acquiring a property in your domestic market. As part of his investment planning, he wants to know how the property might be marketed later to domestic or Japanese buyers. A domestic client asks for your assistance in disposing of a property he controls in Japan. Again, the property might be marketed to domestic or Japanese buyers. Beyond your normal competence in domestic real estate practice and your general understanding of Japan, what specific things will you have to know about to succeed in these situations? Some key factors follow: The potential client's needs, timing, reasons, expectations, resources, decision-making processes. How to nurture the connection while finding and showing properties, or while finding tenants or buyers. What the client needs to have explained about the differences between domestic and foreign transaction processes. How to overcome language and cultural obstacles. Tax implications and parameters for investment alternatives. Special forms and requirements that might be necessary for a transaction involving a foreign buyer or seller. Relevant national, regional, state, county and local market information to help the client evaluate a property in your market. How to present features and benefits in a way to which a Japanese buyer can relate. The relative positions of other economies as they may affect the timing of the transaction. What kind of agreement (if any) to have with the client. How to market the property domestically and in Japan. How to find a Japanese property or buyer. Whether to work with, and how to find, a broker in Japan. How will you get paid. How financing might be arranged. Chapter 6-2 Copyright 2006, National Association of REALTORS

147 These special professional requirements can be categorized into three general skill areas: networking and relationships technical aspects of a transaction selling and marketing activities Exercise #1 1. Select key points under each section 2. Ask the class to share an approach, procedure or requirement they have used in domestic practice and compare or contrast it with doing business in Japan. Exercise #2 1. Present a case study from your personal experience. 2. Include: type of property and location, type of transaction, parties involved, how transaction came about, what economic and market information was needed, cultural influences, marketing and selling techniques, payment for the purchase or sale, how your fee was paid, any other pertinent information. Copyright 2006, National Association of REALTORS Chapter 6-3

148 Networking and Relationships Experienced international real estate professionals know you must develop client contacts and relationships before looking for properties. In international business, it is preferable to control the principal rather than the product, because without a good client relationship, nothing will happen. In the scenarios just described, a client appears to walk in the door. It is likely the client chose the door because of a chain of referrals, recommendations and previous contacts. Even when you have a client, you need to know where go to next for information and services. Following are some tips for establishing relationships in Japan. Who You Need to Meet Potential clients: corporate investors, individuals who may be employees of Japanese firms in need of housing or private investors who may be seeking property for a variety of reasons. Colleagues: Japanese brokers, professional agents and representatives Owners and sellers: corporate and individual, domestic and Japanese Representatives of any of the above: bankers, lawyers, notaries, lenders, developers, importers/exporters, business leaders, government officials, foreign students with families abroad. Where to Find Them Apply for membership in the World Trade Center located in your area. These trade centers belong to the World Trade Centers Association and operate as a franchisee of the World Trade Center Association located in New York City. These centers offer various avenues of interchange for its members. Travel to Japan and personally investigate potential avenues of available contacts. Research the credentials of anyone you are considering to represent you or set up contacts for you remembering that the reputation of your firm is at stake. Attend trade fairs and international congresses in Japan and Southeast Asia as well as those in your own country. Contact the Japanese chambers of commerce. Don't expect government agencies or chambers of commerce to be proactive in helping you. Talk to Japanese bankers who do business with your firm. Chapter 6-4 Copyright 2006, National Association of REALTORS

149 Meet with Japanese peers in your business. Ask for contacts from family members and friends, and people you meet through other contacts. Meet public officials in your specialty area. Contact, visit, and perhaps join industrial, trade and employers' associations. Attend and meet people at courses, lectures and seminars. Ask clients for references and referrals. Refer to the local Japanese real estate association to find brokers in the area. Copyright 2006, National Association of REALTORS Chapter 6-5

150 Cultural and Business Differences Optional Discussion Tell about a personal experience or ask class to share an experience that illustrates a difference in cultures. Social Norms Japanese emphasize the short- and long-term effects of any action on personal relations. Japanese relationships rest on a foundation of order and propriety developed through centuries of customs. Decision-making, group thinking, and saving face are all significant aspects of a relationship. There is an intricate system of social indebtedness that defines who, what, and how much is required. A good business relationship must be founded on a good personal relationship, which takes time to mature. o The Japanese term for relationship, nemawashi, means "the watering of roots." Amae, which means respect, indulgence and concern for another, is the basis for relationships in Japan. o It is evident in the business world in terms of tolerating certain weaknesses or unconventional behaviors, and in protecting others from making mistakes or losing face. A related value, hada to hada, literally "skin to skin", characterizes Japanese relationships as well. o This is the willingness to be open and sincere. o Japanese consider some Western relationships to be cold, distant, insincere, and determined by the needs of the moment. Japanese take great pains to appear polite and to spare others any pain. o They do not say no, because this causes discomfort to others. o They may conceal rejection with phrases, such as "We'll think this over." o The Japanese often smile when they don't understand, rather than ask a question, which is considered to be rude. o This surface politeness often reflects the Japanese concern with maintaining harmony. o It is not an indication of willingness to do business. Public displays of affection are considered offensive. Chapter 6-6 Copyright 2006, National Association of REALTORS

151 o Do not indulge in back slapping or putting your arm around someone s shoulder. o Never initiate the use of first names or nicknames. o The correct form of address is the person s family name plus the suffix -san, for example, Mori-san. Be careful about laughing and about using humor in general. o These may be construed as weakness, embarrassment or an insult. o Japanese regard seriousness as a virtue. o They are uncomfortable mixing humor with work o They may be insulted by laughter directed at a Japanese colleague. The Japanese often feel that silence is the best response. o They have traditionally looked down on verbal communication. o An hour of silence in a business meeting is not unusual. Appearances o It may appear to Westerners that the Japanese take a long time in verbal communication, ask irrelevant questions, give excuses to avoid pressure, or appear vague, indecisive and insincere. o To the Japanese, Westerners may appear concerned with unnecessary details or impatient to move ahead. Impatience is always seen as a weakness. Business Norms The primary aim for Japanese in business, as in life, is to preserve group harmony. o The Japanese subscribe to the proverb: "The nail that sticks up gets hammered down." o This helps explain the Japanese reluctance to express a personal opinion in a group. Japanese are puzzled by the American focus on the individual and the individual's family. o They can't understand preferences of home life over business. o For the Japanese, work is life, and it takes priority. o They may be bothered by a Westerner s lack of single-minded devotion to work, or his or her independence and individualism. Copyright 2006, National Association of REALTORS Chapter 6-7

152 People never work alone in Japan. o The work group, the ka, typically has 15 members. o The ka is led by the kacho. o There is a tremendous sense of teamwork. o All members of a work group in a Japanese company share the decision-making process called ringi. A formal proposal is written on a ringisho and circulated among all individuals involved in the decision. Each affixes his personal seal, upside down if he doesn't approve. This process can take some time. Such rituals that honor and preserve personal relationships slow down all business transactions. The foreign businessman must be patient, and not try to rush things. Once a decision has been made, the Japanese tend to implement it quickly. The best, and often only way to get to know the Japanese in business, is after hours in a neutral territory, such as a restaurant. o Japanese businessmen like to relax outside the office o This is how they find out what kind of person you are Lunch is not a good time for entertainment. o If you are entertaining in the evening, they will expect a good time (i.e., dinner, drinks and a baseball game). o Be careful to choose a restaurant that will cause no embarrassment or discomfort to anyone. Western businessmen often have a strong need for clarity, precision, and accuracy in details and directions. o Japanese, on the other hand, prefer ambiguity. o When Japanese make decisions, not every point is defined. o Ambiguity preserves an arena for discussion and allows for consensus, which preserves group harmony. o While a Westerner may think that no one is taking a stand or agreeing to anything of substance, the Japanese may feel that progress is being made through the chaos of ambiguity. Chapter 6-8 Copyright 2006, National Association of REALTORS

153 Elements of a Transaction Many Asia/Pacific cultures dislike and distrust of lawyers and contracts. o Japanese distrust of lawyers and their preference for unwritten contracts reflects what some have called "a basic distrust and contempt for language." o Japanese contracts often have an escape clause stating that both parties agree to sit down and renegotiate if either has a problem interpreting the written contract. o Japanese businessmen know there may be lawyers and contracts when dealing with some individuals, particularly North Americans. o A real estate professional should always be ready for possible changes in the contract o Learn to keep lawyers, if there are any, in the background. Marketing and Selling Practices Being of service and pleasing others are vital elements in marketing to the Japanese. o Attention to detail is imperative. Be prepared to perform additional services for free to be competitive with Japanese firms. Troubleshooting, performing special favors, and providing strategic information are all highly valued services. Additional marketing strategies for doing business in Japan and the Asia/Pacific region include: o keeping up-to-date on changes in the market o carefully choosing a local partner or representative o establishing relationships that benefit both sides o learning what is important to the target market o keeping in mind that a person's logic may be based as much on intuition and emotion as on reason Copyright 2006, National Association of REALTORS Chapter 6-9

154 Group Question What is the role of emotions and cultural expectations when presenting, negotiating, and closing transactions? Selling to the Japanese is not a matter of simply selling the product. o Japanese look for arguments based on feelings and sentiment, not on logic. o Fun, engaged emotion is a more convincing argument for buying a product than the hard sell. o If you can appeal to emotions first, a friendly relationship can be established. Japanese appreciate creativity in marketing. o Pay attention to the packaging of your materials. o Consult an expert on such details as the use of colors Certain colors have inappropriate cultural connotations After making contact with prospects, be patient and wait for a response. o Allow time for them to check your references and reputation. o They want to know with whom you do business. o Learn as much as you can about a Japanese company or individual, financial situation, hierarchy, who they have done business with, who they refuse to do business with, and their needs and priorities. At a first meeting, present only a broad, verbal outline of your objectives. o Though not in writing, the outline may serve as the agenda for the first negotiations. o Verbal commitment carries binding weight with the Japanese. o Do not make promises and pledges you do not intend to honor o You will be held accountable for them. The first meeting is usually an informal, get-to-know-you affair. o Don't expect serious business discussion. o Avoid making minor, trivial concessions to show good faith. o The Japanese may feel that whoever makes the first unilateral concession is weaker, that you need them more than they need you, or that you are insincere and inconsistent. o Arrange things so that the first concessions seem to come simultaneously on both sides. Chapter 6-10 Copyright 2006, National Association of REALTORS

155 Be modest and avoid extravagant claims. o Keep in mind the dual purposes of the meeting: to present your product or service, and allow the Japanese to evaluate you and your team. o They are more interested in your personal commitment than in the product. o More than anything, they want to know that you are trustworthy. Do not assume that the Japanese know everything about you. o Address all associates equally. You may not be able to tell who ranks highest. The designated leader may rely on subordinates for information and advice. Use persuasion rather than pressure in your discussions. o Be clear. o Have evidence in print to support your claims about yourself, your company and your product. o Distribute translated handouts, including copies of charts and graphics. Be patient and calm during any long periods of silence o Allow extra time for repeated questions. o Expect an extreme initial position This is typical of a win-lose style in which negotiations are favorable for only one party. Take the offer calmly, say you will consider it and leave. After a meeting, always confirm your understanding of the main points in writing to ensure that both sides understood each other. Negotiating and Closing Transactions To the Japanese, Westerners seem compelled to seize control of a negotiation, make their points quickly and directly, and bring the meeting to a decisive close. Japanese, on the other hand, focus on group consensus. o They tend to submerge individual opinions and doubts. o They will not set out clear positions, but present ambiguity and vagueness to avoid any appearance of strong personal initiative. Copyright 2006, National Association of REALTORS Chapter 6-11

156 Two key concepts in Japanese business culture are tatemae (form) and honne (substance). o Japanese find it perfectly legitimate to do or say one thing for the sake of tatemae while thinking or intending the opposite for the sake of honne, all in the name of preserving harmony. o Manipulating tatemae and honne is a major negotiating tactic for the Japanese. Two contradictory positions can be maintained in public and reconciled later in private to save face for the losing side. These considerations override those of logic and common sense. Chapter 6-12 Copyright 2006, National Association of REALTORS

157 Business Protocol Guidelines How to Approach Japanese Prospects Oral communication is preferred. Letters are the least effective and not acceptable. Keep written and electronic communications to the minimum. Try to meet face-to-face. Use the telephone to arrange logistics or to give a courtesy call, not to do business. Intermediaries Use an intermediary to make your introduction. o The Japanese prospect s opinion of you and your firm will be forever colored by the opinion he has of the person who introduces you. o The intermediary should be: someone both parties know and respect. thoroughly knowledgeable about you, your company and the transaction. outside both organizations such as someone from a reputable trading company, a bank, a trade association or another company with which the Japanese prospects have done business. equal in status to the people involved. o Japanese clients will feel compelled to include him in all future dealings o If the intermediary s status is below that of the people you want to work with, it will cause delays and discomfort. Initial Contact Initial contact should always be in person. o This meeting should be made at the middle-management level, never at the highest level Decisions begin at lower levels and work their way up Have plenty of business cards, called meish, o Everyone on your team must have a card. Copyright 2006, National Association of REALTORS Chapter 6-13

158 o Your card must reveal who you are, where you work, and your status. Exercise 1. Demonstrate with a volunteer student the correct way to exchange business cards with a Japanese businessperson. 2. Have the volunteer present the card back to you using the demonstrated technique 3. After the demonstration, have all students stand an get a partner to their left or right. 4. Have all students practice presenting the business cards to one another using the demonstrated technique 5. This exercise also provides a much needed stretch break! o The Japanese rely on business cards to tell them what to expect from you, how much respect to show, and who your counterpart is in their organization. o The card should be printed in both Japanese and English. o Make sure your title in Japanese accurately represents your position and responsibilities. If Japanese client later discovers that you are more important than your card suggested, they may feel guilty about treating you with the improper level of respect. Give and receive business cards properly o Always use two hands and bow slightly. o To give: present your card with the Japanese side up and facing the receiver. o To receive: take the card respectfully and read it carefully o Never write on another's card or throw it down o Comment favorably about their card o Remember the information on the card It is an insult to take someone's card and not remember the information on it at a later meeting. Japanese are accustomed to apologizing often, even when a non- Japanese does not perceive an occasion for an apology. o Be sure to apologize for anything that may inconvenience the Japanese person, even when it is no one s fault. o Westerners who become overly polite, bowing and scraping, appear foolish. The Japanese respect those who are themselves. Business Protocol Guidelines Boasting, frankness and bluntness are offensive to Japanese people. Speak slowly; avoid obscure terms and idioms. Age equals rank. o Japanese companies are structured on a seniority system. o Always identify the older members and offer them respect and courtesy. Chapter 6-14 Copyright 2006, National Association of REALTORS

159 o It may be a mistake to assume that the oldest person or the highest authority is the one in charge of the project. Do your homework In Japan, friendship creates extensive obligations. o Japanese are careful to draw limits o They do not treat everyone equally. o Do not confuse politeness with the desire for friendship. Never confront Japanese with a direct charge or accusation. o Find an indirect way of raising a problem o Suggest the person may want to consider it further in private Never ask a question the person may not be able to answer. o Inform individuals of questions in advance o This provides time for him to consult the group and prepare an answer. o Do not create surprises. Use a go-between to carry unpleasant messages o This is done regardless of where the fault lies. Never refuse or reject an offer or suggestion outright. o Suggest you will consider the matter further. o Later, present your reasons for not accepting the proposal. Be clear and use a non-threatening manner. If the Japanese see your behavior as a threat to their harmony, they will view you as an unreliable business partner. o Be sure to smile o Be humble and good-natured. o Avoid excessive flattery. o Always apologize for any mistakes. Never lose your temper or display hostility o Seen as weaknesses. Be careful of revealing gestures, such as finger-pointing or fistslamming. Avoid criticism and blame directed at either government. Finding a "win-win" situation is not the Japanese way. o They will be seeking their own best interests disguised by propriety, order and politeness. o Do not mistake this politeness for friendship. Copyright 2006, National Association of REALTORS Chapter 6-15

160 Avoid having a top executive with ultimate authority present in the early stages of a negotiation. o The presence of too much authority prevents give and take. o Learn what level of authority the Japanese participants will have, and match your team with theirs. o Expect to be outnumbered. No matter how people on your team, the Japanese will have more. o In Japan, whoever sits farthest from the door is usually in charge. This dates from the ancient practice of the Shoguns. Exclude lawyers, accountants and other professional consultants from your team. o The Japanese will not have them and will distrust you if you do. Negotiations If you employ a professional negotiator, it should be: o Someone the Japanese know and respect. o Someone who knows your company and proposal well. Smooth negotiations require two interpreters one on each side. o Do not change negotiators in midstream. o Japanese will see this as weakness and inconsistency o They will want to return to the getting-to-know-you stage. Do not be surprised by long periods of silence. o This does not indicate disinterest or disagreement. They are evaluating what you have said. Physical signs of difficulty include loss of eye contact, accompanied by a sighing sound. May need more time to consider a proposal Proposal may be unacceptable. Give information whenever you can, even when it seems irrelevant or confidential, without jeopardizing your negotiating position. o Avoid giving too much without getting something in return. o Do not state your deadline. It may be used to force concessions at the end of negotiations. Chapter 6-16 Copyright 2006, National Association of REALTORS

161 Do not assume increasing your offer will move the negotiation ahead. o It may cause the Japanese to lose confidence in your sincerity. o Sincerity, trust and compatibility are more important than the lowest bid or the highest profit margin. Be prepared to spend five to six times longer in negotiation than you would with a Western company. o The Japanese often filibuster to gain thinking time or save face with other members of their own team. o When this deadlock occurs, expect long delays, especially if the point at issue requires the group decision process. In the event of a deadlock, always maintain the appearance of harmony. o If a compromise is required, it will be worked out through go-betweens outside the formal sessions, to avoid displays of power and loss of face on the part of anyone. You may hear the "final offer" several times. o It will be described as generous, just, fair, self-sacrificing. o Don't be fooled into believing it is based on good will or friendship, or that it is the bottom line position. When you make a concession, let the Japanese figure out what their counter-concession should be. o You may make a suggestion through the go-between o Allow them the appearance of having thought of it themselves. o Trying to match each concession will work against you. Westerners will want to sign a final contract but the Japanese will probably not. o They may prefer a brief agreement consisting of the declaration of intention of both parties. o Let your lawyers work details out with their lawyers later, rather than presenting them with a detailed legal document. o Do not be surprised if the Japanese ask you for additional information after you think they have already accepted the deal. o Japanese like to have as much information as possible to justify their final position to themselves and to their superiors. Copyright 2006, National Association of REALTORS Chapter 6-17

162 To Japanese, the written word is no more binding than the spoken word. o o Their performance will be based on their understanding of the agreement, not on what the contract says. If circumstances change, they may want to renegotiate parts of a contract. Chapter 6-18 Copyright 2006, National Association of REALTORS

163 Case Study Cross-Cultural Differences of a Japanese Second Home Purchase by John Shotton and Rob Neyland Breckenridge Associates Real Estate, 229 S. Main Street, Breckenridge, CO 80424, tel Summary This case summarizes a second home purchase by a Japanese national. This is not intended as a characterization of the Japanese people or their business practices. The purpose is to highlight many of the potential differences as they appeared in this specific transaction. Exercise 1. Have students read through the case study. 2. Have them underline or highlight any new information they found regarding working with Japanese clients. 3. Discuss any new points they discovered. Property type: Ski-in/ski-out condominium at ski area base Referral: USA/Japanese broker How We Found the Purchaser A USA broker provided the lead. This broker is active in NAR international programs, and specializes in working with Japanese buyers. The referring broker was organizing a multi-state tour of commercial and investment properties for a group of 25 Japanese businessmen from five top corporate interests. We were given the opportunity to participate in hosting part of the tour, and were provided with a specific time slot to address the group about our area. Preparation Before our time period on the tour was confirmed, we were asked to send an extensive package of information on the area, including economic and demographic profiles, and specific material on the target properties. The properties selected were the best in our market. Copyright 2006, National Association of REALTORS Chapter 6-19

164 Lesson #1 Be cheerfully prepared to present every imaginable fact to your prospects! It will all be analyzed and digested. Our preparation phase lasted about 30 days. Our research on food preferences suggested the visitors would enjoy a typical American lunch: beef, salad, coffee, non-diet soft drinks, wine and American beer. We also learned that orange juice is a luxury item in Japan, so we included that in the menu. No alcohol was consumed until the group leader indicated he had made a purchase decision. Then it flowed freely. Lesson #2 Get your own translator/interpreter! The group will possibly have some proficiency with English, and their own interpreter. But it is your job to make sure that YOUR message gets through. Many nuances do not translate well or at all. With your own interpreter, you can go over your main points ahead of time so they can explain concepts, and know where you're coming from. A Japanese interpreter was recommended to us by the Governor's office. This interpreter helped us learn proper etiquette and he also prepared our welcome package in Japanese, which we distributed prior to the meeting. Our theme was, "We want you to be part of Breckenridge!" The exchange of gifts is an important sign of manners and respect. Elaborate gifts are not necessary; it's the thought you put into it that counts. In our transaction, women were not part of the group, but we have heard that the Japanese business environment is increasingly opening up to women. Exchange of Business Cards The business card is considered an extension of yourself, and proper exchange of cards upon greeting is vital. Present your card with both hands, bowing slightly. Take a Japanese businessman s card, hold it with both hands and read it slowly, acknowledging it with a slight bow. If you don't have a title on your cards, get one. If you expect to have a lot of contact with Japanese customers, it is useful to have them printed in Japanese on the reverse side. Chapter 6-20 Copyright 2006, National Association of REALTORS

165 Be aware of limited physical contact, no back slaps, shoulder pats, hugs, etc. Your prospects will likely smoke, so arrange for this with ashtrays and a well-ventilated area. Presentation Our Japanese customers engaged in a group decision process. Be aware of the group dynamic involved. No matter how much excitement is expressed by group members, nothing happened until the Big Guy gave his approval. We knew who he was and directed our communications appropriately. The group videotaped the entire presentation and checked it later for details, and they asked many thorough questions. Be prepared! This is not the time to say, "I'll get back to you later on that." An hour into the presentation we realized we were making a blunder. Many of the things that make resort real estate tick; mortgage packages, USA tax treatment of the investment, interest deductions and depreciation, were not meaningful to our prospects and only served to thoroughly confuse the subject and the audience. Do not allow yourself to mistake yes and nodding for agreement and approval. At best it means, "I acknowledge your statement or question." After three hours of presentation, lunch and a tour of selected properties, the leader requested to see one of the units for a second time. It was the prime unit in the building. We viewed it again and he nodded briefly to his underlings. The decision had been made. A brief celebration followed. We couldn't pour the wine fast enough! No contracts were signed. The purchase was all based on a handshake. Written agreements and the normal paper trail associated with such a transaction were difficult to obtain. As a result, the transaction proceeded to close in its own fashion. We went through two "established" closing dates before final settlement occurred. New prorating had to be done each time, and it was difficult to explain why the figures changed. Conclusion The single unifying thread running through this transaction was giving and maintaining "face" to our Japanese customers. We made sure we had thoroughly researched our properties and were briefed as to how we should conduct ourselves before the encounter. The major cultural difference is that no buying signals were displayed until the group leader gave the presentation his blessing. Financing is not necessarily the most important, but details are all-important. Yes does Copyright 2006, National Association of REALTORS Chapter 6-21

166 not necessarily mean agreement. And last but not least, be prepared for some last-minute renegotiations prior to transfer of funds and deed. The Japanese are extremely fascinated with American culture and property. It is incumbent upon you, as a broker, to set aside preconceived notions of the Western sales situation and step into the international arena. Chapter 6-22 Copyright 2006, National Association of REALTORS

167 Key Point Review Be accurate and careful in all transactions. Learn as much as possible about the culture and business practices. Build a network and establish good personal relationships. Understand what is expected of you professionally. Plan and prepare for business seriously. Copyright 2006, National Association of REALTORS Chapter 6-23

168 Chapter 6-24 Copyright 2006, National Association of REALTORS

169 Hong Kong Copyright 2006, National Association of REALTORS Chapter 7