December 15, 2015
Abridged version of a presentation to the ASA 2015 International Appraisers Conference in Las Vegas on October 19, 2015. Ethics In The Global Real Estate Market – A New International Coalition By Tony Grant FRICS, Past World President of FIABCI (The International Real Estate Federation) and Deputy Chair of the International Ethics Standards Coalition.
When I began my career, 52 years ago, few people were predicting the arrival of a truly global market in real property. Now it is here. And it is massive. The World Bank estimates that 70% of global wealth is held in real estate. According to a report last year from Price Waterhouse Coopers, the global stock of investable real estate will rise by more than 55% to around $45.3 trillion by 2020, from a 2012 total of $29.0 trillion. It will have expanded again at a similar rate by 2030.
And as it changes and grows, so must our approach to developing and enforcing international ethics. There is a substantial body of evidence which suggests that transparency and ethical conduct are becoming increasingly important for business everywhere. Responsibility to the wider community is regarded as not only a matter of integrity, but a key to commercial success.
And yet codes of conduct among real estate practitioners are still local, national and regonal. Andsectoral. That contradiction represents a serious limitation and is hampering progress in our industry. Investors are willing to place funds in all regions of the world, but in doing so they face different environments and cultures. What may be prohibited in one country could be perfectly acceptable in another.
The need is for the entire industry to speak with one voice by making a declaration of consistent standards. That is why a new International Coalition of organizations representing the property and related professions has been established.
The evolution of professional ethics
Over recent years we have witnessed an evolution in professional codes of conduct. Traditionally, up to the end of the 20th century, they were concerned principally with how to conduct business in a manner that reflected honesty in dealing with clients’ affairs.
Today, those responsibilities are being extended. Many professional bodies require their members to fulfill obligations to all stakeholders affected by their actions and to society as a whole. They must demonstrate professional competence at all times. And they are expected to have regard to modern concepts of social justice. A good place for us to start thinking about international ethics is the Declaration which has been signed by 70 professional bodies (so far) upon joining an earlier and separate Coalition addressing International Property Measurement Standards:
“Ethics guide everything we do and foster public trust. To complement property measurement standards, we support ethical principles that guide and unite our international profession.”
That is the underlying motivation for the new International Ethics Standards Coalition which was founded in October 2014 at an inaugural meeting at the United Nations in New York. It aims to advance the public interest by developing and implementing the first industry-wide ethics standards for property and related professional services. The goal is for property practitioners to work in an ethically consistent way, regardless of where they are located and the nature of their practice.
Let us now take a step back and attempt to analyse in more detail the challenge that exists in the international real estate market with regard to ethical standards.
It cannot be denied that some elements of the real estate industry have a poor reputation. We can identify four main problems:
FIRST: Sad to say, but there are still firms and individuals lacking in integrity and in the skills required for their work. And here we should remember that having the knowledge, training and experience to act competently is an ethical requirement. Clients are at serious risk when practitioners attempt to advise and represent them without possessing the necessary expertise. Such action is a form of express or implied misrepresentation.
SECOND: In many parts of the world, even where standards are in place, they are not adequately enforced by governments or even by professional and business associations.
THIRD: Members of the public simply do not know how to identify practitioners who undertake to adhere to standards of honesty and trustworthiness.
FOURTH: The fourth problem area is a little more subtle. It is that the connection between the adoption of professional standards and the growth of market confidence is not widely appreciated. And here we have come to a key point. It is that ethical conduct leads to market confidence. And, of course, market confidence leads to market stability and improved values. It is no exaggeration to say that ethics in property are not just about doing the right thing. They attract customers. They motivate staff. And they encourage investors who need to know that their financial affairs will be conducted in a morally acceptable way. In a nutshell, good ethics mean good business.
Historic Areas of Public Concern
At this point, we should identify the principal areas where, over many years, there has been continuing public disquiet about unethical practice within the real estate industry. There are nine of them:
– Misrepresentation of property and project information
– Financial misconduct, including fraud and misappropriation of third party funds
– Inadequate skills and expertise to provide the professional services offered, as previously mentioned
– Conflicts of interest. Also a lack of impartiality when an independent assessment has been promised
– No proper insurance for errors and omissions (also known as professional negligence)
– Accepting or offering corrupt payments, gifts and hospitality. In a word, bribery
– Unfair discrimination and a failure to respect human rights
– Concealing relevant facts and acting without transparency
– Unauthorized disclosure of clients’ confidential information
Now let’s consider the requirements of modern social responsibility. At last year’s inaugural meeting of the Coalition at the United Nations, many of the participants felt that one could legitimately ask to what extent are today’s new, 21st century challenges a matter of professional ethics?
Here are some topical questions:
In this age of computers and mobile devices, is there an ethical duty to take active or even pro-active steps to protect individual privacy and electronic data? Would that go too far beyond the established norm of respecting client confidentiality, or is it simply keeping up to date technologically?
Is there an ethical obligation to report any suspicion of money laundering or the financing of terrorism?
How about sustainability ? The majority of informed people around the world believe that reversing climate change is vital for the future of human civilization. Does it follow that there is now an ethical requirement for professionals in real estate to carry out their work based on a ‘green’ agenda ?
On the face of it, the answer is obvious. And a number of professional organizations have already made good environmental behavior a vital part of their code of conduct.
But there is another side to the coin which the International Coalition will at least have to take into account. Some legitimate authorities still question the scientific basis for the theory of global warming. They insist that, in any event, the moral priority is to alleviate extreme poverty in under-developed parts of the world through economic growth and wealth creation even if the current level of pollution is maintained. The point here is that in creating common standards for land and the built environment we will need to reconcile, or at least acknowledge, some very different approaches, to put it mildly.
That theme can be further extended, for example, to today’s development of office buildings. Is it an ethical requirement that new commercial buildings must actually advance healthy living? Should those buildings contribute to the welfare of people working there by providing best air quality, high levels of natural daylight and good recreational facilities? Is this one of several points at which social welfare, productivity and professional ethics ought to march hand in hand?
How far should ethical standards in real estate go in fulfilling the modern idea, reinforced by the United Nations Global Compact, that individual businesses – including professional practices – have a duty to society that extends well beyond delivering a return on investment for their owners? Should today’s standards for real estate – which is only one industry among many – cover aspects like good working conditions; equal employment opportunities for women and for minorities and fairness in the treatment of employees, suppliers and customers?
Or is that notion, which encompasses the entire range of human rights, too political to be a matter of ethics in our professional lives?
A growing number of business leaders are convinced that adopting a genuine corporate integrity, to the benefit of customers, shareholders and employees, is the way forward and is not in conflict with profitability and asset value. It will be interesting to see the extent to which the new International Ethics Standards for real estate are able to answer those questions.
The Solution – International Ethics Standards
The majority of non-profit real estate organizations have long promoted their own codes of conduct which are a vital part of their member value proposition. It is important to understand that the existence of these numerous ethical codes is not a problem in itself. That is because:
• Most, if not all, have a similar foundation in that they demand decent and trustworthy behavior as well as competence in the services offered;
• Many codes are based on established norms and customs and are published by associations in specific localities, states or regions. Examples are:
The German Property Federation
The European Council of Real Estate Professions
The Real Estate Institute of Victoria, Australia
Other organizations set out to regulate single disciplines, such as brokerage, valuation, architecture and management. They do not attempt to address all sectors of the industry. Examples are:
The Counselors of Real Estate
The International Union of Architects
The Institute of Real Estate Management
The International Right of Way Association
Some organizations do both, such as:
The Council of European Geodetic Surveyors
The Royal Institute of British Architects
The American Society of Appraisers
Once again, we are led to the same conclusion. The real problem is that there does not exist in the highly competitive global marketplace a single statement of principles which is universally recognized. The absence of a central authority on ethics can result in uncertainty at best and confusion combined with widespread mistrust at worst.
The solution is to introduce – at an international level – one shared set of high quality, clear and consistent standards on which everyone can agree and to which all are held accountable. Such standards have the potential to become a recognized benchmark of integrity for services provided by real estate professionals throughout the world.
The idea of international standards underpinning a single profession is not new. There is the Hippocratic Oath in medicine which is very well regarded the world over. The global accountancy profession has its International Ethics Standards Board for Accountants to which most of the leading national boards are affiliated. In Law, there are standards applied by the International Bar Association which includes in its membership more than 190 bar associations and law societies from all continents.
In the wider profession of real estate no such structure has existed up to now.
The intention of the new Ethics Coalition is to achieve global consistency across different markets; to promote comparablility, assurance and trust; to work to a formula that is collaborative and self-governed; to reduce unnecessary risk in transactions and business practices and to construct a sound framework for cross–border working.
No conflict with existing codes
Contrary to the fears of a few national associations that their own codes of conduct will somehow be under threat, the adoption internationally of fundamental but high quality principles will leave a vital and permanent role for individual professional bodies. They will be free to retain their own more specialized and possibly more stringent rules if they wish. And the implementation of global standards will be carried out through the codes owned and enforced by Coalition member organizations.
The Coalition will establish clarity and demonstrate harmony on vital concepts of integrity and professional competence. In doing so, it will reinforce the authority of its members’ existing codes of ethics. In fact, the new standards will underpin those codes.
The result will surely be an enhanced reputation for the entire profession and greater public trust.
In this positive atmosphere, confidence in the ownership of real estate is bound to strengthen globally. This will lead to less volatility and, in the long term, enhanced values. Ultimately, there will be a significantly improved rating for property itself as an investment asset class.
The Process is Key
Now we come to the process of administering the Coalition and creating the new International Ethics Standards.
The process is regarded as key on the assumption that, through active participation, the associations which make up the Coalition, and their individual members, will identify with its output.
Therefore, all organizations which join the Coalition are directly involved in its governance. Each member has appointed a Trustee (and an alternate). The Members and their Trustees are equal in authority and make major decisions by majority vote.
As more countries and organizations become committed, the likelihood will grow that what is finally produced will gain universal acceptance and will actually be implemented. However, the challenge is to ensure that in the drive to gain approval from so many different sources we do not dilute the Standards to the point where they become irrelevant. Many under-developed countries lack the political and economic structure to regulate business. As a result, corruption has a devastating effect on vast populations. Our task, which is not an easy one, is to define the principles of acceptable conduct in both emerging and advanced economies so that the property industry can contribute to a solution.
The Ethics Standards themselves are being written by an independent committee of leading global experts nominated and elected earlier this year by the Trustees. It is called the “Standards Setting Committee” and consists of 20 specialists in the field of codes of ethics, governance and professional conduct. They are researching existing rules, both within real estate and outside, and will be codifying ethical principles so as to create the new International Standards. That process is expected to be concluded during the first half of 2016.
When the Committee’s work is completed, the Coalition members will become joint owners of the Standards. They will legally share the intellectual property and will participate fully in implementation and compliance.The new International Ethics Standards, or IES, will join at least four other global standards:
International Financial Reporting Standards
International Valuation Standards
International Property Measurement Standards
International Construction Measurement Standards
The first three are already in existence and are of growing importance in world markets.
Continuing role of the coalition
The adoption of these new ethical standards across the world will take time and the Coalition is expected to have a long term role. This will be:
1. To create and publish high quality international standards in several languages using terminology that is readily understood.
2. To promote, through close collaboration among its member organizations, the adoption, implementation and enforcement of the Standards by (i) leading professional bodies; (ii) national, regional, state and local governments; (iii) private sector entities, and (iv) public sector entities. In all likelihood, this will lead to the Coalition and its members providing guidance and training for real estate professionals.
It is worth commenting that, in the long run, ethics standards that are not enforced are no standards at all. So, ensuring compliance is an absolutely vital part of the Coalition’s purpose.
It is not far fetched to anticipate that that the Coalition could maintain and publish a register of organizations and individuals who have undertaken to adhere to the Standards. This might ultimately lead to internationally regulated practitioners and corporations.
3. The third element of the Coalition’s long term role is to update the Standards, as needed, from time to time while offering advice on their interpretation and application. Also, helping to resolve disputes on their content and meaning.
The International Standards will be promoted through associations’ own guidance and codes (as mentioned earlier); the training of professionals around the world and by businesses endorsing the Standards while choosing advisers and brokers who comply with them. We can expect the result to be a wider understanding among the general public of how the Standards work and why they are beneficial.
One cannot over-state the significance of numerous, prominent professional bodies from all parts of the world voluntarily coming together to create and implement International Ethics Standards.
Global adoption of those Standards will establish a new 21st century, moral foundation for all human activity in land and buildings, including construction, finance, occupation and investment. We can reasonably expect the public perception of the entire property profession to be enhanced.
This is a vital opportunity for our profession to demonstrate the benefits of self-regulation while working in constructive partnership with the public sector.
The new Coalition has the potential to advance decency, competence, transparency and integrity as the professional norm everywhere. As we have seen earlier, that is not just the right thing to do but it is likely to result in more stable markets and substantially improved b