Real estate and construction business optimism tempered by weak governance foundations

The majority of businesses in the real estate and construction sector are still not properly insulated against fraud and corruption according to the latest research from the Grant Thornton International Business Report (IBR). This comes despite warnings suggesting that such practices could account for as much as 10% of global sector revenues or around US$1 trillion, rising to US$1.5 trillion by 2025.

Globally, just 41% of sector businesses have measures in place to accommodate potential whistleblowers, although this ranges from 70% in North America to just 23% in Europe, with Asia Pacific (31%) and Latin America (28%) also lagging behind. A majority of businesses globally do have a compliance and ethics programme in place (57%) but again while this is common in North America (76%), it is much less so in many other parts of the world, including Asia Pacific (51%), Europe (45%) and Latin America (43%).

Clare Hartnell, global leader for real estate and construction at Grant Thornton, said: "The lack of focus on governance is understandable, if still a concern. Real estate & construction businesses have been in ‘wait and see’ mode for a long time, focusing on staying afloat rather than expansion. But now that the market is moving in the right direction, businesses need to make sure that the correct controls are in place so that governance issues do not stifle their next phase of growth."

The IBR reveals that net 42% of businesses are optimistic for the sector in 2014, led by southeast Asia (78%), Latin America (60%) and North America (56%). Europe (33%) is somewhat polarised between persistent pessimism in southern Europe but growing optimism across northern and eastern parts of the region.

This optimism is feeding into business growth prospects for the year ahead, with  an increasing proportion expecting to raise revenue (+8pp) and profitability (+5pp) in 2014, compared with this time last year. Businesses in southeast Asia (54%) and North America (50%) are the most bullish in terms of profitability in 2014. Sector leaders in Europe (33%) and Latin America (31%) remain slightly more subdued.

Clare Hartnell added: "Developers, property companies, investors and homeowners suffered disproportionately during the financial crisis, but now, finally, expectations for profitability, jobs and orders are all on the rise. House prices are climbing in key markets such as the UK and the US, contributing to the so-called 'wealth effect' which boosts the consumption patterns of homeowners.

"But these improvements are far from uniform. Instead we find pockets of opportunity; where money seems to be channelled into cities and regions, rather than countries. Even certain areas in economies that suffered badly in the recession, such as Spain and Ireland, are becoming attractive again.

" Increasing activity in the sector is a strong indicator that the global recovery is gaining momentum, although it would not take much to destabilise these improvements. As cities rather than countries seem to be the focus for investors and businesses alike, this can also mean distorted values in a small area, with the risk of some potential future realignment."

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