Home Investing Strategy Investors should think globally as part of their real estate strategy

Investors should think globally as part of their real estate strategy

by WOOWinvest
0 comment
Investors should think globally as part of their real estate strategy


Thinking beyond the UK market can reduce overall portfolio risk as well as offering healthy returns if managed properly, say Alice Wilcox and Nick Colley of CBRE Investment Management. Sponsored comment from CBRE Investment Management.

Despite global financial market volatility, there remains a strong case for LGPS investors to build a global real estate allocation to help achieve their portfolio objectives. There are three principal benefits of adopting a global strategy:

Greater opportunity set Diversification benefits Enhanced returns Greater opportunity set

Alice Wilcox and Nick Colley of CBRE Investment Management

CBRE Investment Management estimates that the global investable real estate market has a value of $36.9tn and consists predominantly of assets in developed markets (71% of the universe).

The UK has a relatively large real estate investment market yet represents only about 5% of the global investable universe*. By broadening allocations to include markets outside the UK, investors can substantially increase their opportunity set. The range of investment opportunities is diverse across the three principal regions of continental Europe, the Americas and Asia Pacific.

A key attraction of the global market is that it offers significantly greater opportunities for skilled managers to earn “alpha” than are available in the UK market alone. Alpha can be generated by allocating top-down capital to markets which will outperform, as well as by good bottom-up stock selection and asset management within markets.

Diversification benefits

While income returns from property are relatively stable, total returns display higher volatility. Real estate is a cyclical asset class; these cycles differ significantly from country to country because of their specific demand and supply drivers. The upshot is that real estate markets are not perfectly correlated because of this local nature of the asset class. Having exposure to more countries/markets can create a more stable total return profile than investing solely in one country, ie a globally diversified real estate portfolio is likely to have a lower overall risk than a pure domestic portfolio.

It is possible that globalization of markets may lead to real estate markets becoming more closely correlated, but the differences between the UK and other economies are likely to result in diversification benefits continuing.

In our view, subject to management of currency risk (which we return to later), there appears to be a strong case that adding global real estate market exposure to a pure UK real estate portfolio should reduce the overall portfolio risk.

Enhanced returns

The third consideration relates to the opportunity to earn higher absolute and risk-adjusted returns. This can be achieved either by top-down market selection or good stock selection.

The cyclicality of the real estate markets is reflected in the wide variations in returns across markets as illustrated in the figure. Dispersion between the strongest and weakest performing real estate market globally peaked in 2008 at 47.9%. The UK recorded a total return of -21.7% in that year. Being exposed solely to the domestic market in that year would have been extremely damaging to investment performance. In short, this cyclicality creates an opportunity to earn excess returns – and greater downside protection – through top-down market selection by tactically tilting allocations towards markets that offer better return potential at each point in time.

A key attraction is that it offers significantly greater opportunities for skilled managers to earn ‘alpha’

Alpha can also be generated by good bottom-up property selection. Less efficient markets offer greater potential to achieve excess returns by stock selection. Many of these markets can be found in the Asia Pacific region.

Managing the challenges

Accessing the global real estate market presents additional challenges compared to investing domestically, and it is important to acknowledge and manage the associated risks. The key risks (and this is not an exhaustive list) are:

Market risk. The amount of market risk will depend on the underlying geographic and sector allocations.

Property-specific risk. The amount of property-specific risk depends on the number of properties held in a portfolio and the riskiness of the properties themselves (long leased income producing properties vs properties with vacancy or development activity). Portfolios with high asset concentrations, or development activity, will have a higher beta than the market.

Leverage. Over the long run, the cost of real estate loans is lower than the return on real estate, so leverage is generally accretive to return. However, leverage amplifies the volatility of asset values, again resulting in higher beta than the underlying real estate market – a particularly important consideration during downside scenarios.

Tax. Real estate investments are typically structured to minimize tax costs, but cross-border investment can result in some tax leakage for the investor and must be managed accordingly.

Management. Choosing a well-qualified local operating partner for each strategy is critical. Operating costs for international investments are typically higher than for domestic core strategies and depend on the type of execution (direct versus indirect).

Currency risk. Currency exposure, if unhedged, will add extra volatility to the return of a global real estate portfolio, particularly over the short term. We believe the best practice is to manage currency risk through a currency hedging overlay.

A global real estate portfolio

Based on thorough research of market fundamentals, allocations should be made, top down, to markets which are expected to outperform, while ensuring a well diversified mix of market exposures. Individual investment – ​​and local manager/operating partner – selection is critical. Property is a local business, and skilled managers have significant opportunities to add excess return at the property level. An on-the-ground network and rigorous due diligence process are required to source and execute investments in a structured way, and to actively manage the investments on an ongoing basis.

* Source: CBRE Investment Management, Oxford Economics as of May 2022. Notes: Based on the subjective judgment of CBRE Investment Management professionals and subject to change.

Alice Wilcox, head of LGPS partnerships, CBRE Investment ManagementNick Colley, global portfolio strategist, CBRE Investment Management

You may also like

Leave a Comment

Our Mission is to help you make better trading decisions by providing actionable investing content, comprehensive tools, educational resources and assist you in making more money in the stock market.

Latest News

Newsletter

Subscribe my Newsletter for new blog posts, tips & new photos. Let's stay updated!

@2022 – All Right Reserved. Designed and Developed by WOOW Invest

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Read More

Privacy & Cookies Policy