Using global real estate strategically can help enhance diversification, manage overall portfolio risk and insulate overall portfolios from future market shocks. That’s according to Tracey Luke, senior director, product management, with Invesco’s real estate team.
Institutional trends around the globe are pointing to an increase in allocations from institutional investors in real estate pretty consistently, Luke says, and not just in Canada.
So why global real estate? Fundamentals continue to appear sound and opportunities exist for pension plans that are willing to look beyond domestic borders, Luke says.
“Ten percent allocation is kind of the norm,” she says, “as there’s a sense that it’s hard to put their money to work in Canada, or [plans] don’t have the right opportunities or quality of opportunities.”
As she explains, “large plans — $1 billion or greater — are allocating at least 10 percent to real estate, but once you go below that $1-billion mark, you’re starting to see a pretty significant drop-off to 4 or 5 percent.”
Luke says liquidity is a major issue but access can also be a problem for smaller plans looking to diversify outside domestic markets. While the 2017 Preqin Global Real Estate Report shows that roughly a third of plans surveyed intend to significantly increase their allocation to real assets, Luke says the percentage of plans aiming to go domestic or international is evenly split. “There are a lot of cross-border capital flows around the globe,” she explains. “People have a desire to increase their real estate allocations, and accessibility has been a challenge for a lot of plans that want to do that.”
The push to go global is particularly urgent in Canada, which has a small percentage of the overall transparent global real estate market. Overlaying the JLL’s Global Real Estate Transparency Index, which ranks 186 countries around the globe from highly transparent to opaque, and DTZ’s Money into Property, which assesses the size of the global real estate investment market, Canada accounts for just 3 percent of the $20-trillion transparent global real estate universe. That’s a problem for Canada’s pension funds that need to access quality real estate investments.
Luke says there’s a very large investable market available outside Canada that some plans are accessing mainly through public securities. Not an ideal route, Luke cautions.“This is how a lot of plans have traditionally tried to access global real estate,” she says. “However, because they are public securities, they have the volatile characteristics of equities. So you’re losing a lot of the benefit that you otherwise would get if you could access a private real estate portfolio.” Luke says there are opportunities today for plans without billions to invest that weren’t available two or three years ago, mainly due to the emergence of pan- regional and global, open-ended private real estate funds, which require only a $5- to $10-million investment minimum.
It’s worth considering, Luke concludes. Real estate offers the diversification and income stability that plans need in today’s volatile times.