Real estate can deliver good, steady returns—yet, home bias and a limited budget can often present barriers for pension investors.
“The absolute returns are very attractive and they exhibit less volatility than any of the other alternative categories,” said David Mather, executive vice-president with Integrated Asset Management, at Benefits Canada’s Benefits & Pension Summit in Toronto earlier this week.
Laler DeCosta, client portfolio manager with Invesco Real Estate, echoed that sentiment. “Real estate is a very attractive portfolio diversifier” and negative returns happen only during big recessions, he said.
In the United States, real estate assets tend to deliver returns that fall between stock and bond returns, DeCosta explained. “What we’re seeing increasingly is people moving parts of their bond allocations over into real estate because it has a lot of characteristics of bonds.”
A key thing to do when investing in real estate is diversifying. “You want to be in more than one vintage years; you want to diversify by property size, by country, [and] by region,” Mather said, adding however, that Canada does remain a good place to invest.
Investors in North America, Europe and Asia still exhibit a home bias, Mather added. After all, “as you go abroad, you are taking additional risk, you are taking on foreign exchange risk, and [the risk associated with the] volatility of the country,” Mather said.
Global real estate
Still, investing in real estate abroad pays off because “you get different return characteristics from the different regions,” DeCosta explained.
The U.S. is one country Canadian investors have been interested in. “We’ve seen a lot of interest in the U.S., mostly in core [assets], from Canada. The biggest barrier has been the tax barrier. Most of the tax liability comes from appreciation,” DeCosta explained.
When going to the U.S., investors need to keep in mind that “the easy returns have come and gone” due to capital market events, rather than improvements in fundamentals, DeCosta said.
Another consideration when accessing the U.S.—and other markets—are trade-offs between stability and growth. “You wanna focus on markets where your income can grow,” DeCosta explained.
Yet another consideration for accessing the U.S. market is the availability of certain types of jobs. “We like markets where the jobs are in technology,” DeCosta said, explaining that it’s important to look for assets that have the power to attract young tenants who are also tech workers.
What if you are a small pension fund?
In that case, “the trophy assets are gone […] and you can’t buy them—not only because you can’t afford them but because [the big pension funds] don’t want to sell them,” said Mather, explaining that big investors hold these assets because they’re indifferent to short-term price.
But even where non-trophy assets are concerned, smaller funds still have smaller allocations. “And it’s hurting them. And its going to hurt them as long as that prevails,” he added.
The first step for smaller funds is to start with a core asset and to stay home, because that’s a familiar market and liabilities will be denominated in local currency, Mather said. Then, over the years, smaller funds can gradually incorporate value-added and opportunistic assets located abroad, including in emerging markets, he added. “In the end, you will have a portfolio you can put up against any of the big guys.”
All the articles from the event can be found on our special section: 2014 Benefits & Pension Summit Coverage.
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