If you’re looking invest in global real estate, where should you look? Maybe not here.
According to Investment Property Databank (IPD) data, “Canada really stands out in a global context, in terms of cyclical valuations being at an all-time high,” said Liz Troni, global property strategist, Aberdeen Asset Management. She was speaking at the 2015 Risk Management Conference held in Muskoka, Ontario, in August. Data from 1997 to 2008 show a strong correlation between total returns and market pricing. In other words, overpriced markets consistently underperform, she explained. That’s why she advises looking at undervalued or less-valued markets instead.
Using a global property short-term indicator to see how capital values should be performing in the next six to 12 months, Troni noted North American markets are still holding up, but there’s likely to be a slowdown. Canada is already experiencing a softening in investor sentiment and a weakening economic environment. In contrast, Europe is picking up quite considerably. “We’re seeing plusses in these markets for the first time,” she noted.
Right now, it is important for investors to focus on fundamental value analysis—meaning, what do current market prices look like compared to where market valuations are expected to be in the long term. In that context, Europe again stands out, Troni added. European real estate appears fairly valued, supporting an overweight position. She views Europe as a good choice for near-term risk management.
Themes for the future
Since “real estate isn’t a market that moves quickly,” Troni believes in the importance of investing based on themes for the longer term.
“Themes allow investors to actively manage risk and ensure that capital is actively deployed against investments that reflect their convictions,” she explained.
Looking out to 2030, some factors to consider include “winning city” populations (i.e., those with strong population and economic growth, as well as a large, highly educated labour force) and industrial technology (e.g., robots, 3D printing). Both factors can have a significant impact on certain types of real estate strategies.
When investing in “winning cities” such as London and Sydney, “investors have typically favoured offices, but unfortunately, they have been an underperforming sector in the long run,” said Troni.
Looking at the theme of industrial technology, “tech is unquestionably a U.S.-led industry,” she explained. Other regions of the world are absorbing and responding to technological advancement at different paces, suggesting diversification potential for global investors. “Technology is disruptive. There will be winners and there will be losers,” she noted.
Ultimately, themes “help bridge the micro and the macro, and they’re an alternative to the relative benchmark framework,” Troni added.
Winning cities
