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Diversify your investments with global real estate

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Market uncertainty such as Brexit is one of the reasons motivating investors to park their money in global real estate. December 2018 registered one of the worst performances for global equity markets since the Global Financial Crisis.

London

VOLATILITY in global securities markets is expected to continue into 2019. Global real estate may be a better bet for stable returns.

Many Asian investors are familiar with the appeal of holding real estate. The appetite for properties from high-net-worth and even mass affluent investors in the region continues to rise, driven partly by an increase in overall wealth, but also due to concerns over pricing of equity and fixed income markets.

Market uncertainty is another driver, especially in recent months. Indeed, December 2018 registered one of the worst performances for global equity markets since the Global Financial Crisis.

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Investors have been coming to terms with macro risks that are perhaps greater today than in previous years, including rising populism, an escalation of the US-China trade war, a misstep in monetary policy normalisation, a disorderly Brexit or a China debt crisis.

Times like these underscore the importance of broad diversification for Asian investors, and that should include adequate exposure to alternative asset classes. With a generally low correlation to other asset classes, real estate serves as an excellent diversifier in a mixed-asset portfolio.

Many investors like the physicality of real estate - owning a part of something tangible. The relatively high-income return from core real estate and the potential for capital appreciation has proven to be attractive.

Indeed, real estate has delivered strong relative performance across multiple business cycles compared to other asset classes, and its characteristic stable income makes it a compelling alternative to traditional fixed-income instruments.

When considered as part of a long-term mixed-asset portfolio, the income return of real estate becomes even more compelling. Over the period between 2001 and 2017, global equities derived 40 per cent of their total return from income and 60 per cent from capital appreciation.

By comparison, for real estate globally, income contributed a greater share of total return (49 per cent for listed and 81 per cent for unlisted real estate) and was arguably a more predictable source of return. This suggests that a portfolio that includes global real estate stands to diminish risk through lower volatility.

For those who are already investing in real estate today, the exposures tend to be domestically focused, and concentrated in the residential sector. Indeed many individual investors have limited avenues to access large-scale commercial real estate opportunities, whether it be offices, logistics or retail.

This carries some concentration risk for investors, as residential prices in major cities may be led by investment sentiment rather than local market fundamentals. Historically, there has been little correlation between commercial and residential real estate prices.

In fact, many institutional investors are now investing in non-domestic or even global real estate. Large asset owners and sovereign wealth funds have been at the forefront of the shift.

Likewise, a lack of domestic investment opportunities has also played a role in investors' increasing appetite for an international portfolio as a way to significantly broaden their opportunity set.

Now there are multiple ways to access the real estate asset class, including listed vehicles such as real estate investment trusts (REITs), or mutual funds that invest directly in unlisted real estate. Traditionally, the latter offers less liquidity, but in exchange for generally greater stability under normal market conditions. But now a new range of mutual funds has evolved that provide greater liquidity through a blend of direct and listed real estate. This enhancement is providing investors greater motivation for diversification by adding unlisted global real estate to their portfolios.

Analysing global real estate markets and the different ways to invest can be a large task. An investor needs to assess what resources and capabilities they have to execute a global real estate allocation. They will also need to assess various other factors such as the impact of currency, tax, liquidity and pricing.

For investors considering expanding their exposure beyond their home country and residential properties, listed and unlisted global real estate offers compelling returns derived from generally stable income streams while also lowering portfolio volatility. Moreover, the depth and transparency of many international markets make cross-border investment increasingly accessible.

With global equities and bond markets more difficult than ever to navigate in the year ahead, for many investors, global real estate may be the simpler, better way to achieve the portfolio benefits.

  • The writer is managing director of global client portfolio management at Invesco.