Using global real estate strategically can help enhance diversification, manage overall portfolio risk and insulate overall portfolios from future market shocks, according to Tracey Luke, senior director of product management at Invesco Ltd., speaking at the 2017 Global Investment Conference.
Institutional trends around the globe are pointing to an increase in allocations from institutional investors in real estate pretty consistently and not just in Canada, said Luke. So why global real estate? Fundamentals continue to appear sound and opportunities exist for pension plans that are willing to look beyond domestic borders, she added.
“Ten per cent allocation is kind of the norm, 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,” said Luke.
“Large plans — $1 billion or greater — are allocating at least 10 per cent 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%.”
Luke said liquidity is a major issue, but access can also be a problem for smaller plans looking to diversify outside domestic markets. London, England-based data and intelligence company Preqin Ltd.’s 2017 global real estate report shows that roughly a third of plans surveyed intend to significantly increase their allocation to real assets, but Luke said the percentage of those aiming to go domestic or international is evenly split.
“There are a lot of cross-border capital flows around the globe,” she said. “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 Jones Lang LaSalle Inc.’s global real estate transparency index, which ranks 186 countries around the globe from highly transparent to opaque, and DTZ’s money into property research, which assesses the size of the global real estate investment market, Canada accounts for just three percent of the $20-trillion transparent global real estate universe. That’s a problem for Canadian pension funds needing to access quality real estate investments.
Luke noted there’s a very large investable market available outside of Canada that some plans are accessing mainly through public securities. But that’s not an ideal route, she cautioned.“This is how a lot of plans have traditionally tried to access global real estate,” she said. “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 noted 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-million to $10-million investment minimum.
It’s worth considering, Luke concluded. Real estate offers the diversification and income stability that plans need in today’s volatile times.
This article originally appeared on Advisor.ca’s companion site, Canadian Investment Review