Widening the Real Estate Opportunity Set

The global diversification of equity and fixed income allocations is regarded as an integral part of portfolio construction; however this is rarely reflected in the case of real estate allocations in Canada. Of 113 surveyed Canadian investors, roughly 90% had a combination of Global and North American real estate exposure with roughly 46% with only exposure to North America (U.S. and Canadian).

Historically the domestic geographic focus has been driven by a number of factors, including:

• The complexities and costs of investing in global real estate;
• Local regulatory restrictions;
• The limited numbers of managers with global expertise; and
• Strong performance of domestic property markets.

We believe that market developments and diversification benefits warrant revisiting the case for global core and core plus focused real estate strategies. With capital commitments of less than $50 million we typically see clients investing in just core real estate.

Where global real estate exposure exists, it is often via tactical value-add and opportunistic closed ended fund allocations.

We focus on core and core plus real estate as our preferred strategies and the combined strategies are referred to as ‘core’ for simplicity within this paper. Fundamentally this combined approach results in a portfolio where there is a strong income component underpinning returns with potential for additional performance generated through active asset management.

The paper explores the strategic rationale for building a diversified, global core real estate allocation as well as providing consideration points for access and implementation.

Revisiting the strategic case for global real estate

Institutional investors have typically invested in domestic real estate markets and placed a significant risk premium on foreign markets. Imperfect information on foreign real estate markets and a lack of managers with the expertise and skills required to manage global portfolios are part of the rationale for this. However, we believe the situation has changed markedly, especially with regards to solutions available for investors.

Consequently, investors who only invest domestically are limiting their investment opportunities substantially and concentrating their risk to one market, making their portfolio returns susceptible to negative country specific shocks. The chart to the right shows the regional breakdown of the global, investible commercial real estate universe.

The global commercial real estate market is estimated to be around US$32.4 trillion in size, split almost evenly across North American, European and Asian markets4. Taking a more granular look at each market would reveal that the sector composition of each market differs.

A global real estate allocation increases the opportunity set and we believe that the size and the distribution of the investible universe warrants focus on the benefits of such an allocation.

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