Stephen Messenger, Head of UK Strategic Institutions, Invesco Asset Management Limited
Why we advocate a global approach to real estate investing…
DC members have traditionally sought to invest in global equities and bonds to achieve their financial objectives, and are now increasingly exploring the world of institutional quality commercial real estate. This is due to the perceived benefits it can offer in a multi-asset portfolio. However, while a domestic focus has naturally been the starting point, at Invesco Real Estate we advocate a global approach to real estate investing.
In our view there are five key reasons: the potential for stable income returns; low correlation to bonds and equities; access to high quality real estate; equity-like returns and bond-like income. Adding real estate to a portfolio has the potential to provide more stable returns as it has low correlation with other asset classes. In addition, a global approach provides access to more markets and investment opportunities than domestic investments, and adding countries and cities reduces exposure to local real estate market and asset risks. And the global investable universe is c.US$26.08 trillion!
Looking locally, the UK real estate market has underperformed global real estate over the last 24 months (Source: MSCI, Q4 2020). The UK economic and real estate market outlook is uncertain, which suggests a high quality, diversified approach is likely to provide a consistent, attractive income stream that has better downside mitigation potential over the long term.
Given the challenges of managing a high quality, locally driven asset class across national borders at scale, it is clear to see why historically real estate investors have remained in their own markets. However, today a broad range of investors can access daily priced funds that provide access to commercial real estate.
Capital values in the UK started to fall in 2019, a trajectory that has continued throughout 2020, thus resulting in a “peak to trough” value fall of 8.7% to December 2020 (Source: MSCI, December 2020). In contrast to other markets in other countries, this is significantly worse. This is characteristic of the UK under stressed markets conditions; for example, a similar divergence was seen post-GFC.
MSCI also produces a quarterly index of domestic open-end funds globally. They concluded that a diversified approach through 2020 has shown significant resilience over and above a localised domestic strategy in most markets. Historically, modelled over longer time periods, a global approach to real estate investment has proven to be beneficial in terms of a significant reduction in return volatility.
Whilst there has been a difference in the reaction of governments and the various timing of lockdowns globally, the UK real estate market has been impacted more severely than others. This is not only due to COVID-19 but also likely a function of additional factors like the declining appeal of shopping centres; Brexit-related concerns; an increasingly diverse investor base, more sensitive to market shocks; and a broad universe of secondary, more regional assets within funds. These have seen heavy yield compression in previous years and are likely to be more reactive to volatile market conditions.
With the future still uncertain and the UK planning its way out of strict lockdown, it is unclear how the UK real estate market will perform. We believe this suggests a high quality, diversified approach is likely to provide a consistent, attractive income stream that may provide better downside mitigation to DC members over the long term.
 Total investible universe market size is estimated based on each region’s investible stock as defined by latest Cushman & Wakefield Money into Property as of December 2016.