Four considerations when going global on real estate

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Real estate is a good option because it can deliver an attractive stream of income that typically grows with inflation, says Michael Peck, senior vice president and head of Canadian Institutional Investments at Invesco Ltd.

However, he says that in Canada, real estate prices are quite high and that there may be limited investment opportunities still left.

“There’s not a deep breadth of real estate product in Canada because for the most part the big pension plans already own all the trophy assets,” Peck says.

Peck says Canadian plans’ first journey into global real estate was in the U.S., which may be because of similar language, time zones and legal structure. And now, Canadians are moving beyond just the U.S. and looking globally.

Investment Policy/Legal/Tax

But before leaving the Canadian real estate world and going global, there are a few things plans should consider including making sure it’s consistent with their investment policy, and that they have legal and tax expertise, Peck says.

“We’ve seen Canadians in general embracing alternatives be, it infrastructure, real estate, private equity, private debt,” Peck says. “So as you’re stretching into those alternative assets classes, I think it’s incumbent upon plan sponsors to make sure that they understand the contracts that they’re signing because you’re no longer in the public daily liquidity realm.”

Currency

Peck also highlights the importance of considering currency – which can be both a risk and opportunity in global real estate.

Because most pension plans pay their liabilities in Canadian dollars, buying global real estate exposes a plan to different currencies, he says.

“I think you need to understand how that type of investment can fit in from a currency hedging perspective,” Peck says, explaining many plans have currency policies that would address this.

“They just need to understand that you are exposing yourself through foreign currency risk, but again that’s one of the reasons that people like the diversification. Having exposure to different currencies over the long run tends to be a diversifier. But in the short run, there are some risks there that people need to make sure they understand,” he says.

ESG

When looking at real estate, plan sponsors are increasingly asking about ESG, Phinex Wong, a fund manager at Invesco Real Estate- Asia, says.

He highlights that this is about more than just looking at a building’s energy use, emissions, waste or water control, saying that investors need to work with other parties like property managers and even tenants.

“We need to provide tools, resources to engage the property manager on sustainability issues,” Wong says. “We also need to encourage those sustainable practices to be implemented by the tenants in the buildings.”

He says that when talking about governance, leadership, transparency and disclosure are important.

Liquidity

Peck says it’s important to remember that there are different ways to access real estate, including both direct and indirect routes.

He highlights that the big pension plans can go out and buy buildings themselves, but smaller plans can’t, and for them real estate investment trusts may be attractive.

“Over the long run they [REITs] deliver effectively the same return as direct real estate,” says Peck. “But over the short run you’re subject to a lot more volatility because it’s a stock.”

He says that REITs offer daily liquidity, investing through a real estate fund generally offers quarterly liquidity and with direct real estate investing it can take even longer to sell.

“And so pension plans need to think about that and how it impacts their liquidity profile,” Peck says.

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