Real Estate, Disrupted

Coverage of the 2018 Global Investment Conference

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story_images_GIC_office-buildingWhen it comes to real estate, Canadian plan sponsors were early adopters, starting domestically 20 years ago and, more recently, looking further afield for opportunities outside the country. Explains Timothy Bellman, managing director, head of global research at Invesco Real Estate, the push into global real estate has become more urgent in recent years as Canadian pension plans confront a lack of supply at home.

While the shift to global real estate has been limited to all but the biggest plans able to invest directly, smaller plans are beginning to take note and seek ways to follow suit.

“Canadian institutional investors are the first and largest investors in global real estate,” Bellman explains, comparing Canada’s plans to their smaller peers. “Big plans like the CPPIB are like trucks driving down the road with trailers behind. They’ve been pioneers in investing in real estate internationally — and people follow them.”

As that happens, new opportunities are emerging to bring smaller pension funds into the space.

It’s a good time to be looking at real estate, even as it moves late into the cycle in some regions like the U.S. While the outlook for global real estate is positive, investors should proceed carefully: with no shortage of capital chasing real estate assets, prices have been driven higher while yields have dipped relatively low compared to historical trends.

Playing the long game 

Investors should instead look at the long-term fundamentals of real estate, and that means understanding some of the disruptive forces driving performance, including technology.

“If the statistics are right, 30% to 40% of jobs are under threat to be replaced by artificial intelligence in the service sector,” he says. That will have a clear knock-on effect in commercial
real estate, where secondary office spaces in suburban locations dedicated to back-office functions are at risk.

Autonomous vehicles also open up new opportunities in real estate, especially in the retail sector. “Shopping centres with huge car parks can use land dedicated to parking for new purposes,” Bellman says, noting that land values will rise as higher value land uses are identified.

For Canadian investors considering global real estate, Bellman advises them to look closely at where it fits in their portfolios.

“Investors are looking at shifting their domestic-oriented investments overseas to diversify risk,” he says. He sounds a note of caution for investors chasing higher returns from global real estate — that will mean moving up the risk curve, which isn’t recommended.

Smaller plans might not be able to take the direct route in the same way their larger peers can; however, there are now unlisted private real estate vehicles that can provide global real estate exposure. They can also consider funds of funds that assemble multiple managers together in one product.

Says Bellman, “The number of ways to invest in real estate outside the home market has increased and become more sophisticated. Today, investors with smaller allocations can gain access to this opportunity set.”

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