Real Estate: Getting Over the Home Country Bias
Sticking close to home puts investors at a disadvantage.
BY Steve Buller | October 21, 2015
When investing in real estate, investors often focus on their home country or region, overlooking significant opportunities that exist internationally. However, international real estate makes up a significant portion of the global real estate opportunity set, and deserves consideration by investors. It is also a useful complement to a North American real estate allocation, to international stocks and bonds, and to a globally diversified portfolio.
As the saying goes, what matters in real estate is “location, location, location.” Often the specific street or city area where a real estate company owns property can be a key driver of its fundamentals. Globally, the same is true—because of different supply and demand drivers and market structures, the office market in Tokyo typically has little correlation to market dynamics in New York.
When investing in real estate, many North American investors concentrate on an area close to home and yet North America represents only half the global real estate opportunity set, or roughly 51% of global market capitalization. International regions also have represented a significant portion of total capital raising in real estate globally in recent years.
Individual property sectors can behave differently from one country to another, as varying economic and local market conditions affect supply and demand. Different lease structures, often due to local customs, also can impact real estate fundamentals. For example, office leases are traditionally two years in Japan, three years in Hong Kong and Singapore, five to 10 years in the U.S. and 10 or more years in the U.K. Interregional correlation for real estate is lower than it is in the broader equity markets due to local supply and demand drivers for real estate. In contrast, other sectors of the markets, such as technology, are more driven by global supply and demand dynamics.
Investing across geographic areas can help diversify a real estate portfolio, theoretically leading to lower volatility and potentially greater risk-adjusted returns. International real estate has also demonstrated meaningful return differences and imperfect correlations relative to North American real estate and to international stocks and bonds.
It may also offer compelling secular, or long-term, growth opportunities. Real estate trends tend to start in North America and then spread to Europe and Asia. Listed healthcare properties, for example, reflect the fact that healthcare represents 13% of the North America market, but is an area of limited exposure in Europe and Asia. In Asia in particular, the development of this sector is supported by strong secular tailwinds, such as an aging population and rising incomes, which are driving increased demand for quality health care and senior living facilities.
International real estate does introduce foreign currency exposure to investors who might otherwise invest solely in their home country. Currency can also play an important role in investment diversification. It can be volatile over shorter time periods, boosting returns relative to an investor’s base currency in some periods, while detracting in other periods. However, over longer periods, these currency movements are likely to revert to the mean.
In short, maintaining a home-country bias may obscure the potential benefits that international real estate can offer, including diversifying an allocation to North American real estate, diversifying a global stock-and-bond portfolio and taking advantage of long-term real estate growth opportunities around the world.
Steve Buller is Portfolio Manager, Fidelity Investments