Global Real Estate
IN PRINT ARCHIVE CIR Winter 2008
Global Real Estate
By David Gilbert, Managing Director, ING Clarion
The historic flow of institutional capital across national borders into commercial real estate has confirmed the status of real estate as an important global asset class. Only a decade ago, few U.S. institutional investors had international exposure to real estate while most had robust international programs to invest in stocks and bonds. At the time, international real estate investing was challenged by complex tax structuring, poor information on real estate markets, limited liquidity, few private market performance indexes and few managers to execute such programs. Many of these challenges have been mitigated by the growth of information on markets, well-established tax treaties and structures, expanding performance indexes, and the emergence of truly global real estate managers. A truly balanced and globally mixed asset portfolio should include real estate for several reasons: the potential for very high short-term total returns; long-term strategic growth and portfolio diversification benefits. In the past five years, the return profiles of real estate in numerous markets around the world have been extraordinarily high, with total returns in the majority of investable markets well above their long-term trend. The increasing values of many assets and very solid fundamentals supporting strong income growth have led to very high benchmark returns.
The case for cross-border diversification
Even in 2007--a year that witnessed extreme volatility due to the credit crunch and the re-rating of risk-- almost all major real estate market indices around the world delivered solid total returns. In the U.S., the world’s largest commercial real estate market total returns performed well alongside those of the indices of other asset classes. NCREIF property index total returns for the year of 2007 came to 15.8% with some property type sub-indexes performing even better (office delivered 20.5% and hotel, 18.1%). Although the comparable index in the U.K. (the IPD all-property index) experienced negative returns for 2007, along with many national REIT indices, this illustrates an important factor about global real estate. Market conditions can differ tremendously from market to market – thus bolstering the case for cross-border diversification to take advantage of any divergence of performance.
Like most asset classes, commercial real estate is cyclical and asset selection requires thorough market analysis and due diligence. Although real estate has clearly emerged as a global asset class, conditions at the local level are still of great importance in driving performance. Commercial property has become an increasingly transparent asset class-- many independent firms now track fundamentals of supply and demand in a growing number of markets and sub-markets.
Global real estate embraces four traditional property types: office; retail; industrial; and residential. Although general economic growth is an important driver for each type, each has a somewhat different set of economic and demographic drivers. This diversity is enhanced when property sub-types or niche opportunities are considered. Other property types such as hotels, hospitals and infrastructures are increasingly available for institutional investors, and these are driven by very different fundamentals again.
The universe of investment-grade real estate has expanded as the global economy requires this growth to be housed in commercial facilities. Over 50 countries around the world have a commercial real estate stock of sufficient size and quality suitable for international institutional investors. They include not only the large, developed and modern economies of North America, Western Europe, Japan and Australia, but emerging countries—like China, India and Mexico-- that are rapidly developing and urbanizing and where a growing middle class requires new stock.
Opportunity funds in the real estate arena may be especially well-placed to benefit from the cyclicality of real estate and the divergence of trends by market. Distressed assets, privatizations and the effective use of leverage in development are just three “tools” in a “tool-chest” of strategies that can re-position assets to take advantage of the complexity of global real estate cycles.