Global Real Estate Investment Opportunities

By M. Isi Eromosele

Despite recent price turbulence in many developed world real estate markets, global real estate as an asset class continues to offer long-term institutional investors several important benefits: portfolio diversification through low correlations to other asset classes, solid cash flows and a measure of inflation protection through index-linked rents.

Investing in real estate across the world enhances this diversification by allowing investors to choose among the strengths and weaknesses of local property markets as they evolve.

There are many ways to design exposure to global real estate depending on risk and return preferences. Investors can choose opportunities in real estate equity or real estate debt. Within each of those asset classes, there are multiple segments, each with its own advantages and disadvantages.

Global Real Estate

Investing within and across regions can offer varied sources of returns, providing additional diversification to a portfolio. Real estate is ultimately a local business, with cash flows linked to the physical assets and influenced by local economic conditions.

Thus, the timing and nature of real estate returns can be very varied, depending on prevailing conditions in countries and regions.

Investing in real estate globally allows investors to take advantage of region-specific opportunities. They can seek stable value investments in developed markets such as the United States, the United Kingdom, continental Europe, Canada and Australia.

Alternatively, they can target emerging markets with high growth potential such as China and Brazil. Investors need to be aware, though, that going overseas involves risks, including a potential lack of transparency in many markets.

While the real estate markets of the U.S. and U.K. are some of the most transparent, with price discovery and market data among the best, corporate governance and reporting standards vary considerably around the world.

Apart from interest rate fluctuations and inflation risk, another potential problem for global real estate investors is the difficulty of identifying appropriate benchmarks for performance. It can also be more challenging to monitor and evaluate investments from a distance.

Investing abroad is also likely to incur higher transaction costs and there is the potential for exposure to foreign exchange risk. Another significant consideration in a globally diversified portfolio is liquidity, especially in less mature and less transparent markets. For many investors, investing in overseas real estate will require specialized expertise.

Investing In Real Estate Equity

Investing in real estate equity covers a broad range, from the direct purchase of a property to buying shares in a real estate investment trust (REIT) or a property unit trust. An investor’s concerns about diversification, liquidity, correlation and transaction costs will affect investment choices.

Equity real estate investments can be grouped according to the level of direct or indirect ownership.

Direct Property

Investors can purchase physical assets such as an office building or shopping center. Done on a relatively large scale by an institutional investor, these investments can be made through a segregated or separate account.

Investments can be made in a joint venture with another investor and/or an experienced operating partner or owned by a single investor. An advantage to this approach is the ability to target specific geographic markets or property types; investors have a great deal of control over their investment strategy.

By buying a physical property, investors would have invested in a hard asset and enjoy specific cash lows from rental income, in addition to any gains in value realized at the time of sale.

But there is another side to that physicality: direct ownership of property increases the illiquidity of the investment as it takes time to buy or sell a property. In addition, there are high transaction costs associated with property sales.

Pooled Funds

A pooled or commingled fund gathers capital from a group of investors and uses it to purchase a portfolio of properties; these investments can include property unit trusts in the United Kingdom, open-end real estate funds in Germany or private equity real estate funds in the United States.

Generally, pooled funds are able to acquire more properties than an individual investor, and so are able to have a more diversified portfolio of underlying properties.

Pooled funds can be either open-end or closed-end. A closed-end fund has a fixed term and aims to raise investment money, acquire assets, hold them for a specific period, then sell the assets for a gain. Open-end funds do not have a fixed term, and so investors can, in theory at least buy into the fund or sell out of the fund at their own discretion.

Real Estate Securities

Another way for investors to invest in property is through the purchase of real estate securities equity shares of publicly traded companies that invest in real estate, such as REITs or real estate operating companies (REOCs).

Investors can directly purchase real estate securities, or they can invest in a fund or separate account that is professionally managed. REITs, which have an advantageous tax structure by virtue of distributing almost all their taxable income in the form of a dividend, also offer attractive dividend yields and global REITs have delivered average

total returns of just over 9 percent annually over the past 10 years.

An advantage to investing in real estate securities is the speed with which an investor can build up a portfolio; it is much quicker to buy stock than it is to buy a building. Real estate securities can offer daily liquidity and pricing, as well as transparent reporting processes.

It is also much easier to invest in a portfolio that is broadly diversified by geographic region and property type compared with buying physical real estate.

Global Real Estate Outlook

The world is moving into a real estate investing environment with lower debt levels and lower expected returns. There will be more focus on rental income security, and less on capital gains from property price appreciation.

Expect the decoupling of global markets, which will have a significant impact on returns. Asian markets, excluding Japan, and emerging markets will be near-term winners, but volatile. Low growth in the U.S., U.K. and continental Europe will likely shift investors’ focus to income in those markets.

Private real estate investors have had trouble raising new equity, while listed REITs are shaping up to be in the best position for the next few years. Listed REITs have strengthened balance sheets by raising new equity, and with their experienced management teams, will be able to take advantage of distress in the real estate markets and will have the financial strength to develop new properties as demand for space returns.

Listed real estate securities are generally a leading indicator of the recovery of the real estate markets; thus there is already a significant rally in most global listed markets, in line with the broad equity market recovery. However, great value and growth opportunities abound for active managers.

In the direct property market, the emergence of distress has been slow, with banks continuing to subscribe to the extend and pretend strategy with regard to their commercial real estate loan books. However, those with access to equity and less reliance on debt funding are starting to see more distressed opportunities at great prices coming from those in immediate distress or in need of short-term liquidity.

With such a wide range of choices, global real estate investors should carefully consider their return objectives as well their risk appetite and volatility tolerance. As the universe of investment opportunities expands globally, so too does the stock of high-quality real estate assets investors can consider for expanding their sources for portfolio diversification.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

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