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Global real estate, a world of relative value: Target markets 2019

Growing investor interest in diversification has increased demand for global core real estate. Making sense of the global opportunity set requires a structured and disciplined approach to regional market and sector selection. We present our target market analysis approach and discuss the practical challenges facing investors, including structuring, trade-offs between regional and global exposures, and
foreign exchange risks.

Capital at risk. All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed.

Why go global?

The idiosyncratic nature of local markets, with their different fundamental drivers, means that investors may seek international real estate for beta exposure as well as for “alpha” generation via active regional, sector or asset selection. Today, the impetus for geographical diversification across Europe, the U.S. and Asia is reinforced by the pressure on performance as the cycle matures. In a lower-return climate, investors can be forced to choose between pursuing sustained performance by incurring a higher level of risk and moderating return expectations in favor of maintaining a constant risk profile.

One of the most compelling arguments in support of international investment comes from the continuing evidence on comparatively low correlation between geographies, 0.4 on average (MSCI Indices from 2007 to 2018 for China, Swiz, NL, UK, Fr, Ger, Jpn, Can, USA, Aus, HK, It, Sing, Spain.). The property markets of different countries exhibit considerably lower linkage than the equivalent equity or fixed income indices since they tend to be on different supply cycles. The chart below shows how this could potentially benefit a hypothetical U.S.-based investor.

Real estate is inherently local: there is a relatively strong correlation between economic growth and the performance of real estate markets. The interaction between regional GDP growth, credit cycles and interest rate cycles are important; negative impacts can be mitigated by combining regions and countries whose rates are less synchronized.

A smoother ride: Hypothetical returns from regional and global portfolios

real estate portfolio returns report

Source: MSCI, BlackRock (July 2019). Regional portfolio represents the investment universe as reported by MSCI IPD. Calculations are based on the full data set where there is a common historical span (2006-18). The figures relate to past performance. Past performance is not a reliable indicator of current or future results. The above does not represent a BlackRock product and is for illustrative purposes only.

Alan Synnott
Managing Director, Global Head of Research & Strategy for BlackRock Real Assets
Alan Synnott is the Global Head of Research & Strategy for BlackRock Real Assets.
Simon Durkin
Director, European Real Assets Research
Simon Durkin is the Head of European Real Assets Research at BlackRock.
Steve Cornet
Director, Head of US Research and Strategy for BlackRock Real Estate
Steven Cornet is a member of the Global Real Estate Research & Risk Analytics team.
Bruce Wan
Director, Head of APAC Research and Strategy for BlackRock Real Assets
Bruce Wan is the Head of APAC Research and Strategy for BlackRock Real Assets.

Capital at risk. All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed.

 

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