JOHANNESBURG – International investors – notably pension fund investors – are still considerably more globally diversified in shares than in real estate, research from BlackRock shows.
Sources: BlackRock, February 2015; Towers Watson Global Pension Asset Survey, IPD Asset Owner Survey as of December 31, 2014
But over time the asset manager expects investors to increasingly turn to global real estate markets in order to reap the benefits of a bigger pool of international listed property opportunities.
Speaking to Moneyweb on a visit to South Africa, James Wilkinson, co-global chief investment officer of BlackRock’s Global Real Estate Securities Group, said historically real estate investors have tended to invest in their local markets and in physical property, due in part because of accessibility issues.
“It was actually quite hard for investors to invest internationally.”
Historically, there weren’t many investment managers who had the capability to manage physical properties or even listed property globally.
Wilkinson said part of the reason for this was the limited availability of data and benchmarking solutions and the manager’s ability to effectively measure their risk and performance against an acceptable benchmark.
An important development both in physical and listed real estate securities markets has been the increasing professionalisation and maturity of data providers and benchmarking. Not that long ago (before the year 2000), professionally provided benchmarks covered less than half of the investable real estate world. Today rigorous, institutionally acceptable benchmarks cover over 90% of the investable real estate world, Wilkinson said.
At the same the size (market capitalisation) of the global listed real estate market has tripled from $1 trillion ten years ago to just over $3 trillion.
Wilkinson said it has become much easier for investors to feel confident about investing outside of their home markets, but outside of the US there is still a long way to go before the asset class reaches maturity, but it will happen in time. The US and Australia – another very mature listed market – are signposts to where other markets will end up over time.
But what would facilitate a move away from home markets?
Wilkinson said the influences will be many and varied – firstly the granting of real estate investment trusts (REIT) structures will be important.
Demographic changes are also likely to facilitate the move.
In many parts of the world populations are ageing and increasingly want stable income returns with a degree of inflation protection and real estate does offer many of these characteristics, he said.
In many parts of the world, a move from defined benefit pensions to defined contribution pension funds, which have a requirement for liquidity could also tend to encourage people to increasingly turn to listed real estate markets for their real estate exposure.
The trend to mainly focus on home markets is also evident amongst retail investors.
Wilkinson said historically people have liked a tangible asset – to drive past it and look at the asset, see the tenants and their employees walking in and out of the building and feel the rent cheque in their hands from month to month, but this trend is slowly changing.
But how much global property exposure should be included in a diversified portfolio?
Wilkinson said this would be case specific depending on the risk profile of the investor and his personal targets and liabilities.
One of the ways to frame the answer to this question is to look at the size of the global real estate market in the context of all investable markets. The investable universe of global real estate (physical and listed) is around $28 trillion. This constitutes around 11% of the total investable universe of all assets – equities, bonds and real estate. The global listed real estate market represents about $3 trillion – about 5% of total global equity markets. This suggests that around 5% of your equity exposure and 11% of your total asset exposure could be a reasonable starting point for real estate exposure, he said.