The ultimate goal of this report is to explore the important relationship between global real estate securities (GRES) and the broad private real estate universe. This dynamic has been well-known by many but has not yet translated into a more balanced allocation trend stemming from the most recent global financial crisis. Institutional Real Estate reported that the average 2016 actual allocation to GRES was approximately 7 percent of the overall real estate allocation for US institutions. Others have estimated a higher share of REITs, but all estimates are well below their actual share of the investable universe.
There is no single level of GRES exposure that institutional investors should hold within their portfolio. Based on our research, coupled with industry analyses, large institutions should consider allocating a meaningful portion of their real estate allocations to GRES – anything between 10 percent and 50 percent – while smaller institutions should consider allocating an even higher percentage to GRES. While a higher allocation to GRES can introduce higher short-term volatility to a real estate portfolio, there are fundamental benefits that can outweigh any volatility.
Missing out on advantages
We believe this relationship to be complementary, and that by over-weighting private real estate, institutional investors may be missing out on advantages that GRES can provide. These benefits include expanding the investable universe while providing an attractive and efficient way to invest globally; adding a valuable short-term liquidity option, allowing investors to quickly respond to new information and changing relative valuations; offering access to many established and specialty sectors with high-quality assets and best-in-class operators, such as regional malls, residential, self-storage, data centers and cell towers that are difficult to own privately in various parts of the world; creating opportunities due to pricing disparities between GRES and private real estate; and, crucially, generating higher risk-adjusted returns than either strategy on its own.
GRES and global private real estate are both very large sectors, with estimated institutional market sizes of $4.5 trillion and $5.1 trillion, respectively. Each sector offers a large universe of potential investments, strong historical and potential future performance, diversification benefits vis-à-vis equities and fixed income, and a range of risk and return strategies.
GRES are available on publicly traded exchanges in 41 countries worldwide, a number that has been growing steadily. The US is the largest individual real estate securities market, but its relative share of the global universe may decline over time as real estate is increasingly securitized in Europe, Asia and emerging markets.
There are numerous ways for institutional and individual investors to take advantage of the complementary relationship between public and private real estate, and this report aims to highlight the inherent benefits that can be achieved with a blended investment approach.
Going forward, we are optimistic about the prospects for an evolution in public-private allocations and the composition structures for investors. Although we might not reach the pre-recession allocation levels for GRES, the ability of these investments to provide a tactical gap-filling strategy for property types that are hard to own directly, coupled with with the aforementioned benefits of short-term liquidity, global exposure, and enhanced risk-adjusted returns is a compelling canvas to discuss with clients and prospects.