RREEF: core investors should be underweight Europe, overweight Asia

Global investors in core real estate should be underweight in Europe and overweight in Asia over the next five years, according to RREEF, the real estate investment management business of Deutsche Bank.

The firm’s Global Real Estate Investment Outlook & Market Perspective 2011 report, published today, said global returns from real estate should come in at between 8 percent and 11 percent from now until 2015 with Asia Pacific real estate outperforming.

Europe would likely ‘lag’ the global market, the report said, while properties in the US would ‘perform on average’ prompting the firm to recommend taking a neutral weighting to the country. RREEF said: “Between the regions, global investor allocations should overweight the Asia Pacific region, neutral weight the US and underweight Europe relative to invested stock.”

The global economy is bifurcated between those countries that had a financial crisis and those that entered recession purely due to failing demand,” the report noted. “Nations that experienced the financial crisis (much of Europe and the US) are currently in a slow recovery, while those with only a demand driven recession (most of Asia Pacific, including China, Central and Eastern Europe, including Russia, India and Brazil) are bouncing back more quickly and entering expansion.”

It added: “[real estate] market fundamentals are following in line with growth rates of local economies.”

Citing headline figures in property services firm DTZ’s Money into Property report, in which global invested real estate totalled $11.3 trillion in 2010, RREEF said the Asia component of that, currently 31 percent, would grow more quickly than that of ‘fully matured markets’. As these markets grow and mature, the case for increasing investment would become more evident, RREEF argued, although it also warned against over-allocation.

Asia Pacific was benefiting from a “virtuous cycle of improving scale, liquidity and transparency and governance which was compensating investors from the region’s higher volatility”, according to the report. The firm said the region was also benefiting from a relative disconnection with the US and Europe markets.

Conversely, RREEF said growth in Europe would depend largely on there being more clarity on the region’s sovereign debt crisis.

Despite its position on core investing, RREEF did however make the case for opportunistic investing in Europe. RREEF said: “Although outperformance is more difficult to achieve in slower growing economies, it is possible to get outsized risk-adjusted returns and so these areas should not be ignored by global investors.”