For years, real estate investment has been done with a home bias. Today, international diversification is on the rise. So why are there still so few ‘global’ real estate funds, and what are the options for investors seeking global exposure?
The real estate asset class is over 50 years old. For much of this time, most of the capital involved has been deployed in domestic markets. For investors that have ventured overseas, the timing has frequently been terrible – the British in the early 1970s, the Japanese and Swedish in the late 1980s, the Americans and Australians around 2007.
At these times, investments were made at the late stage of the market cycle, when domestic real estate was expensive and allocators more motivated to look overseas, often with fickle partners. The losses that followed seemed to reinforce the appeal of a home bias.
Through these cycles, however, there has been steady growth in ‘global’ investing, and key lessons have been learnt by investors and managers. Today, the options are more diverse, deep-rooted and better understood.
And so, in the face of today’s increased investor appetite for ‘global’ real estate investment, one might expect that there would be substantial growth of ‘global real estate fund’ offerings.
This is not the case. Their numbers have increased modestly in recent years, primarily through the morphing of the fund of fund model whereby some managers have begun taking direct positions in assets, often working closely with a group of operating partners. Yet, on the whole, there remain relatively few ‘global’ offerings.
In the face of today’s increased investor appetite for ‘global’ real estate investment, one might expect that there would be substantial growth of ‘global real estate fund’ offerings.
The shortage of global unlisted real estate funds may be even more surprising when one considers three other trends. The first is the greatly increased size of large real estate managers and funds: the assets of the top 20 real estate mangers has nearly trebled in the last 15 years, now sitting around $1.5 trillion. The second is that investors are trending toward fewer and larger manager relationships. The third is the surge of global REIT funds, with bfinance estimating that over half of the largest 170 REIT fund offerings now have a global focus.
Before the financial crisis, opportunistic real estate funds appeared to be progressing in a more globalized direction. As distressed opportunities dried up in the US, managers moved abroad to exploit similar opportunities, first in Europe and then Asia. The early vintages of these funds tended to be relatively successful. Yet the opportunistic asset class suffered catastrophically through the crisis and has only gradually gained back ground since then. Amid the recovery, the focus has remained on regional rather than ‘global’ strategies.
As for core, there has – with very few exceptions – been a limited tradition of global strategies. The main exceptions have been German open-end funds that have been investing internationally for many years. Beyond these, and despite the growth of regional core funds, there are few global core or core-plus vehicles.
Beyond the potential use of REITs, investors have a number of options for building their exposure to global real estate. Each brings its own strengths and limitations:
- Combination of funds. Multiple mandates spanning different regions and strategies remain the norm. Yet there is an interesting new dynamic in play: with the recent growth of global asset manager platforms, there are more managers with capabilities – albeit separate – across the three main regions.
- Separate accounts. These have the advantage of being tailored to the needs of the specific investor. The major downsides relate to their scale and limited scope for diversification.
- Global funds. Whether direct or fund of funds, there are a modest number of global funds available outside of the German-domiciled vehicles. These include some global ‘direct’ funds and a number of former fund of funds that have come to take more direct control of assets.
Increasingly investors are exploring these options alongside each other. Given the maturity of the real estate asset class, most investors already have some real estate exposure, so they are looking to complement this with global strategies that are most appropriate to their needs.