A tendency to focus domestically may be hampering UK real estate investors' returns, according to the team at Invesco Real Estate who point to a lack of high quality, differentiated opportunities and potentially exacerbating liquidity concerns.
In the UK, debate has raged about how investors should go about real estate investment with open-ended fund structures attracting an increasing amount of scrutiny due to high-profile gating incidents. This has since raised questions about the best way to access real estate for UK investors.
This highlights the importance of looking abroad according to Invesco Real Estate managing director and Head of DC and Wealth Simon Redman who argues that the UK, as a real estate market, is too concentrated to target in isolation.
Broadening horizons
"With 95% of investible real estate lying outside the UK, it makes sense to take advantage of the wider opportunities a global real estate approach offers," says Redman. His colleague, senior director of client portfolio management Douglas Rowlands, adds that focusing domestically is a natural fault that many real estate investors make.
"You [invest globally] in your equity and your fixed income portfolio, so why wouldn't you do so for real estate?" asks Rowlands. "We talk to our investors about this a lot and it's a real ‘penny drops' moment.
The argument to diversify real estate investment with a global approach is clear in the apparent pitfalls between different countries and real estate performance. From 2012 to 2021, the global unlisted real estate portfolio returned an annualised average of 8.0% with a standard deviation of 2.8. Compared to similar returns from global equities but with four or five times the risk. This highlights the appeal of a diversified global approach, given the difficulty in timing country peaks and troughs.
A broader investment universe, and better access to high quality properties and liquidity, was why Invesco launched the latest in its range of global real estate funds, with the Invesco Global Direct Property Fund launching at the end of 2023. This global fund blends both public and private market allocations with a skew that is typically split 70% to 30% respectively, predominantly aimed at the DC pension market.
International opportunities
In terms of underlying assets, global real estate investors are able to capitalise on opportunities not typically found in the UK such as numerous established private healthcare assets. Invesco Real Estate owns a large number of medical offices in the US, and half of these properties are on or adjacent to a hospital campus, creating strong locational demand among tenants. Demographics, in the form of an aging population requiring increasing care will act as a driver here, says Redman.
"In the next 20 years, the number of Americans that are aged 75+ will expand by over 20 million, more than doubling in size," he says. "Accordingly, healthcare spending in the US - which already represents nearly 18% of GDP - will only increase further. This, combined with the country's private healthcare model, is creating a compelling opportunity for real estate investors."
To read the full Spotlight in association with Invesco please click here.
