- Deglobalization has had a profound impact on portfolio construction in listed assets. Conversely, with real estate, there are signs that the asset class has become more globally in recent years.
- The spread of returns across national markets has narrowed, while property type has become a more important driver of returns across all markets, indicating a greater international focus as cross-border transaction volumes have remained stable.
- Institutional real estate investors might still face challenges from deglobalization, but a historical preference for more transparent and stable markets might help offset some of them.
Real estate has historically shown a strong home orientation, with investors favoring their local markets. Where investors have sought offshore exposure, they have typically favored markets that offer greater levels of transparency, better governance and stability. That’s not to say investors haven’t allocated to markets that are less transparent than their home markets. Nor that they have not pursued strategies higher up the risk curve when investing in foreign markets. But in aggregated markets with higher transparency and government ESG scores, real estate capital tended to be attracted more.
Globalized real estate drivers in a deglobalizing world
Demand for international real estate is being driven by the world’s largest institutional investors, many of whom have explicit global real estate investment mandates. Investment intention surveys show continued strong demand for cross-border investment among this group.1 Despite this sentiment, the share of cross-border transaction volume, as tracked by MSCI Real Capital Analytics, has remained relatively stable over the past decade, ranging from 19% to 26% of total quarterly transaction volume.2
Even with relatively stable cross-border flows, there is evidence that real estate may have become more globally based on return behavior. Since 2008, the MSCI Global Annual Property Index has seen a significant decrease in the dispersion of total returns across national markets. At the same time, the dispersion of returns across property types has increased across all markets as technology has changed (such as the rise of z-commerce) and the pandemic has disrupted property markets, creating headwinds for sectors such as retail and office, but gives a boost to other sectors such as industry. These trends indicate a potentially more international bias in the asset class: unlike most of the previous two decades, since 2019 there has been a greater opportunity for outperformance through allocation decisions based on property type rather than country.
The dispersion of returns decreased across national markets but increased across property types
Source: MSCI Global Annual Property Index
Could deglobalization affect real estate?
Political populism, the COVID-19 pandemic, and rising geopolitical tensions have all contributed to concerns about deglobalization. Business cycles can become desynchronized, leading to greater variability in equity and bond market performance across countries, lower correlations and higher volatility. The investment impact of this trend has been evident in recent years: in equities, correlations between countries and regional blocks have declined.
Going forward, global bond and equity investors could respond by taking a more nuanced approach to asset allocation – for example, by considering new, more focused country allocations (geopolitical blocs, energy importers vs. exporters, or autocracies vs. democracies) for overall allocation decisions and greater emphasis of risk factors exposed by the war in Ukraine, such as sanctions risk, reputational considerations and currency convertibility. While it’s possible that real estate investors will face similar headwinds from deglobalization, there are several factors that could mitigate this.
An example is that, as mentioned earlier, transparency, governance and stability have always been important considerations for global real estate investors as it is an opaque and illiquid asset class where asset lifecycles are typically measured in years (the medium inventory). period for assets in the MSCI Global Annual Property Index is six years). The result is that markets with higher transparency, better governance scores, and stronger institutions account for the lion’s share of opportunity and transaction volume.
Transparency, governance and stability play a role in real estate
Where available, market size estimates are derived from MSCI’s Real Estate Market Size Report 20/21. A market size of 10% of GDP is assumed for the other countries. Source: JLL, Our World in Data, MSCI
Institutional real estate investors may therefore have less exposure to countries that face significant decoupling risk due to deglobalisation. Of the approximately $2.3 trillion in assets that MSCI tracks in the MSCI Global Annual Property Index and the MSCI Asia Annual Property Index, over 91% of capital value has been invested in liberal democracies whose real estate markets have been rated by JLL as transparent or highly transparent .
Still, deglobalization could have domino effects affecting real estate. For example, increased political polarization and pandemic-related supply chain disruptions could drive nearshoring and shifts in international trade patterns.3 These changes could in turn affect the volume, nature and location of real estate demand. For example, a shift from just-in-time to just-in-case logistics could increase demand for industrial warehouse space and cause some of that demand to shift away from more distant markets that are more vulnerable to potential trade disruptions.
While deglobalization could have profound implications for asset allocation and portfolio construction, different asset classes may be affected in different ways. The unique characteristics of the real estate investment process as opposed to publicly traded stocks and bonds, and the nature of opportunities typically available to global real estate investors, may mean that real estate may be less directly exposed to the impact of this investment megatrend.
The authors thank Alexis Maltin for her contributions to this paper.
1See for example: “2021 Institutional Real Estate Allocations Monitor”. Hodes Weill & Associates and Cornell Baker in Real Estate program, November 10, 2021.
2It should be noted that purchases made by third party administrators on behalf of offshore investors count towards domestic volume rather than cross-border volume and may therefore underestimate total cross-border capital flows.
3Nearshoring is the practice of moving a business operation to a nearby country, especially versus a more distant one.
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