Over the past ten years or so, US real estate investors have had little need to look abroad, thanks to the high performance of their domestic market.
Naturally, this performance has driven an increase in domestic allocations – our latest research shows that US investors now typically target domestic allocations of 70-80%, up from 66% in the back half of the last cycle.
But there is increasing evidence that points to a sweet spot between domestic and international allocations. Allocating roughly 20% of a portfolio to international real estate drives strong efficiency gains, continuing more modestly in the 30-40% range.
But this isn’t about taking dozens of positions in global markets. The sweet spot is much lower – in the 10-15% range – and it is based off three investment principles. The first is that European residential offers low cash-flow volatility, thanks to social housing structures and long tenancies, contrasting with US multifamily housing.
Secondly, office markets in Asia-Pacific and Europe offer a tighter supply-and-leasing dynamic than much of the US, and regional hospitality is benefitting from rising tourism against constrained supply. And the third is the opportunity of still emerging sectors in Europe, like self-storage, which has a fraction of US supply per capita, allowing investors to import mature operating models into markets that haven’t yet institutionalised, capturing development profit and yield compression as those markets mature.
Our house view treats Europe’s fragmentation not as a drawback but as a source of alpha – without a unified capital market, pricing inefficiencies persist longer, rewarding investors who do bottom-up, market-by-market work that a passive approach cannot.
In our view: Iberia stands out for real estate’s outsized role in still under-institutionalised economies; Ireland’s living sectors benefit from a genuine structural shortage; UK affordable housing is drawing private capital into a niche shielded from broader market caution; and German distress is opening entry points for investors pairing debt and equity capabilities.
Living and logistics persist across nearly every market, whilst demand-led sectors, including self-storage, grocery-anchored retail and premium hospitality, are more selective. A complementary debt allocation, where liquidity is deepest in industrial and living assets, adds a further lever without adding equity risk.
For allocators building their next strategy, the question is no longer how much international exposure to hold, but what job it needs to do and which markets and sectors do it best. Being selective and finding this domestic/international sweet spot is where the next decade of outperformance will be found.
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