GLOBAL - The argument for global diversification is becoming more compelling, but institutional investors are often simply investing according to total return expectations, say industry experts.
The outlook for real estate markets around the world is becoming increasingly varied, lending more justification to the pursuit of global diversification, said Tim Bellman, head of research for North Asia at Jones Lang LaSalle in Hong Kong.
"In the period when we had exceptional real estate returns around the world… diversification was a benefit, but it was fairly marginal," he told a global real estate markets conference in London last week.
"When you have returns that are moving in different directions in parts of the world, when you have returns that are being driven by markedly different economic fundamentals and markedly different real estate market fundamentals, the global diversification argument for investors is much more compelling."
However, Nick Tyrrell of JPMorgan Asset Management, also speaking at the conference, said while institutional investors commonly claim to be pursuing an internationally-diversified strategy, they often invest where they have high return expectations.
Moreover, Tyrrell has questioned this approach.
"We speak to institutional investors and they tell us: ‘we understand the diversification benefits and we are looking to build up our total return exposure'. These are all very fine words," said Tyrrell.
"But if you look at the weight of money historically coming into real estate, it actually correlates very closely with… people's expectations of what total returns are going to be."
This behaviour is evidenced by the increasing inflows of institutional capital targeting Asia, according to Tyrrell.
"A lot of UK institutional investors have convinced themselves at last that the right thing to do is to internationalise their real estate portfolio. And where are they going? Are they going to Europe and the United States? No they are going to Asia. Why go to Asia? Because they think the total returns are going to be higher.
"That's probably not really the best way to invest in the asset class," he concluded.
Further information from this conference will be available in the January/February 2008 edition of IPE Real Estate.
