GLOBAL - Real estate will go back to offering full diversification effects, having lost some of its credibility as a decorrelated asset class, research from Invesco has predicted.
Both the IPD UK Real Estate Index as well as its US counterpart, the NCREIF Property Index, considerably increased their correlation to the MSCI World Equity index steadily between the middle of 2005 and long into last year's crisis.
Having started off with a negative correlation of around -0.3, both indices increased their correlation to equities to over 0.8 in 2008. Prior to that, the correlation had fluctuated at between 0.35 in 2002 and 0.00 in early 2005.
"We expect the correlation will lessen again, along with a decrease in leverage in property investments," said Robert Stolfo, director of business development at Invesco Real Estate.
By the end of the second quarter this year, the correlation to equities had dropped back to over 0.6 for the IPD UK index and to 0.4 for the US NCREIF index.
Stolfo admitted that diversification "has taken a damper" in the 2008 crisis but argued that the research showed global investments still minimised the risks in portfolios.
"The average correlation between international REIT markets is 0.3," he pointed out.
Among the lowest correlated markets are Germany and Canada with 0.07 or Germany and Australia with 0.11.
In general, Asia has a much lower correlation with Europe (0.19) than it has with the US (0.36), while Europe and the US show a correlation of 0.50.
Within the regions Asia was the least correlated and the US the one with the highest correlation, explained Stolfo.
He also said "returns are possible from relatively simply structured products" at present and named the UK as one of "the most interesting markets" at the moment.