The tradition of US pension funds only investing outside their domestic property market for outsized returns is coming to an end, according to CBRE Global Investors’ new global head of separate accounts.
Pieter Roozenboom, recently hired to head up the company’s separate accounts business, said US institutional capital has begun to move away from the long-held belief that European real estate investment could only be justified if return projections were above those of core domestic property.
Speaking at the MIPIM trade fair in Cannes, France, Roozenboom said US investment had been primarily “opportunity-driven” in recent years, but he believed US investors would remain active in the region on a longer-term, “strategic” basis.
On the same day, CBRE Global Investors published a white paper, on “the merits of international real estate allocation”, co-authored by Roozenboom. While not aimed specifically at US investors, it challenged the idea that the US property market was large enough to provide sufficient diversification on its own.
The paper cites the IPD Global City Digest and shows that the 16 cities covered have an average correlation coefficient of 0.95 – meaning they “move up and down almost simultaneously”.
The paper argues that not only do domestic markets not provide sufficient diversification, but – by extension –international investments should not be undertaken purely for “return enhancement”. This, it argues, “positions those investors higher up the risk curve in markets that they will understand less, especially if higher returns are to be found via higher asset-specific risk and leverage”.
It adds: “This tactic of taking higher property and financial risk in foreign markets has often proven to be a source of disappointment in the recent past, but this is in itself an improper justification for continued home bias.”
Other US investor relations professionals at MIPIM agreed that US investor return requirements for Europe were changing. But the story is tied into lower expectations across the board, to which opportunistic strategies are not immune. Gone are the days of 20%-plus returns or even those in the high-teens. US investors (along with their global counterparts) have recognised that property returns will be lower in the coming years. But, crucially, they are still attractive versus most other asset classes.
The point was not lost on the various pension funds and sovereign wealth funds at RE-Invest, MIPIM’s annual closed-door investor summit. Finding value in increasingly competitive markets was revealed as one of the key problems for investors, but with interest rates anticipated to remain low for some time, investors will remain committed to putting money into global property markets.
Some of the biggest beneficiaries of this dynamic have been the alternative sectors. Student housing came up time and time again, and not just the UK market where there have been a number of very large portfolio deals (including the £600m transaction between Greystar and Round Hill Capital); fund managers are looking to raise capital for France, Germany, the Netherlands – an even Ireland.