Due to its versatility, real estate offers excellent opportunities to hedge a portfolio against risk through diversification. Every building is unique due to its location, what it is used for and other criteria. If you have the right mix, you can earn during good and bad times.
More growth and return with a diversifying real estate investment strategy
Returns on real estate investments are largely unrelated to equity and bond market developments and also keep up with inflation. Real estate investments thus play a valuable role in diversifying an investment portfolio. Moreover, this area has seen rapid growth over the past ten years: nowadays it’s more global, complex, transparent, institutional and liquid than ever before. As a result, real estate is now more than just a means of hedging risks and losses. It also provides a secure way to accumulate assets.
There can be very large differences between specific investment properties. These relate, for example, to:
- building structure
- building specifications
- tenant profile
- macro and micro location aspects:
- transport links
- use of neighbouring areas
This results in an almost infinite range of product types. Every combination of specific differences has its own risk profile: every building also fits into a specific background of economic, social and geopolitical trends.
Another relevant factor is tenant profile: the scope for attracting and retaining tenants and rental income depends on the property management and landlord relationships. With the right information, landlords can actively generate, increase and protect income in any economic climate. Furthermore, responsible investment makes a tangible contribution to achieving ESG goals.
A real estate investment strategy that hedges potential risks through its diversity invests in European properties across the full risk spectrum. This gives the portfolio the lowest possible correlation with economic cycles:
- during an economic downturn, you can boost your income with countercyclical holdings and
resilient prime assets.
- if the economy is bullish, you can return to higher capital growth by switching to sectors, properties and locations that are reaping the rewards of the upswing.
Logistics is a good example of a countercyclical sector: driven by growing e-commerce and renationalised supply chains, demand for existing logistics rental properties in good locations has recently become increasingly stable. The Kustermannpark office building in Munich is another example of a crisis-proof property. The building was acquired by Swiss Life Asset Managers for the TIGR Pan-European Fund in 2019 and is in a good location: it is in a dynamic submarket of Munich (a growth city), surrounded by numerous knowledge-based jobs. Further crisis-proof rental growth criteria include a government anchor tenant and
scope for value-adding measures.
A diversified investment strategy avoids an overweight of specific countries, sectors or tenants in the portfolio, thereby ensuring consistent returns. Diversified pan-European funds are especially well placed to respond to new market conditions and trends. Additionally, rental growth can be driven individually through changes to property management and building specifications. These are all good reasons for investors to commit more capital to real estate.
Source: first published in "Insights October 2020".
Author: Tom Duncan, Research, Strategy & Risk, Mayfair Capital Investment Management
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