But that’s not to say that there aren’t other effects. Real estate is a GDP-linked asset class, and further ‘slowbalisation’ will affect global trade in goods, direct investment, and migration, so ultimately an increasingly fragmented world would weigh on future returns via weaker economic growth.
Assets leveraged to sensitive sectors – such as warehouses for the distribution of strategically important goods; life sciences critical to healthcare; or politically sensitive sectors such as residential – are also at risk of geopolitical events.
But risk and opportunity are two sides of the same coin; these sectors could allow cross-border capital to invest and gain exposure to some of the opportunities that arise from these same geopolitical trends (for example, new nearshoring/onshoring assets created as a result of supply chain diversification) to diversify from home markets.
Large US private equity groups, for instance, are returning to global markets, and to the office sector, as values rebase and investors recognise the nuance in the returns profile of the sector outside the US. There’s also scope for other major money managers to expand globally; Australian pension funds, for example, need to diversify from their home market by looking abroad, and Canadian pension funds are also likely to continue expanding their operations in European and Asia-Pacific markets.
There’s also more potential for investors in Asia, excluding China, to grow their global presence. Institutions in the region are generally under-allocated to real estate compared with their US and European counterparts, and generally exhibit less of a home bias within those allocations.
We can make some predictions of where may benefit from this. Historically, given the opaque nature of many real estate markets, cross-border activity was highly concentrated in the largest, most liquid and transparent markets – cities such as London, New York, Paris, Sydney and Tokyo were typical recipients. These locations were favoured by institutional capital such as sovereign wealth, pension and insurance funds with global investment mandates, seeking to deploy in locations renowned for their ease of doing business, governance, and rule of law.
These cities will remain on shopping lists, but their dominance has receded over time, accounting for 18% of non-domestic transactions globally in 2023, down from 30% in 2014. They’ve been joined by second-tier markets as these have matured and now offer investors an opportunity for potentially higher returns. But certain regions still hold challenges; Asia Pacific has only a few markets that are easily investible to long-haul investors and can provide compelling returns, while the US can be difficult to break into absent local partners.
The type of asset favoured by global capital has also shifted. Cross-border investors have increased risk appetite as markets have matured. While private capital continues to favour core assets (although this can vary by origin), private equity and other institutional capital – regardless of nationality – is increasingly looking to own and/or create best-in-class assets.
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Contact Oliver Salmon
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