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Global real estate: true diversification amidst looming inflation

Global Strategic Analytics
Global real estate: true diversification amidst looming inflation

All too often, real estate investors concentrate exposures in their home geographies, ignoring diversification benefits from a broader geographic and sector mix. 

At a global level, real estate offers considerable diversification against the traditional asset classes of equities and bonds (Figure 1). Measured in local currencies, we see returns from both direct real estate and listed real estate assets (REITs) with a negative correlation to bonds. Even when returns are rebased into US dollars, direct real estate can deliver a strong diversification benefit versus other asset classes. 

Also of note – and counter to many general market perceptions – is the slightly negative correlation between REITs and direct real estate. This highlights the need to examine these asset classes in detail, rather than generalizing them all as ‘alternatives’. 

The diversification benefit of including direct and listed real estate in a portfolio is also evident on a regional basis. However, in Europe and AsiaPacific in particular, some of the diversification benefits erode (Figure 2), emphasizing a key failing of many asset allocation strategies that limit alternative investments to local assets. 

Conclusion 1: To make the most of real estate’s diversification benefits, investors should consider allocating to multiple regional real estate markets and invest in both direct real estate and REITs. 

Figure 1
Figure 1

Source: Invesco Real Estate using data from MSCI, Macrobond and Barclays as of September 2021.

Figure 2
Figure 2

Source: Invesco Real Estate using data from MSCI, Macrobond and Barclays as of September 2021.

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