European Real Estate: A new real estate value cycle
Our experts unpack the 2025 outlook on the evolving real estate market. We explore the implications of recent trends and ESG considerations on the market.
This fund is for DC investors only. Its structure seeks to deliver daily liquidity whilst avoiding the fund suspension challenges associated with UK property funds.
With 95% of investible real estate lying outside the UK, it makes sense to take advantage of the wider opportunities a global real estate approach offers.
Our investment methodology involves studying how human behaviour is evolving and what this means for real estate – from demographic shifts to the rise of technology.
We believe that buildings with strong environmental, social and governance credentials are more likely to outperform.
Real estate: unlocking enhanced returns for DC members
It hasn’t always been easy for UK DC pension schemes to invest in illiquids. But in today’s environment, it is more important than ever. Kate Dwyer and Simon Redman outline how Invesco Real Estate can help.
My name is Kate Dwyer, Head of UK Distribution at Invesco, and today we'll be diving into a topic that is increasingly capturing the attention of investment professionals.
Let's start by acknowledging the shifting landscape of pension fund investment in the UK. Defined Contribution pension funds play an increasingly pivotal role in securing the financial future of individuals. At Invesco we are committed to helping pension members attain the best outcomes they can. Focusing solely on traditional assets like equity and fixed income, does not, in our view optimise these outcomes. DC investors are now exploring alternative private market investments to diversify their portfolios and generate attractive risk-adjusted returns.
Whilst there are a few alternatives, global real estate, at around £31tn USD, is by far the largest private market and one that is familiar to many - making it a natural first step. To give this some context, the real estate investible universe is over six times larger than infrastructure and private credit combined.
But why should DC investors consider allocating part of their portfolios to this asset class at all?
In summary, global real estate has delivered risk adjusted returns 50% higher than global equities and 100% higher than fixed income over the last ten years.
Given this compelling backdrop, I’m delighted to introduce Invesco’s Global Direct Property Fund: a portfolio built specifically for Defined Contribution pension funds, allowing them to bring the benefits of global, direct real estate to their scheme members.
Here to tell us more about it, and the investment approach being taken, is Simon Redman, Managing Director and head of DC and Wealth at Invesco Real estate.
Simon
Thank you, Kate, the benefits in terms of improving investment outcomes by both increasing returns and reducing risk are pretty clear, and it is why many global, sophisticated institutional investors typically commit 10-15% of their portfolio and some as high as 25% to direct global real estate investments. I should at this point stress that I am talking about direct global, unlisted real estate – physical buildings in other words – and not listed REITS. The challenge for many DC investors is often not the idea but the execution. How can DC members make this sort of investment into physical buildings around the world? Something that, at Invesco, we have worked hard to solve in a practical way.
Invesco’s Global Direct Property Fund, leverages not only the deep expertise of our on-the-ground teams in 21 offices and 16 countries to provide scheme members with unprecedented access to some of what I believe to be the most interesting real estate around the world; but we have also harnessed our experience of UK DC members to create a fund that is easily accessible for members via DC platforms in a cost effective way and one designed to avoid many of the gating challenges UK only property funds have suffered from. We do all of this whilst taking an active approach to sustainability.
Over the next five minutes I will talk through some of these opportunities, and explain how we, at Invesco, tackle global investing.
Before that, I want to talk a little about the potential for attractive long-term returns that global direct real estate offers. Historically, real estate has been recognized as a valuable source of income and capital growth and by focusing on developed markets worldwide, gives exposure to a diverse range of properties across different geographies and sectors – many of which are simply unavailable in the UK.
Whilst global real estate is the largest private markets asset class the UK represents less than 5% of it. It is natural therefore to take a global approach, taking advantage of the 95% that the rest of the world offers. By doing this we can mitigate the risk associated with local market fluctuations and provide a stable income stream, thus helping to meet the long-term pension fund obligations. A very simple and illustrative example of “why global” is that whilst BREXIT had a material impact on the UK property market, it had no impact on any other real estate market worldwide.
Secondly, real estate income has historically demonstrated a positive correlation with inflation as rental income tends to rise in tandem with inflationary pressures – many continental European leases for example are directly linked to inflation. This characteristic can be particularly beneficial for members seeking to protect the purchasing power of their assets and ensure they receive adequate income in the face of rising living costs.
Furthermore, global real estate offers compelling diversification benefits. Unlike publicly traded fixed income and equities, including REITs, which are subject to daily market volatility, direct real estate investments are much more stable. This can help reduce the sensitivity of pension fund returns to short term market fluctuations. It is why the risk adjusted returns are 100% higher than bonds and 50% higher than equities.
So now onto our approach to investing in global real estate. I’ve already hinted at the idea that global real estate can provide an avenue for accessing unique investment opportunities that may not be readily available in public markets. Investors can gain exposure to a wide range of property types, including commercial, residential, industrial, and healthcare assets, thus allowing them to capitalize on the potential for enhanced risk-adjusted returns by tapping into real estate growth sectors linked to long term secular trends.
The way we think about this is simply that real estate houses the economy. It may be the oldest asset class, but it is always relevant – we always need somewhere to Connect, Live, Innovate and Consume.
Consumption, is where we look at how wealth is spent – that maybe retail either physical or on-line, but let’s not forget travel, hotels or healthcare.
We need places to Live, but where and how we actually live is driven by demographic and economic trends.
Innovation helps drive global growth, from the industrial revolution in the past, to technology and life sciences today - it all needs to be housed somewhere.
And lastly, most economic growth does not, of course, come solely from innovation but is through Connections be that services, technology or manufacturing from warehouses, data centres or offices… we all need to connect and again it has to happen somewhere.
All these activities require real estate.
Demographics around the world are also different. The profile in Europe versus Asia versus the US is not the same.
These trends and differences around the world create different opportunities and is why, we feel, having the ability to invest globally simply offers us more investment choice. We can pick the best of a larger pool of opportunities.
Another important secular trend is a welcome increased focus on sustainability. Real Estate accounts for 39% of CO2 emissions worldwide. By directly owning and managing properties we can actively reduce CO2 not only emissions but also energy and water usage and waste. In fact, we are currently ahead of some of our 2030 goals. Importantly, this does not have to result in us sacrificing financial returns to do so; we can even increase them.
We believe that, by taking a deliberate and disciplined approach to ESG, we can successfully balance our social and environmental responsibilities, meet the needs of our clients, fulfil our fiduciary responsibilities and drive strong investment performance.
So, I have talked a bit about the theory, but let’s look at some of the investments in practice:
Asia’s rapid urbanization will see over 50% of the world’s population residing in Asia by 2030.
Asia has higher living densities and generally smaller living space that North America or Europe.
This increased demand for residential space across major Asian cities combined with limited supply creates a potentially interesting real estate investment opportunity.
Late last year we invested in this portfolio of fifteen state of the art, newly built apartment buildings located in Tokyo, Osaka, Nagoya and Fukuoka – the four largest cities in Japan. The portfolio, comprising over twelve hundred individual apartments exemplifies how we put investment theory into practice by investing in cities where there is a multi-decade secular trend of urban city centre migration and falling vacancies.
Urbanisation not only creates a residential opportunity, but there will also be a need for more offices, retail and more niche sectors like cold storage to satisfy this expanding population.
So, staying with demographic influences, but looking at how they impact a different sector and region.
Health care spending in the US represents nearly 18% of GDP, and has been growing at more than 5% per year for the last 20 years.
Over the next 20 years, the number of Americans that are aged over 75 will expand by over than 20 million, more than doubling in size.
This age-group’s spending on health care is dramatically higher than the general population.
The combination of these demographics together with the US having a mainly privately funded healthcare system creates a real, real estate investment opportunity.
The number of privately run healthcare facilities like the two shown here, which are part of a portfolio we manage, will have to grow in order to satisfy this increasing healthcare demand.
These are just a few examples from our portfolio, and we have many others.
So, in summary, investing in global real estate offers the potential to invest in some of the most compelling sector and market combinations worldwide, in opportunities both unavailable and unaffected by negative events in the UK. We can do this whilst increasing return potential, reducing risk and with the capacity to improve the environment. Investing after we have seen interest rates peak will, we think, offer vintage year opportunities we have not seen since after the global financial crisis.
I mentioned at the beginning that Invesco is focused on improving the outcomes for DC members. To that end, the Invesco Global Direct Property Fund provides an innovative, cost effective way for DC schemes and master trusts to access direct real estate in a platform friendly way.
It hasn’t always been easy for UK DC pension schemes to invest in illiquids. But in today’s environment, it is more important than ever. Kate Dwyer and Simon Redman outline how Invesco Real Estate can help.
At Invesco Real Estate, we keep a close eye on how people around the world consume, live, innovate and connect with one another. Things like demographic shifts, climate change and technological advances all have a big impact on how we use and invest in real estate.
Urban migration has been a trend for many decades in Japan, and the population is expected to continue centralising in the country’s largest cities. This has resulted in falling vacancy rates across major cities. For real estate investors, this has created a sustainable, long-term investment opportunity.
Investing in urban centres in Tokyo, Osaka, Nagoya and Fukuoma
Having identified this opportunity, Invesco Real Estate acquired a portfolio of residential assets in Japan as part of a joint venture in 2023. The portfolio includes fifteen newly built, high quality multifamily properties located in the four major cities of Tokyo, Osaka, Nagoya and Fukuoka.
Increasingly, people want their home to be within close proximity to their place of work and all the essential amenities. Importantly, all of the properties in the portfolio are within a ten-minute walk of metro or Japan Railway stations.
Invesco Real Estate owns a large number of medical offices in the US, including twenty properties in the “Sunbelt region” of Dallas, San Antonio, Nashville, Denver, Los Angeles, Tampa and South Florida. 50% of these properties are on or adjacent to a hospital campus, creating strong locational demand among tenants.
This sort of demand is only going to grow over time, given changing demographics in the US.
In the next 20 years, the number of Americans that are aged 75+ will expand by over 20 million, more than doubling in size. Accordingly, healthcare spending in the US (which already represents nearly 18% of GDP) will only increase further. This, combined with the country’s privately funded healthcare model, is creating a compelling opportunity for real estate investors.
The logistics sector has seen huge growth in recent decades. This has been a necessary part of the shift from bricks-and-mortar to online retail. Companies need more warehouse space to store goods for online retail, and the distribution networks involved in transporting parcels from A to B also need somewhere to store and process them along the way.
Namansan Logistics Centre, Seoul
In 2018, Invesco Real Estate sourced a rare opportunity in Seoul, acquiring a prime logistics development project. The asset was secured as part of an off-market deal, made possible by the strong connections and experience that we have in the market.
The building was completed in 2021 – a new, innovative, multi-story logistics facility. The opportunity was attractive for several key reasons:
The demand for energy-efficient, sustainable spaces is growing, but supply is weak. Tenants are keen to reduce their occupational costs by renting more efficient buildings, and they are often willing and able to pay more rent to achieve this. This creates an area of investment opportunity. By investing in assets to make them more sustainable, we can add to their value and enhance returns for our clients.
321 Exhibition Street, Melbourne, Australia
321 Exhibition Street is a 30,200 square meter, 20-storey office building – and it has been certified as completely carbon neutral.
In 2017, it became the first retrofitted office building in the State of Victoria to achieve the 6-star NABERS energy rating. This is the highest rating on the scale, and a sign of a market-leading building. It also has a 6-star NABERS water rating and 5.5-star indoor environment rating.
Through modern building systems and an onsite trigeneration plant, providing electricity and heating, the property is among the top 5% of buildings nationally in terms of emissions per unit of area. Key features include LED lighting, a bin tracker system which increases waste diversion, and an onsite organic waste recycling plant.
The building also encourages a sustainable commute, with 150 bike racks, 20 showers, 200 lockers and a wellness centre.
Now more than ever, DC members are interested in aligning their pension pot with their personal values. In a world where sustainable buildings carry a rental premium, real estate provides an exciting opportunity for investors to create positive change while also enhancing their return potential.
As a business, Invesco Real Estate is committed to being fully net zero by 2050, with 50% achieved by 2030.
European Real Estate: A new real estate value cycle
Our experts unpack the 2025 outlook on the evolving real estate market. We explore the implications of recent trends and ESG considerations on the market.
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If you have any questions or would like to discuss our Global Direct Property Fund in further detail, fill in the form to speak to our team.
*Source: as at 31 March 2023.
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
Property and land can be illiquid and difficult to sell, so the fund may not be able to sell its investments when desired and at the intended price. The value of property is generally a matter of an independent valuer’s opinion and may not be realised. Real estate investments are typically not listed on regulated markets and need to be valued via the application of appropriate models (potentially applied by independent experts): this may lead to inaccurate valuations which may not be reflected into transaction prices.
Changes in interest rates, rental yields, FX rates, market trends and general economic conditions may result in fluctuations in the value of the assets and of the fund and in the level of cash-flows generated. Real estate investments are exposed to counterparty risk, which is the risk that a counterpart is unable to deal with its obligations.
The fund may use derivatives (complex instruments) and borrowings, which may result in the fund being significantly leveraged and may result in large fluctuations in the value of the fund. Real estate investments can be exposed to new sustainability-related regulatory requirements and trends that may negatively affect the value of those assets which are not compliant and can envisage significant costs to be invested to comply or to simply improve their sustainability profile. In addition, real estate investments can be also significantly exposed to negative economic effects stemming from climate change, natural disasters and the general preference of investors for assets with better sustainability features.
Real estate investments are labour-intensive and present a significant amount of human/manual inputs and activities, hence potentially exposed to several types of operational risks that may affect areas such as administrations, operations, reporting and others. The underlying funds might make use of debt to finance investments which may result in such fund being more leveraged and may result in greater fluctuations in the value of the fund. Many Real Estate investments are illiquid, meaning that the fund may not be able to sell them quickly at a fair price and/or that the redemptions may be delayed due to illiquidity of the underlying investments.
If on any given Redemption Day of the Sub-Fund, the applications for redemption of units of the Sub-Fund represent in aggregate more than: (i) 3% of the Net Asset Value of the Sub-Fund per calendar month, (ii) 5% of the Net Asset Value of the Sub-Fund per any rolling 90 calendar days period, or (ii) 20% of the Net Asset Value of the Sub-Fund per any rolling 356 calendar days period, IMSA may decide to (a) start applying the Monthly Investor Limit (as described hereafter), (b) cancel all requests received on such day, and/or (c) decide that no further applications for redemptions shall be accepted until the first redemption day of the following calendar month or until further notice. Any such decision will be published on the Website of the Sub-Fund (https://www.invesco.com/gdpf/en/literature.html). IMSA also reserves the right (irrespective of whether any limits have been exceeded) to limit the applications for redemption of units of the Sub-Fund to a percentage between 2% and 5% of each unitholder’s designation account per calendar month (the “Monthly Investor Limit”). Further to this where redemptions have exceeded lower redemption limits (as may be determined by IMSA), IMSA may decide that no further applications for redemptions or conversion shall be accepted until further notice.
All information is provided as 31 December 2023, sourced from Invesco unless otherwise stated.
This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. Views and opinions are based on current market conditions and are subject to change.
Investors should consult a financial professional before making any investment decisions if they are uncertain whether an investment is suitable for them. Please obtain and review carefully the Offering Memorandum relating to the Interests described herein before investing. Invesco makes no representation or warranty, expressed or implied, regarding any prospective investor’s legal, tax or accounting treatment of the matters described herein, and Invesco is not responsible for providing legal, regulatory or accounting advice to any prospective investor.
For more information on our funds and the relevant risks, please refer to the Offering Memorandum, the Annual or Interim Reports, and constituent documents (all available in English). These documents are available on the product literature page: https://www.invesco.com/gdpf/en/literature.html. A summary of investor rights is available in English from www.invescomanagementcompany.lu. The management company may terminate marketing arrangements.
The fund, as a Reserved Alternative Investment Fund domiciled in Luxembourg, is eligible for Well-Informed Investors (as defined in the Luxembourg Law dated 28 July 2023) and marketing in the EEA is permitted to Professional Clients only. The fund is a dedicated Luxembourg open-ended unregulated fund. It qualifies as an alternative investment fund (AIF) managed by Invesco Management S.A. (IMSA) as external alternative investment fund manager (AIFM).
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