At abrdn, we believe an allocation to global real estate can enhance portfolio resilience and potentially boost returns in the months and years ahead.
In this article, we set out the benefits of this dynamic, income-driven asset class using four key charts.
Effective diversification
Global real estate is a highly differentiated asset class, thanks to a wide range of sectors, geographies and asset types. Subject to the right fund choice, the asset class can add meaningful diversification to your client’s portfolio.
Weakly correlated with asset classes such as bonds and equities
Chart 1: Direct Real Estate Correlation with Bonds, Equities and Listed Real Estate
Sources: abrdn, Refinitiv, MSCI, JPM, Q4 2022. Based on annual data from 2003-2021
Put simply, the performance of direct global real estate is not closely tied to other mainstream asset classes. It can therefore act as a good diversifier in client portfolios. This lack of correlation has the potential to enhance portfolio resilience, adding downside protection in volatile markets.
Additionally, given the stronger correlation with direct real estate over the long term, a listed real estate allocation within a hybrid global real estate fund, can add flexibility. It can also add ease of access to different geographies and niche sectors, further diversifying the underlying holdings within a fund.
Resilient income
By adding more income-producing assets into their portfolios, your client can take advantage of the stability and predictability of the income return from the asset class while potentially boosting total return in volatile market conditions.
As you can see in Chart 2, global real estate income has remained resilient over the years and continues to provide the majority of the asset class returns.
Chart 2: Global Real Estate income continues to provide the majority of asset class returns
Lower volatility?
All investors should be prepared to face ups and downs, no matter the asset class. However, as you can see from Chart 3, global direct real estate has a track record of low volatility compared to other asset classes. Over the past 10 years, the risk-adjusted returns of global direct real estate compare favourably to other mainstream asset classes.
Chart 3: Global direct real estate total returns and volatility over 10 years
Complementing UK real estate
We can also see from Chart 4 that the addition of global real estate exposure has the potential to enhance existing domestic portfolios, for example by complementing a UK real estate allocation.
Chart 4: Risk and return by % of allocation to a global real estate strategy
Source: Financial Express Analytics & abrdn, monthly data points over 5 years to October 2022. Past performance is not a guide to future results.
Is it time to power up portfolios with global real estate possibility?
Despite today’s unpredictable investment conditions, we believe diverse, actively managed income strategies can potentially help your client boost portfolio resilience.
By allocating to global real estate, investors can potentially take advantage of a broader opportunity set, increased flexibility, high conviction ideas, and an enhanced risk/return profile.
Visit our website to find out more about actively managed income strategies such as global real estate.
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