LaSalle’s Jacques Gordon: Real Estate Can Buttress a Portfolio, Especially if it’s Foreign
The Globe and Mail
Real estate is a great way to diversify your portfolio. But just as with equities and fixed-income investments, a domestic focus on real estate can be shortsighted.
Think beyond Canada.
"Publicly traded real estate in Canada makes up about 3 per cent of the global market cap of publicly traded real estate," says Dennis Mitchell, formerly a senior portfolio manager with Sprott Asset Management's Global Real Estate Fund. "So if you only own Canadian assets, you're missing out on most of the marketplace."
It's not that the Canadian market has been a poor performer over the past decade, says Frank Magliocco, national real estate leader for PricewaterhouseCoopers LLP in Toronto. "In Canada right now, a lot of commercial real estate is fully priced, so it's quite expensive," he says. "When investors look across the pond, they see more opportunity."
Consider the MSCI World Real Estate Index, which tracks 23 developed markets. It has a year-to-date total return of about 8 per cent, compared with the S&P TSX Capped Real Estate Index, which has returned less than 2 per cent.
Global commercial real estate also offers much more choice. Investors can access office, retail, industrial, hotels, multiresidential and even cellphone towers, data centres and billboards, Mr. Mitchell says. "The ability to diversify one's real estate investments has never been greater."
While investors have lots of options, the risks and rewards can vary significantly, says Jacques Gordon, a global strategist for LaSalle Investment Management in Chicago.
"The fundamentals can be country-specific, metro-specific and even property-specific," he says. "So for Canadians to do it on their own, it would take a lot of research and resources." He recommends investors consult a money manager.
A good first choice for most investors is real estate investment trusts (REITs), which are traded on public markets.
"The smart way to get multicountry exposure for a small- or medium-size investor is through a basket of international REITs," Mr. Gordon says. "There are now 300 to 400 REITs of good size and liquidity to build a diversified portfolio pretty easily with exposure to 20 to 30 countries."
Some investors choose mutual funds, where a manager purchases a basket of REITs for them. Exchange-traded funds (ETFs) also provide diversified exposure, often tracking broad real estate indices.
Higher-net-worth investors can choose private real-estate funds with minimum investments of about $1-million or more, Mr. Gordon says. Some offer more risk and less liquidity, but they generally provide higher returns with less volatility. "They don't have the stock market noise of publicly traded investments," he says.
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