North America represents about 30 percent of the total value of real estate globally, yet many investors fail to consider real estate investment opportunities in other global markets, according to an analysis of investment patterns.
The report from Fidelity Investments suggests that investors are missing out on a number of benefits from international real estate. Fidelity cited data showing that at the end of 2014, the level of assets in U.S.-domiciled mutual funds and exchange-traded funds (ETFs) focused on U.S. real estate was nine times that of funds focused on international real estate.
“International (real estate) has been consistently ignored in favor of U.S. and global funds,” said Guillermo de las Casas, portfolio manager of the Fidelity International Real Estate Fund.
North America represents roughly half of global real estate securities on a market capitalization basis, according to Fidelity. Developed markets in Asia represent 25 percent of global real estate on a market cap basis, while developed European markets represent 14 percent and emerging markets 10 percent, Fidelity reported.
“When investing in real estate, investors tend to focus on their home country or region, overlooking significant opportunities that exist internationally,” the report said.
Fidelity pointed out that one-year rolling returns on international real estate have differed from those on North American real estate by 20 percentage points or more on multiple occasions during the past 15 years.
“Lower correlation and high performance differentiation can make international real estate a useful complement to a North American real estate portfolio,” Fidelity said. In addition to the diversification benefits offered by international real estate, it also has the potential to offer long-term growth opportunities, according to the report.
“The low level of ownership of real estate by professionally run companies in both Europe and Asia provide great opportunities for potential long-term outperformance,” de las Casas said.
Fidelity observed that real estate trends tend to originate in North America and then spread to Europe and Asia. The paper points to self-storage and health care as two real estate sectors that are well-represented in the U.S., but have yet to reach their potential abroad.
While the largest U.S. self-storage company has a market capitalization in excess of $30 billion, the market cap for similar companies in Europe and Australia is still below $2 billion. Due to the generally limited penetration of self-storage in foreign markets, there could be an opportunity for a major self-storage company to emerge outside North America, according to Fidelity.
In Asia, Fidelity noted, demand for quality health care and senior living facilities is supported by factors that include an aging population and rising incomes.
“I believe the urbanization of many countries in Asia will continue to give a demand tailwind in the region,” de las Casas noted.