A global approach to private real estate
Investing in global private real estate
Traditionally, institutional real estate portfolios have been overexposed to domestic or regional assets and active asset management has not been a major priority. Significant shifts in recent time periods have now exposed the vulnerabilities of this approach.
A global strategy addresses the challenge faced in traditional real estate investing by unlocking access to a significantly larger universe, spanning diverse geographies, property sectors, and return drivers. Global diversification may provide a distinct advantage, offering investors access to thematically driven growth opportunities and lower-correlated property sectors across regions.
Following a considerable reset in valuations, the recovery across the real estate market is gathering momentum; we regard this as an attractive entry point for new investment – particularly in open-ended funds.
The fund-of-funds approach can potentially provide access to a much broader opportunity set for investors, ultimately helping them to strike a balance between risk, return, cost and liquidity in building resilient, future-facing allocations in private real estate.
With over 25 years of real estate expertise, Mercer has developed platforms, relationships, and deep industry knowledge. These capabilities allow us to propose solutions tailored to our clients’ needs aligned with today’s global market.
Private real estate has been a staple of institutional portfolios for decades due to its ability to generate potentially attractive returns. Further potential benefits include some degree of inflation protection and diversification from traditional asset classes.
Head of Pacific – Real Estate Investment
Historically, allocations to private real estate have been structured toward local or regional exposure, with investors typically favoring properties within their primary markets. The significant structural and cyclical shifts unfolding over the past five years have now exposed the vulnerabilities of this regionally concentrated, low-fee ‘passive’ approach to private real estate investment.
In traditional real estate portfolios – often domestically focused and passively managed – the recent valuation hit may have been particularly acute, lacking the protection of both geographic diversification and active asset management.
Regionally diversified private real estate strategies can mitigate the challenges associated with local approaches, reducing the cyclical risks tied to individual economies and markets.
The current market environment presents a potential opportunity for investors to improve their geographic and sectoral real estate diversification, while also targeting thematically driven property sectors by entering private real estate funds at historically low values.
Active asset management and effective risk management are central to value creation in private real estate, one possible way to effectively deliver on this could be through a fund-of-funds strategy.
This approach enables investors to potentially benefit from a diversified exposure to investments across multiple geographies by leveraging the expertise of managers who understand the intricacies of their markets, overlaid with the strategic oversight of an established fund-of-funds manager, without needing to build their own in-house resources. While sceptics may point to the probability of a double layer of fees, the drag of such additional costs is generally lower than for closed-ended funds and can be mitigated through multi-manager fee aggregation savings, improved returns, and lessening downside risk.
A fund-of-funds approach can also help deliver significant operational efficiencies across diversified private real estate by simplifying exposure to multiple managers through one allocation, removing the need for internal oversight to manage the flows across numerous funds arising from individual allocations.
