HNWIs should look beyond prime residential, says Invesco

Asset Class in Focus

Wealthy investors in Asia should steer away from location as the only component to consider in real estate investing, argues Simon Redman, managing director, client portfolio management at Invesco Real Estate.

Simon Redman, Invesco

Instead, wealthy individuals should take an institutional-like, rational approach to property investing, London-based Redman told FSA during a recent trip to Asia.

Most affluent individuals have good knowledge about real estate, in particular their own domestic market. But in most cases, this also blocks them from looking further afield.

Redman pointed out that even if these investors look at real estate in foreign countries, they tend to focus on residential properties in prime areas in capital cities, such as London and Vancouver.

“What we find is that a lot of capital in residential markets is dominated by high net worth investors, and these are typically residential in the wrong places,” he explained.

He said the locations of these investments are not where majority of people live, resulting in a high degree of vacancies. Such investments are merely betting capital growth instead of income.

“Capital appreciation is driven by demand but the demand and pricing of the prime location is driven by those very investors. As soon as [the wealthy individuals] choose not to invest anymore, prices fall,” he added.

Additionally, in Redman’s view, real estate investment should be made in a global context.

“When you look at equity or fixed income, you would approach it from a global basis. It seems logical.” But many investors do not take the same approach in real estate. “It may not be all of your portfolio. The majority can still remain in domestic markets, [but] a portion of it can be invested overseas and globally,” he suggested.

He added that investors should allocate money to properties that may attract solid demand, rather than investing with any strong emotional links.

For his team, the investment funds focus on seeking stable income generated from the assets. “When we do residential investments, we look for places where everyday people actually live. It might not be as glamorous as those central locations.” The same income-generation approach is applied to industrial and commercial buildings.

Meanwhile, FSA‘s quarterly survey during the third quarter 2018 showed a bigger upward shift in buying intentions for property assets, as compared with recent quarters.

Moreover, real estate is generally not well-correlated with traditional equity and bond investments; it can therefore help to diversify a mixed-asset portfolio. Using proxy IPD Global Property Index, global direct real estate has a correlation of 0.3 with the MSCI World Index and -0.26 with the Barclays Global Aggregate Bond Index, according to data provided by Invesco.

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