At a time when Canadian real estate is looking increasingly frothy, a growing number of foreign property markets offer diversification, relative security, decent liquidity and solid returns to yield-hungry investors.
That's the message Simon Treacy, global chief investment officer with BlackRock Real Estate, the property arm of the world's biggest fund manager, has been taking to Canadian pension plans and other institutional investors.
BlackRock estimates the global property market of $13.7-trillion (U.S.) will nearly double by 2020.
"The rationale for investing overseas is not revolutionary," Mr. Treacy said in an interview. "Canadian institutional investors do it with their fixed income and their equities. What's happened in the last 15 years is that the international real estate markets have developed sufficiently, with transparency and liquidity and governance, and evidence of people investing and getting money in and out."
With the damaging effects of falling oil prices and other economic pressures spilling over into real estate, "the party's going to come to a stop at some point. It's just good practice to diversify," said Mr. Treacy, whose unit manages $23-billion worth of property assets, much of it in the form of private equity.
The major Canadian funds don't need any prodding. The Canada Pension Plan Investment Board, the Ontario Teachers' Pension Plan, British Columbia Investment Management Corp. and other heavyweights are the main reason Canada outstrips other developed countries when it comes to pouring money into foreign real estate.
About 40 per cent of Canadian pension funds' property-related investments sit outside Canada, almost double the U.S. level. And the total is rising. But smaller funds typically park only about 5 per cent in foreign real estate vehicles. One reason is concern about foreign exchange risk. For most of the past 15 years, a lot of returns for Canadians investing overseas "have been kind of washed away because of FX," he acknowledged. "There are swings and roundabouts. But that's part of diversification, and investors are used to it."
At a time of record-low bond yields – about 80 per cent of fixed-income products globally yield less than 4 per cent and some less than zero – real estate is bound to attract more capital. But it remains a largely local affair for many Canadian fund managers, who may not be aware of what's been happening in a remarkable number of markets.
Indeed, "you can make a lot of money in markets where economies are going sideways, like Europe at the moment," Mr. Treacy said.
Here are some of his favourite locations, whether the economies are sputtering or not.
China
He is attracted to second- and third-tier cities with shopping centres that need to be refurbished to appeal to a changing population with higher disposable incomes.
Despite a slowing economy, "you've got the world's largest migration from farms to the cities still occurring," said Mr. Treacy, an Australian and a one-time Shanghai resident. "And you've got the whole rising middle class and the market continuing to open up."
In 10 years of experience dealing with Chinese property investments, "I've not heard of any horror stories of foreign investors being trapped and having to go to the courts because contracts were being reneged on or they haven't been able to get money out."
United States
Mr. Treacy likes top cities on both coasts – San Francisco, Los Angeles, Boston and the Washington area – with such expanding businesses as health care, technology and, at least until recently, energy.
Western Europe
He calls this "just a global sweet spot at the moment," particularly for office buildings. In major cities such as Paris and Frankfurt, about 2 per cent of buildings essentially become obsolete annually. And unlike previous decades, the rate of new supply is only about 0.5 to 0.7 per cent of existing stock. So the idea is to buy the outmoded properties and renovate them to suit modern tenants.
Among specific European plays, Mr. Treacy zeroes in on the following:
Poland
Unlike the euro zone, Poland got through the global financial crisis largely unscathed and remains a cost-effective place to do business. BlackRock has invested in office buildings, residential and retail, and still owns a few shopping centres. The country has only been effectively open to foreign investors for about a decade.
Germany
The attraction is a slew of older buildings in major markets that can be fixed up, as well as retail stores in cities and towns around the country, many of which are dated. BlackRock owns a couple of hundred standalone retail complexes in a country with few large-scale malls.