2. How should an investor think about investing domestically versus globally?
Investors typically make their first real estate investments in their domestic markets, before moving on to invest in other countries later. Their home market is the natural choice given they will be most familiar with it and its associated legal structures, tax system, supply, demand and other potential risk factors. This creates a strong home bias, which typically leads to over-exposure to domestic real estate and results in concentration risk. Moreover, home bias tends to increase during times of market volatility as investors understandably focus on the market they know best. In contrast, international investment offers investors a much larger, global real estate investment universe which can complement any domestic holdings they might have rather than being a substitute for them. The largest real estate investment markets in the world – the US, Japan, China, Germany, the UK – typically can offer opportunities across all the main real estate sectors of commercial, logistics, residential and hotels, as well as niche and specialist sectors.
However, smaller and developing markets often do not provide access to all sectors and more specialist and operational areas such as life sciences, student housing and self-storage. International investment can thus serve a different purpose in a portfolio, for accessing new and different property types and for diversification. Correlations of real estate returns across international markets are generally lower than between sectors within countries, in part because the economic and construction cycles vary strongly across markets. This means that investors can reap significant benefits from international property investment in terms of risk-adjusted return. Nevertheless, investing in a foreign market exposes an investor to risks and information asymmetries that can dilute returns. However, these can also be mitigated with expert advice.
