Research Briefing | Nov 22, 2023

Geographic allocation alpha makes a comeback in CRE investment

While we expect that sector selection will still be an important component to generating alpha in commercial real estate investment, we think the thematic drivers that are likely to support outperformance over the next decade will require more emphasis on selecting for geography.

What you will learn:

  • Generating alpha over the past five-seven years has favoured those who have allocated correctly for sectors, rather than for geography. This shift away from geographic allocation is rooted in the recognition that structural drivers supporting outperformance have been more pronounced at a sectoral level.
  • The significance of sector selection in CRE markets cannot be overstated. Notably, returns across sectors have exhibited notable disparities, particularly since 2016. For instance, global industrial returns have outperformed both the office and retail sectors every single year since 2011. At a country level, disparities in returns have been far more uniform.
  • Now, though, the thematic drivers of these outperformances are changing. The industrial sector will see headwinds associated with deglobalisation and tailwinds from energy dynamics; the office sector will experience a contrasting set of effects from the work-from-home phenomena; and demographic shifts will play an ever-increasing role in both residential and retail markets.
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