Townsend Guides LPs to Global Diversification

Turmoil in global equity markets has put greater investor focus on real estate. With market demand for core plays in U.S. and European gateway cities running at record levels, the time is right to consider diversifying globally.

“In the face of uncertainty, demand has shot up,” says Prashant Tewari, a principal with The Townsend Group. “There is no abating in investor appetite for stabilized assets, especially in developed countries.” He is describing the continuing demand for real estate in the face of nerve-rattling headlines that include China’s economic slowdown, turmoil in the Middle East, and debt crises in Greece and Puerto Rico.  “Looking at the numbers from core performance among ODCE funds, the market is really strong.”

As an institutional investor with $13B under management and as an advisor to more than $170B in client real estate, the Townsend team has kept its finger on the pulse of investor sentiment as the landscape has shifted.  “Investors see real estate as a safer place,” says Tewari. “The sector has been shielded from volatility in terms of returns.”

However, investors would do well to align their time horizon with the real estate cycle as it crests.  “Over the next three to five years, investors focused on U.S. non-core strategies may be disappointed as they invest in blind pools, value-add and opportunistic funds that will look to invest over the next three years and harvest in seven years,” Tewari explains. “That will put you well on the other side of the cycle by then and returns may be less likely to materialize.”

Instead, Tewari recommends that investors “favor those investments with lower J-curve impact,” that include global opportunities and “special situations” that are poised to perform during this cycle.

“We are looking for neglected areas around the world,” he says. “Global cycles are not synced up as they have been in the past. For example, the U.S. and U.K. have grown for a while now while Japan and Europe have struggled, and Australia has been neglected. There’s a looming slowdown in China and recession in Brazil.  Meanwhile, Mexico is doing well and India is accelerating. If there were ever a time to get diversification, now is the time.”

The key when looking at these neglected areas in the world, according to Tewari, is to be both creative and selective within global markets while not getting entrenched.  “We are not tied to any single market,” he adds. “If the timing is not right we are patient and can shift to other geographies and property types for better opportunities.”   

Tewari also advises on getting innovative—focusing the specific drivers propelling special situations in particular markets. This includes looking at emerging markets, with a mix of traditional asset classes and those that are considered somewhat alternative, including property sectors such as hotels, student housing, self storage, and hotels. For reference, he provides wide-ranging global examples including U.S.-dollar denominated investments in Mexico, senior secured lending in India, and self storage in Singapore.

“Astute investors will get away from the herd mentality of pursuing the same strategies until the returns fade,” says Tewari. “Smart players will have a higher risk appetite, cast a global net, and seek creative deals and partners.”

The views of Townsend Holdings LLC are as of the date of this publication and may be changed or modified at any time and without notice and should not be construed as investment advice or an offer or solicitation for the purchase or sale of any financial instrument. This document may contain statements that constitute “forward looking statements.” While these statements may represent the judgment and future expectations of Townsend, a number of uncertainties and other important factors could cause actual developments and results to differ materially from the expectations of Townsend.