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Understanding the benefits of diversifying commercial real estate investments in global markets

By Kunal Moktan

30 Aug, 2023

In an increasingly interconnected and dynamic global economy, the landscape of commercial real estate (CRE) investment has transcended traditional boundaries, paving the way for a new era of international opportunity. As investors seek to maximize returns and mitigate risks, diversifying commercial real estate investments across global markets has emerged as a strategic imperative. Many investment platforms are expanding their reach into markets like the UK, USA, and Europe. The reason for this expansion is the attractive returns they can expect in these countries, as the yield is measured in strong currencies providing greater stability and growth potential. Additionally, foreign markets offer advantages such as a strong tenant profile with longer lock-in periods, ensuring a steady rental income. Furthermore, developed markets come with reliable infrastructure and well-established regulations, reducing investment risks and increasing potential returns.


Different economic cycles


While there is a general correlation between most global markets, at an individual asset class level, different countries can be in different stages of an economic cycle. Diversifying across different economies thus increases the likelihood of consistent returns, even when there is a possibility of a global downturn. For example, in most western countries like the UK and US, commercial real estate has significantly underperformed over the last 18 months. However, in the Middle East and India, the performance has been significantly better. Even within the UK, the commercial office market and the warehousing market are currently in different stages of the economic cycle. The warehousing market in the UK has performed exceedingly well over the last couple of years due to increased take-up by 3PL and e-commerce players, as well as limited supply in Grade A warehouses. Meanwhile, the office market is facing increased office vacancies due to the continuation of the hybrid policy amidst the high-interest-rate regime aimed at reducing spending.


Access to developed markets


In mature markets, high-quality data is easily available, vastly increasing the ability to make informed decisions. Processes like sale and purchase, due diligence, renegotiation of rentals, and the judiciary system have established processes and timelines, making owning real estate much easier compared to developing economies. Mature markets typically boast well-established transportation networks, communication systems, and utilities, providing a solid foundation for CRE projects. Moreover, their robust regulatory frameworks ensure property rights protection, transparent legal processes, and investor-friendly policies, fostering confidence among investors and attracting capital to the market.


Currency benefits


Developed economies have very stable currencies. Therefore, there is an additional appreciation in the property due to the appreciation of the foreign currency against the Indian rupee. For example, the INR has depreciated by 3.3% against the GBP and 3.7% against the USD in the last five years. CRE investment platforms' expansion into the UK, USA, or Europe market is driven by the allure of compelling yields measured in stable foreign currencies like pounds, dollars, or euros. Unlike investments in India, where returns are denominated in rupees and susceptible to currency fluctuations, investing in foreign markets offers a unique advantage. This currency advantage shields investors from the inherent risks associated with currency volatility leading to enhanced overall returns and increased confidence in international real estate investments.


Diversity in structure


Each country has its own standard market practices that gives a portfolio additional diversification. For example, in the UK, leases are signed for at least ten years, where both the tenant and the landlord are locked in. While in India, typically leases are only signed for five years, out of which the tenant is only locked in for only three years. A landlord in the UK would be happy that their cash flows are fixed for a long time but may be unhappy if the market rents increase significantly compared to their unit. While in India, a landlord would always be at risk of the tenant walking away but can renegotiate rentals in just five years if the rent in the market increases. A portfolio with both UK and India assets would reduce both risks and offer a good balance of rental appreciation and safety.


With a strategic focus on foreign real estate markets, CRE investment platforms like us (Property Share) are poised to leverage the strengths of these markets and deliver attractive returns to Indian investors.


Kunal Moktan


The author is the co-founder and chief investment officer at Property Share, India’s first and largest commercial property investment platform.


The article has also been published on on 18th August, 2023.