Diversify for the right reasons
Adding real estate to a portfolio of equities and fixed income can address declining bond yields and the increasing volatility in equity markets. Real estate can enhance income and reduce risk. Over the past twenty years, bond yields have continued to fall, and many investors are not comfortable attempting to find additional income further down the quality ladder. Including an allocation to real estate can address these issues. The inherent low correlation that real estate assets have with equity markets - which has seen increasing volatility since 2000 - also provides the benefit of reducing portfolio volatility.
Cornering the market on correlation
Tighter correlations and the increasing volatility in the global equity markets have left investors searching for solutions that add meaningful diversification and stability to their portfolios. Real estate, in Canada or abroad, has low correlations to to the broader equity markets, delivering the diversification and stability that investors are looking for.
Global real estate has an attractive 0.35 correlation to global bonds, and a 0.77 correlation to global equities,1 which appears high, but it doesn’t tell the whole story.
Correlations between global real estate and equities are low; there are only a handful of areas – focused in Asia – where correlations spike. For example, Hong Kong real estate is highly correlated to its local equity market. The same is true of Japan and Singapore. Conversely, Canadian real estate has a low correlation to its local equity market, with the same being true of the U.S., Europe and Australia. In addition, correlations between specific real estate markets and foreign equity markets are, with few exceptions, markedly low.
Data: Bloomberg. Data as at December 31, 1992 to January 31, 2016