Following a period of around ten years during which US property investors saw little reason to invest internationally due to the strong performance of the domestic market, a trend reversal is now emerging. This development led investors to allocate an average of 70 to 80 per cent of their portfolios domestically, an increase compared to 66 per cent in the previous economic phase. However, current analyses suggest that an optimal mix of domestic and international property allocations exists.
An international property allocation of around 20 per cent of a portfolio can thus bring significant efficiency gains. This effect is slightly diminished in the 30 to 40 per cent range. The so-called sweet spot, or optimal range, is approximately 10 to 15 per cent. This is based on specific investment principles that highlight the attractiveness of European and Asia-Pacific markets.
Specific advantages of European markets
European residential properties are characterised by low cash flow volatility. This is due to the structures in social housing and long-term rental agreements, which contrasts with multi-family homes in the US. Furthermore, office property markets in the Asia-Pacific region and Europe exhibit tighter supply and leasing dynamics than large parts of the US market. At the same time, regional hotel markets benefit from increasing tourism amidst limited supply.
A third principle concerns opportunities in still-growing sectors in Europe, such as the self-storage segment. This sector accounts for only a fraction of the US level in relation to population size. This enables investors to transfer mature operator models to markets where they are not yet fully established. In this way, development gains and yield compression can be realised as these markets mature.
Fragmentation as a source of Alpha
The fragmentation of Europe is not seen as a disadvantage, but as a source of Alpha. Without a unified capital market, pricing inefficiencies persist longer, benefiting investors who conduct bottom-up analysis at the market level. A passive approach cannot fully utilise these opportunities. The Iberian Peninsula, for example, stands out because property plays a particularly significant role in its economies, which are comparatively less influenced by institutional investors.
Ireland's residential sector benefits from a structural supply shortage. In the UK, affordable housing is increasingly attracting private capital, as this market segment is only marginally affected by the general restraint in the property market. Moreover, the challenging situation in the German property market offers entry opportunities for investors who can implement both debt and equity strategies. Sectors such as residential and logistics retain their relevance in almost all markets, while demand-driven sectors such as self-storage, food-anchored retail, and premium hospitality require a more selective approach.
A complementary debt allocation, where liquidity is highest in commercial and residential properties, offers additional leverage without increased equity risk. For investors developing their future strategy, the focus is no longer on the amount of international investments, but on their function and the selection of the most suitable markets and sectors. Selectivity and finding this sweet spot between domestic and international markets will be crucial for outperformance in the coming decade, according to Greg Kane, Head of Investment Research, Real Estate, at PGIM.
