Can a US private real estate strategy help Canadian investors now?

Wholesale change in central bank monetary policy has many investors reconsidering their real estate asset allocations. As money becomes more expensive, and ‘higher for longer’ interest rate narratives prevail, there is growing demand for defensiveness and diversification from real estate assets. Franklin Templeton Canada has recently taken a step to meet that demand, launching a new private real estate strategy focused on US assets managed by Clarion Partners, an $80 billion US-based real estate asset manager.

Richard Schaupp, managing director of Clarion Partners, outlined exactly why he thinks his strategy can help Canadian investors now. He explained the specific real estate areas Clarion invests in and highlighted the tailwinds and headwinds those assets face now. He emphasized, too, the key difference between US-based private real estate assets and the public real estate assets more Canadian investors are currently familiar with.

“It’s important to distinguish between public real estate, which are publicly traded REITs correlated to small-cap stocks, and private real estate which is valued independently every month by an appraiser,” Schaupp says. “The actual holdings of the fund are in high quality institutional real estate. Generally, that’s warehouses, rental apartments, and some life science assets diversified across the United States.”

While the fund being made available in Canada holds more than those three asset classes, they do comprise the core of what Canadian advisors will be able to access. Schaupp believes those three asset classes are well positioned in the current environment.

Demographic shifts as baby boomers age and gen Z enters the workforce point to a growing demand for apartment housing — the ongoing shortage in housing contributes to that demand as well. Deglobalization remains a massive trend, with many countries onshoring their storage and industrial capacity, driving demand for warehouses. Life sciences real estate — which Canadians have a hard time accessing here — is benefitting from both the aging of baby boomers who will need more medical care, and the constant innovation of the US healthcare sector. 

Dennis Tew, head of national sales at Franklin Templeton Canada, contrasted this exposure with what Canadians currently have access to. REIT investments, he noted, are relatively widespread among Canadian investors. If investors currently have access to private real estate, that is also likely in Canada. The US private real estate market, he believes, offers a level of diversification that investors need.

“This is a natural step beyond Canadian real estate into a bigger more diversified pool like the US with different opportunities,” Tew says.

Schaupp believes US private real estate assets have returns profiles that Canadian advisors may find attractive, especially in an environment of slowing growth. These assets come with low correlations, low volatility, and strong income. Historically, too, they’ve been a solid hedge against inflation. As advisors look for alternatives to the 60/40 portfolio Schaupp sees private real estate as a valid place, following the so-called ‘smart money’ of US institutional investors who have broadly allocated around 10% of their portfolios towards private real estate.

Schaupp admits there are still considerable risks in the US private real estate space. Office buildings and malls, for example, once looked attractive but changing circumstances and a dynamic world have made them into risky assets. There’s innate risk, he says, in buying hard assets in a changing world. However, he thinks the scale and diversification offered by portfolios like Clarion’s can mitigate those risks somewhat.

While Clarion holds geographically diversified allocations, they have skewed their investments towards the cities and locations that Americans are moving to. That means investing in the southwest and southeast of the country as Americans move to warmer cities. Places like Nashville, Austin, Denver, and Charlotte all have the combination of population growth, diversified economies, high quality of life, and relative affordability that makes an asset manager like Clarion interested.

Schaupp emphasized that Clarion’s strategy is not as focused on short-term gains or even purely on capturing individual trends. Rather his team is seeking to provide a degree of long-term diversification that can help advisors navigate still-challenging markets for their clients.

“We’ve seen over the last few years how the traditional stock-bond technology needs further diversification,” Schaupp says. “To have an asset class with low correlations, low volatility, and strong returns over longer periods of time, it’s not really a tactical timing play. We think of this as a strategic piece of an investment portfolio.”