Nuveen advises 50% offshore real estate for Australian investors

Global real estate values bottomed in mid-2024 and institutional capital is returning to the sector, according to Nuveen Real Estate CIO Shawn Lese. The chief investment officer advised Australian investors looking to diversify offshore to aim for around 50 per cent of their property portfolios in foreign markets.

Lese, who also heads funds management for the Americas, argued that a valuation reset combined with strong capital flows is creating one of the best entry points in years for investors willing to look beyond home soil. He suggested the split should be skewed roughly two-to-one in favour of the United States.

Of the US$140 billion Nuveen Real Estate manages globally, some US$105–110 billion sits in the US market alone. Lese told Investor Daily that he would place two thirds of that offshore allocation in the United States and a third in Europe.

“I’d probably put something like 50 per cent offshore,” Lese said. “I would probably put two thirds in the United States, and… a third in Europe.”

Why overseas markets offer different opportunities

Recent data from MSCI shows global markets are recovering with seven consecutive quarters of positive total returns and transaction volumes climbing 17 per cent year-on-year. Pricing remains below 2019 peaks, and values bottomed out after falling for eight consecutive quarters before ticking up marginally.

Cap rates, which measure a property’s annual yield, have risen and since plateaued. Lese argued that valuation growth will now need to come from the income side, underpinned by a sharp slowdown in new development and the absorption of earlier supply gluts.

“You’re missing out on the broad expanse of different types of real estate,” he said. Unlike Australia, where superannuation funds pour large amounts of capital into real estate, the sheer scale of overseas markets like the US hasn’t been flooded in the same way.

“One of the benefits of going to the United States is just that the investable universe is so vast, and the opportunities to find pockets of outperformance [make it] probably the best in the world.”

Structurally, Lese explained that the US offers a maturing exposure to alternative real estate subsectors that aren’t achievable in Australia. This includes sectors such as self-storage, data centres, medical outpatient buildings and senior living facilities.

“It’s not just the traditional real estate investment opportunities, but a bunch of other new burgeoning sectors that are maturing and that institutional investors are coming to view as the type of thing they can invest in,” he said.

Focusing on the US, Lese noted that some of the strongest opportunities lie in areas that have surprised investors in recent years, such as offices. “Believe it or not, we’re actually starting to see values bottom out in the United States, and we’re starting to see demand kick back in. Particularly in places like New York and San Francisco, and throughout the South of the United States.”

Retail has also staged a quiet comeback, becoming one of the best-performing real estate asset classes over the last couple of years.

Structurally, Lese explained that the US also benefits from different macro drivers to Australia, where commodities still rule the roost, adding a further layer of diversification for investors.

“You’re going to get different fundamentals underlying the investment thesis of innovation and particularly energy independence.”

Risks and diversification benefits

Beyond the US, Lese identified Europe as an increasingly attractive hunting ground, particularly after a sharper and faster reset in values. The region also didn’t begin from a position of oversupply, unlike the US.

Within Europe, he highlighted a chronic shortage of rental housing as a core opportunity, and was also upbeat on offices recovering even faster than in the US. He added that select industrial markets such as Germany, where increased military spending is adding support.

Turning to Asia-Pacific, Lese’s preferred themes were housing, student accommodation, offices and modern logistics, supported by the continued growth of e-commerce.

“Some of our favorite things to be investing in [in APAC] are basically housing in general… student housing, in particular, across Asia is also another great place to be investing,” he said, noting that more Asian students are choosing Australia over the US.

For Australian investors going global, particularly into the US, Lese was clear that the biggest threat to the thesis isn’t oversupply but another lurch higher in interest rates, given the impact this would have on valuations and overall performance. However, with supply falling to a decades-low and demand fundamentals strong, he said the fundamentals are on the side of the investor.

Meanwhile, he added that while currency risk poses an additional consideration for Australian investors looking offshore, it’s still outweighed by the benefits of diversification.