The breadth of opportunity that falls within the parameters of real assets is far wider today than it has ever been. Infrastructure has matured into an important second pillar alongside real estate. Some investors have also added niche exposures such as timber and farmland into the mix. Meanwhile, credit and public market strategies are deemed to be important complements to an equity approach.
Infrastructure fundraising increased from $23 billion in 2009 to $136 billion in 2021, according to Infrastructure Investor. That interest has been driven by returns diversification, as well as strong inflation protection, says Dominic Garcia, chief pension investment strategist at CBRE Investment Management. “In high inflation regimes over the last 15 to 20 years, infrastructure has performed far better than stocks or bonds and that is particularly true in regimes where there has been higher than average inflation and lower than average growth,” he says.
Meanwhile, regulation changes aimed at preventing another economic downturn restricted bank lending practices in the wake of the financial crisis, allowing a proliferation of real estate and infrastructure debt funds. Credit, of course, offers investors an additional layer of downside protection, clearly demonstrated through the pandemic.
“Even when the real estate assets that back our loans have seen rent collections fall, we have experienced no missed interest payments or missed distributions to our investors,” says Emma Huepfl, managing director of Europe credit strategies at CBRE Investment Management. Real estate credit can also represent an efficient way to deploy capital because transaction costs are lower than for equity. Furthermore, cap-rate compression in equity markets is narrowing the returns differential with credit.
“Debt has developed into an established component of real estate investment”
Allianz Real Estate
“Debt has developed into an established component of real estate investment,” says Roland Fuchs, head of European real estate finance at Allianz Real Estate, part of the German insurer. “It provides an attractive short- and long-term spread over benchmark returns and excellent risk protection in cyclical and volatile markets. It also allows for the optimisation of risk capital charges and is a great product for delivering on ESG ambitions.”
Interest in listed real assets, meanwhile, has been accentuated by what many investors see as a missed opportunity during the collapse in listed real estate when covid first struck. Listed markets can also help overcome the challenges investors face in reaching their target allocations and can provide diversification. “We can access thousands of real estate and infrastructure assets on a global basis, all in a one-time investment,” says Jeremy Anagnos, CIO of listed infrastructure strategies at CBRE Investment Management.
Holistic and data driven
Finally, a listed real assets allocation offers an effective way to access growth sectors. “Between 60 and 65 percent of the investable universe is comprised of sectors that the private markets still deem alternative,” says Joseph Smith, CIO, listed strategies at CBRE Investment Management, citing data centres, towers, manufactured housing and single-family rentals as potential missed opportunities for those that restrict their investment to privately held assets.
This more nuanced understanding of real assets requires a holistic and data-driven approach to portfolio construction, which can then be reinforced by tactical decision making within the individual asset classes. The end result will vary, depending on the investor’s objectives, but a model portfolio today may have a 60:40 split of equity to debt, with around 50 percent allocated to real estate and a further 30 to 40 percent to infrastructure. Around 70 percent will be allocated to private markets, with the remainder reserved as a listed allocation.