Fluctuations across oil and global equities markets, uncertainty about a Grexit and a stuttering eurozone on the cusp of deflation have rekindled concerns among investors and created an uncertain start to 2015.
As a result, a global hunt for secure and transparent income-producing assets is likely to dominate as it has done during the past few years.
The appetite for an increasing real estate component in a multi-asset portfolio is a global trend. It is being driven by the need for a defensive, risk-weighted approach to income generation.
For some investors, their allocation to “real assets” will cover both real estate and infrastructure. And while there may be similarities, it is important to remember that infrastructure is not property.
The key attractions of infrastructure assets include a secure stream, often tied to inflation and potentially de-risked or even backed by a government. And because infrastructure is underpinned by different economic drivers to equities or property, macro forces can have more of an impact on infrastructure’s performance.
Uncertainty over the timing of central bank tightening of monetary policies in the US and UK, together with the re-emerging eurozone debt crisis and the political direction of Britain, the US and Hong Kong could have profound effects on investor sentiment.
At the same time, banks are having to contribute a large portion of infrastructure spending as governments tighten their capital requirements under changing regulation. This is likely to affect traditional real estate development too. But in a climate where governments are under pressure to deleverage and where debt may begin to cost more, seeking private sector investment for infrastructure and development is politically crucial.
The coalition’s revised 2014 National Infrastructure Plan needs £460bn of public and private sector investment, while -London’s own infrastructure plan will require an eye-watering £1.3tn by 2050. These offer huge opportunities for institutions.
Canada’s model for infrastructure investment is one that pension funds around the world are looking to emulate. Canadian pension funds’ allocation to infrastructure, among the other alternative assets, grew from 8% to 24% between 2010 and 2013, according to Mercer.
Yet, while there is opportunity globally, risks and transparency vary greatly because a lack of data and benchmarking on infrastructure has rendered it largely opaque and unstructured compared with real estate.
To foster more infrastructure investment that will benefit pension fund returns and national economies, it is essential to be able to analyse and benchmark infrastructure against shares and other assets.
The recently launched IPD Global Infrastructure Direct Asset Index seeks to address the sector’s lack of cohesion by providing insight into investment market cycles and trends, asset pricing, benchmarking analysis, attribution analysis and risk modelling.
With the lines being blurred between property and infrastructure – notably on the “alternative” peripheral of emerging property sectors in healthcare and housing – taking a long-term view will be essential to secure finance. Understanding demand and tenant risk in real estate is increasingly necessary over a 10- or 20-year period.
Prime real estate is increasingly put side-by-side with infrastructure opportunities, and with political and financial turbulence, infrastructure’s attraction remains strong. While there can be no certainty over market activity or political outlook, having a solid foundation on which to base decision making can at least inform the things we do know to be controllable.
Phil Tily is executive director at MSCI Real Estate – IPD
