We are witnessing an emerging market trend of infrastructure funds buying real estate assets as direct investments or investing in heavy users of real estate.
We have recently acted for a real estate fund that sold assets to an infrastructure investor – Kennedy Wilson’s disposal of the Fire Control Centre portfolio – and we are also currently advising infrastructure funds buying direct real estate investments.
There are two key factors that are driving this growing trend. Firstly, the assets under management of these funds and the capital that they have available to invest have grown dramatically in recent years as infrastructure investment has moved into the mainstream focus of global investors. Secondly, the limited supply of new opportunities for new projects in the UK means that infrastructure funds are looking away from their traditional investment targets to identify opportunities and sectors in which to invest their capital to meet their targeted returns.
This trend highlights the re-emergence of real assets as an investment asset class that a growing amount of real estate assets can also be classified in to.
Infrastructure funds have so far primarily targeted properties that are let to government or public sector occupiers on long leases and often with inflation-linked uplifts. However, the definition of what constitutes an acceptable counterparty is becoming more broadly defined. Some of the more active infrastructure investor groups are venturing further and looking at residential and healthcare-related assets that have long-term leases but where there is no direct link to a government covenant.
In addition, infrastructure funds that specialise in operational businesses are also considering more peripheral asset classes, such as data centres, where the counterparty on the lease is not the government or the public sector but they can identify high
barriers to entry, sustainability and longevity of cash flows.
In a real estate market that has seen a recent reduction in the number of active buyers, it is essential for sellers to have different types of buyers competing for their assets in order to maximise price and minimise execution risks.
The ability to access new types of buyers does, at the very least, bring a greater level of competitive tension against the more traditional buyer landscape of UK institutions and other fixed-income-focused buyers.
Infrastructure funds have a different approach and focus to their investment decisions and needs than traditional real estate investors. As such, investment propositions need to be prepared and presented appropriately, considering the longevity of the income streams, prevailing bond rates and risk premia, legislative risks and residual value requirements.
For owners of these types of real estate assets and those who would consider a disposal, there is undeniable benefit from engaging with this group of investors in the current market. Because of their long-term focus, the equity return requirements of these investors is typically lower than that required by pure real estate funds. Combined with their ability to secure (by real estate standards) very aggressive debt packages and their transaction structuring expertise, this means they are able to put very compelling bids on the table for the right assets.
However, owners need to ensure that their investment opportunities are correctly presented if they are to be attractive to infrastructure buyers. In some examples this may include adapting the cashflow profile, underwriting rental deductions or providing insurance support for the income or title.
Mathieu Roland-Billecart, partner, real estate corporate finance, EY
