Real estate investors are expanding their investment horizons to capture the social infrastructure opportunity
This evolution has seen the gradual integration of infrastructure and real estate into combined ‘real asset’ teams, evident in Europe, the US and Australia.
In Europe and Australia, the management of real assets is evolving with real estate and infrastructure teams increasingly operating within the same team, applying the same risk management and decision-making process. In effect, real estate managers are expanding their investment boundaries.
Charu Lahiri, investment manager at Heartwood Investment Management, the asset management arm of Handelsbanken in the UK, explains:
“‘Real assets’ are – exactly as their name suggests – tangible investments. Offices, industrial buildings, retail property, social housing, infrastructure projects, wind farms… all of these assets can be seen and touched. This sets them in stark contrast to ‘paper assets’ like company shares or government bonds.
“Returns from real assets are typically driven by two components: capital returns based on the relative demand for the asset in question (e.g. changes in central London property prices due to changes in their popularity) and the income returns that the asset creates (e.g. rental income earned through leasing a property to tenants).
“As an incredibly varied set of investments, real assets have the advantage of offering different portfolio benefits at different times. Some real assets may be held for the defensive, secure income streams they produce; others may be held for the much higher (but also riskier) growth opportunities they represent.
“There is more than one way to invest in real assets. For example, investors could choose to position themselves in the shares or the debt of real assets – or indeed invest in both, depending on where they see attractive opportunities. The routes to investing in real assets are numerous too; investors could opt for actively managed funds or private equity vehicles, and/or choose the shares of listed investment companies or real estate investment trusts.
“At Heartwood, we tend to avoid retail ‘open-ended’ funds, which can suffer from the ‘liquidity mismatch’ inherent in these structures (meaning investors can sometimes struggle to quickly exit their position in the fund).
“We are also conscious of liquidity risk in listed shares; selling shares without drastically dropping their prices can be difficult during periods of market stress, though these shares can provide useful long-term portfolio positions when held through a range of market conditions. Balancing the risks of a relatively illiquid asset class with the return potential it can offer is our primary goal.”
