Page 12 - Newcom

SPECIAL SPONSORED CONTENT
Diversification, Risk Management and Private Equity in Real Assets
Middlefield Group specialists provide insights into latest developments in real estate, infrastructure
Investment in real assets is a proven means of portfolio diversification and complements more traditional equities and fixed income assets. This has become more relevant with the evolving objectives of large institutional investors (such as pension funds) in response to recent developments in world economies and markets. Investments in real assets such as infrastructure and real estate are attractive because they provide exposure to different combinations of growth potential, value creation and risk, while also providing reliable income streams.
The way in which institutions access these investments continues to evolve as well. A large portion of high-quality real estate and infrastructure assets remain in the private market as the burden of public ownership, and the quarterly earnings spotlight, intensifies. This migration of critical assets to private markets makes practical access extremely difficult for investors who lack a structured investment approach and large amounts of capital.
For further insights, we caught up with the specialists at Middlefield Group, a recognized authority in real estate and infrastructure investment. Dean Orrico, President and Chief Investment Officer, and Robert Lauzon, Managing Director and Deputy Chief Investment Officer, shared their views of the benefits of real asset investments and ongoing developments in the sector.
Interest rates and a renewed focus on real assets
While real estate and infrastructure represent compelling opportunities in any business or economic cycle, current macroeconomic, market and industry factors are driving increased interest in these investments. One such factor is the frequently discussed environment of low interest rates, which benefits real assets in two key ways.
The first factor that Orrico notes is the impact of low interest rates on leverage. The capital- intensive nature of real estate and infrastructure investment makes the actions of world central banks particularly critical for the continued financing and expansion of such projects. Signals of continued low interest rates, at least in the near term, bode well for real assets in general.
“Given that real estate and infrastructure are generally stable, cash-flow-producing assets that tend to employ some leverage, lower-for-longer rates support higher free cash flows,” says Orrico.
Add to that the appetite of investors for robust income streams in a low-interest-rate environment, says Lauzon, and real assets become even more compelling.
“If interest rates continue to be low and you need cash-flow assets with a growing income stream, real estate and infrastructure typically have escalators in their rents or rate/price agreements,” Lauzon explains. “These real assets become investments that behave somewhat like bonds that generate growing payments, and due to the contractual escalators in those payments, can act as a hedge against inflation.”
Not only do real assets generate cash flow, but they are often characterized as being holdings with a very long lifespan. That makes them especially attractive to institutional investors such as pension funds.
Dean Orrico,
President and Chief Investment Officer
Robert Lauzon,
Managing Director and Deputy Chief Investment Officer
“Take a pension fund, for example, that has liabilities that are very long term in nature,” Orrico says. “An investment in real assets, with cash flows that are also long term in nature, naturally aligns with a pension fund’s need for cash flow from its investment portfolio.”
Insights into the moves of institutional investors are particularly useful, not just for the volume of investment assets involved, but for signaling the overall forward direction of the market. Lauzon points to a recent survey of U.S. institutional investors by global asset manager BlackRock, Inc. According to the survey, institutional investors are most likely to increase their allocations to real assets, compared to other asset classes.
Institutional investors investing more in real assets
60% 50% 40% 30% 20% 10%
0%
Equities
Hedge Funds
Cash Fixed Income
Private Equity
Increase Slightly (1-5%)
Increase Significantly (5% +)
Real Assets Opportunities: Multi-Residential Properties
Worldwide, macroeconomic factors such as rising housing prices, increased urbanization, immigration patterns and population mobility have put considerable upward pressure on rental accommodation.
“From our office in Toronto, we can see the trend toward multi-residential happening in Canada. But it’s also a global phenomenon, happening in major cities throughout North America, Europe and other markets,” reports Dean Orrico of the Middlefield Group. “When you see immigration levels of countries like Germany, for example, or if you examine the high levels of housing prices in the United Kingdom, more and more people with fewer means are looking to rent before buying. We think that’s going to be a very powerful tailwind that will help grow the multi-residential rental market for a number of years.”
Source: 2019 Institutional Rebalancing Survey, BlackRock Inc., January 2019
Breaking down current opportunities in real assets
It is important to note that real assets represent a highly diverse range of investments.
Even within the real estate and infrastructure sectors, there is considerable diversity in the opportunities available in terms of their earnings expectations and prospects for future growth. For example, ongoing shifts in the preferences of consumers and how they make purchases have had a significant impact on the real estate market. A greater focus on e-commerce has Orrico favouring industrial real estate over traditional retail properties, such as shopping malls.
“With respect to industrial real estate, we’ve been focused for several years on holdings whose tenants are logistics and distribution types of businesses that provide the infrastructure that facilitates the demands from growing e-commerce activity,” he says.
“When you think about companies like Amazon, which is really the 800-pound gorilla in e-commerce, they’re still building out their logistics and distribution infrastructure to this day to fulfill their increasing service requirements. A company like Amazon that offers one-day delivery will need additional logistics and distribution facilities near major urban centres.”
Lauzon points to several ongoing and long-time trends that he expects will continue to generate opportunities in both infrastructure and real estate. One example is the expansion of mobile technology, requiring both property and infrastructure by tower companies to expand their capabilities in both developed and emerging markets. The growth of data centres is another related area of considerable opportunity.
Real Assets