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Infrastructure and real estate are two trillion-dollar asset classes with deep ties. Real estate would simply not exist without the supporting infrastructure, and infrastructure would be of little use without the surrounding real estate, and investors are increasingly seeing their exposure to both holistically. Both are also growing rapidly to cater to increasing demand from the market, with population growth, urbanisation, economic development, the drive for sustainability and changing consumer behaviour all driving durable and long-term demand. Both are breaking records and reaching new heights of investments from across the stakeholder spectrum, reaching the trillion-dollar mark in AUM for the first time ever. Institutional investors have been increasing allocations on the back of the attractive returns of the past decade which has, in turn, brought the asset classes to the attention of growing numbers of private investors.
In this article, we will explore the factors driving the growth of the global real estate and infrastructure markets, the scale of the investment opportunity and the ability of institutional and private investors to gain exposure to these sectors in their portfolios. As with all investing activity, investing into the real estate and infrastructure sectors requires considered due diligence, paying due regard to risks, including those outlined in article.
With a global population expected to hit 9.8 billion by 2050, it’s of little surprise that demand for real estate is expected to grow. The global market was estimated at $3.69 trillion in 2021 and is expected to grow by at least 5% every year until 2030. The negative impact of the Covid-19 pandemic notwithstanding, continuous population growth and a trend towards younger generations moving out earlier have driven positive growth for residential real estate. Investors have entered into the post-Covid market with some force, with North American opportunistic fundraising for real estate rising by 177.3%, while value-add fundraising reached a new record of $53 billion. Total global real estate AUM reached a record high of $1.2 trillion, driven mainly by economic recovery in the post-Covid world and new strategies from investors.
Commercial real estate is similarly adapting to rapidly changing spending and working patterns while the industrial segment has seen steady growth in recent quarters as ageing warehouses are remodelled and new facilities are built out. A diverse list of sub-sectors including logistics, smart building, student housing, childcare and senior living are benefitting from structural tailwinds. Even as institutional investors became warier in 2022’s volatile market, their faith in real estate remains strong. This faith from investors will potentially support the continued growth and outperformance of the returns of the asset class in an inflationary environment.
For investors, real estate remains an asset class that can potentially offer significant protection against inflation and can outperform other asset classes, including private equity, which is historically a leading driver of returns for institutional investors. Above all, in the current environment, it is this potential protection against rising prices that is driving high levels of interest in the market. It is also pushing growth in the capital allocations that investors are committing to the asset class, growth that has been on an upward sloping trajectory over the past 10 years (Figure 1) and that is not expected to slow down for the next decade.
At its core, infrastructure investing means building and maintaining the real assets that allow modern economies to function such as energy, transportation, utilities, communications and public amenities. This can include projects such as renewable energy plants, smart motorways, and fibre networks, with global demand totalling $2.3 trillion. For many investors, the main draws of the asset class are that it may show little sensitivity to swings in the business cycle, may have a low correlation with equity markets, and can offer long-lasting and inflation-linked cash returns. Demand is considerable and infrastructure is in dire need of private investment, due to the constraints on current financing available from other public sources. An estimated $13 trillion investment in international infrastructure will be needed by 2050 to bridge the infrastructure funding gap. Similar to real estate, global fundraising in private infrastructure is strong (Figure 2). In 2021, this totalled $137 billion, a 23% increase from the previous year.
The sector’s total AUM reached $1 trillion for the first time in 2021, with returns for investors remaining above average, supported by recovering commodity prices and the recovering global economy. For the global infrastructure market, this record investment reflects trends including investment in communications as part of wider digitalisation, and investment in alternative energy thanks to growing interest in sustainability. Allocations from across private and institutional investors have grown to fill the funding gaps and claim their share of the returns.
Growth in the asset class has not been impacted by the pandemic; rather, investors have seen more opportunities arise due to the drop in public financing and the rise in demand for digital infrastructure. Two major trends that have driven this are remote working and e-commerce, with investors already capitalising on investments in fibre networks, telecommunication towers, and data centres. Major institutional investors, including Goldman Sachs and KKR, are already deploying a combined $4 billion towards data centre development, for example, with more major allocations from leading investors anticipated. Interest in investing in the sector has leapt higher recently, with data centres receiving 213% more interest in 2021 compared to 2019, a 193% increase for cold storage, and a jump of 125% for public healthcare.
Fundraising activity in both real estate and infrastructure seems unlikely to slow down, demand is high and rising and institutional and private investors are happy to enjoy the potential rewards of being the supplier of much-needed capital. Even as macroeconomic and geopolitical challenges are becoming more evident, private real estate fundraising has stepped up after the pandemic. Blackstone is leading the charge raising $24 billion for its flagship vehicle at first closing in a fund that is set to ultimately reach over $30 billion while Brookfield held a $17 billion final close on its latest North American opportunistic fund in November. Infrastructure fundraisings meanwhile have continued to hit new highs with KKR’s latest global fund-raising of $17 billion in March – some $10 billion larger than its predecessor vehicle, as a clear sign of investor appetite around the asset class in the current environment.
The case for global infrastructure investment has also benefitted from support across the political spectrum, with investor efforts boosted in the US by President Biden’s bipartisan $1 trillion infrastructure bill which will provide funds across transportation repairs, digital infrastructure, and climate resilience projects. Being the largest influx of public investment into infrastructure in a decade, it is key to have this level of support from government in further developing the market. The focus on the future is also seen in recent US government policy, with $73 billion dedicated to updating electricity grids to favour renewable energy sources. This includes sizable investments in charging stations for electric vehicles, low-carbon public transport, and the removal of lead pipes from existing infrastructure. Infrastructure spending from government also supports investment by underpinning income payments on major transactions, providing stability in the assets that investors use to grow their commitments.
Real estate and infrastructure can be highly beneficial to investors, potentially generating returns with lower levels of volatility and they have consistently polled as a favoured destination for long-term investment. Furthermore, increased regulation since the Global Financial Crisis has had a positive impact on their reputation and paved the way for increasing numbers of private investors into the market, a figure that continues to grow in the post-pandemic world. Even so, the risks related to investment in the space require proper management, and investors should clearly do their due diligence. Large-scale developments can overrun on planned timelines, regulatory changes can affect income streams, and stakeholders can always be negatively impacted by human error and hubris.
Real estate and infrastructure are literally the building blocks of our society and represent trillion-dollar investment opportunities for private and institutional investors. They are not only enormously deep markets but may see very strong growth in the decades to come in both established and emerging economies, potentially breaking even more records and reaching new heights of AUM and allocation. While of course there are risks associated with such real assets, leading institutional investors such as Sovereign Wealth Funds, University Endowments, and Family Offices have benefited from the long-term demand for new and redeveloped real assets in recent years to achieve attractive returns from their large allocations. Now, finally the market is opening up for private investors to partner alongside leading operators with decades of experience and add these asset classes to their own investment portfolios, accessing the potentially significant pool of opportunities that institutional investors have made such success from.
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