Globally, more than 70 per cent of public institutional investors have increased their allocations to real assets over the past three years, according to a new survey by the Official Monetary and Financial Institutions Forum and the Bank of New York Mellon Corp.
The survey, which interviewed public pension and sovereign funds with almost $4.6 trillion in assets under management, found respondents have seen major gains in the valuations of their real estate and infrastructure assets since 2009, rising 120 and 165 per cent, respectively. And some 70 per cent said they’re looking to increase their allocations to infrastructure in the next year or two, while only 32 per cent said the same of real estate.
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While there’s demand for transportation and energy infrastructure, transport is dominating the infrastructure gap in every global region, according to the report, which noted that attracting capital to regions of uncertainty will prove difficult. For example, Africa and Latin America, are facing issues around political stability and the quality of institutions, while reforms in Asia-Pacific region and the Middle East appear to be moving in the right direction to improve investor confidence.
Within real estate, direct investment is on the rise, especially in prime properties in less traditional locations or sectors, according to the survey. In particular, institutional investors from Australia, Canada, Europe and the United States are taking advantage of high valuations to sell current investments and are allocating the proceeds to projects with more potential for growth.
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“A different skill set is needed when pursuing value-add strategies, as these investments are often in locations where funds have less experience,” the report noted. Even so, the potential challenges wouldn’t appear to be enough to deter even small- and medium-sized funds, as they also indicated they’re pursuing more value-add strategies in real estate.
The report also suggested that demographic shifts in emerging markets are creating the potential for further opportunities. The growing middle classes in the Asia-Pacific region and the Middle East are fuelling real estate demand, and the expansion of the labour force in Africa and Latin America is boosting the need for both commercial and residential property, it noted.
Institutional investors are also increasingly considering environmental, social and governance issues with regards to real assets, according to the survey, which found 86 per cent of respondents require the external managers they work with to consider them. Among those that invest in sustainable assets, green bonds are the most popular, with 62 per cent invested in them compared to 46 per cent that opt for green equities.
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Although there are many signs that monetary policy is likely to normalize in many regions and thus boost yields on more traditional conservative asset classes, 82 per cent of institutional investors said they don’t plan to exit their current real asset holdings.
“Our survey suggests that sovereign funds and public pension funds remain committed to real assets for the foreseeable future, with some respondents indicating a market downturn would create an opportunity to increase their holdings,” said Hani Kablawi, chief executive officer of global asset servicing and chair for Europe, the Middle East and Africa at BNY Mellon, in a news release.