Foresight Capital Management
10 minutes
16/01/2025
The Value of Real Assets: Unlocking Potential and Diversification
Real assets are tangible assets that have inherent value due to their physical properties. These assets can offer diversification and stability, but also carry potential for substantial income and capital appreciation.
Examples of Real Assets include:
Real Estate
Residential properties such as single and multi-family homes, or commercial properties such as offices, warehouses and shopping centres
Infrastructure
Roads, bridges, airports, railways, and renewable energy projects like solar and wind farms
Natural Resources
Farmland and timberland are assets characterised by the ownership of undeveloped land and the harvesting of agricultural commodities
Commodities
Examples include oil and gas, precious metals, industrial metals, grains and livestock.
Real Estate: Looking at Stability and Growth
Real estate investments cover properties designed for residential and commercial use. The benefits can include:
-
Portfolio diversification
-
Stable and predictable income
-
Capital appreciation
-
Tax benefits
Investing in real estate:
Investors can access real estate through Real Estate Investment Trusts (“REITs”), which hold a portfolio of diversified properties in a single sector or geography. These trusts offer liquidity, transparency, and professional management while potentially providing consistent income streams.
Examples of real estate sectors include:
-
Industrial Properties: Properties like warehouses are essential for wholesale and retail distribution to enable global supply chains via the shipping and storage of products.
-
Retail Properties: Retail properties vary widely from shopping centres to supermarkets, with demand tied to consumer spending habits.
-
Data Centres: Data centres house large computing systems that process and store vast quantities of data.
-
Healthcare Properties: Demand for healthcare space is supported by growing and aging populations. Properties include hospitals, medical office buildings and senior housing.
-
Office Properties: Offices range from large multi-tenant buildings found in central business districts like Canary Wharf in London, to single tenant buildings. Demand for buildings is adapting to work-from-home trends.
Key trends shaping the real estate investment sector:
1. Decarbonising Buildings
The built environment accounts for almost 40% of global carbon emissions1, prompting counties and corporates to shift focus towards the decarbonisation of buildings. The industry foresees annual increases in insurance premiums of 8-9% in the US as extreme weather events drive pricing growth2, while tenants are willing to pay 7-12% rental premiums for more energy efficient buildings3. Meanwhile regulations are pushing for energy-efficient buildings with minimum EPC C by 20287 and EPC B from 2030 in the UK4.
2. Data Demand
Rising demand from 5G, cloud computing and AI all require denser networks of communications and data infrastructure. The global demand for data centre space is surging, with leasing activity at all-time highs.
3. Aging Populations
Healthcare provisions globally will need to adapt to demographic change as populations age. This will require more investment in life science research to improve drug efficacy, increased healthcare capacity to support older populations and better senior housing solutions as utilisation increases.
Infrastructure: Investing in Future Stability
Infrastructure trusts invest in multiple projects, offering:
-
Stable cash flows underwritten by strong counterparties, such as governments or investment grade counterparties.
-
Contracted cashflows often benefitting from inflation-protection. Critical assets are essential to public services.
Investing in infrastructure:
Investors can access infrastructure investments through Infrastructure Investment Trusts (“Infrastructure ITs”) in the UK, and via operating companies globally. Like REITs, these portfolios offer better liquidity and transparency than their private counterparts, while potentially providing consistent income streams.
Examples of infrastructure sectors include:
-
Renewable energy: Projects include solar farms, onshore and offshore wind farms and hydroelectric power plants. Long-term contracts with governments, utilities and corporates are agreed to provide green electricity.
-
Core infrastructure: Essential infrastructure such a bridges, tunnels and traditional infrastructure that support day-to-day economic activity.
-
Digital Infrastructure: 5G, WFH, cloud computing and AI all require denser networks of cell towers, fibre networks and data centres.
Key trends shaping the infrastructure investment sector:
1. Clean Energy
Clean energy investments are booming, with over 40% of global power in 2023 generated from zero-carbon sources.5 The need to decarbonise, electrify processes and improve the security of energy sources all require greater generation from renewables and improved electricity transmission and distribution systems. Significant advancements in technology and policy support have driven investment, with global investment in the energy transition surging 17% to $1.8tn in 2023.6
2. Digital Infrastructure
The growth in the absolute amount of data, and the speed at which we require it to be processed and transported, requires physical backing. This is forecast by many to continue growing, with AI just the latest accelerator to a long running trend. According to estimates from S&P Global Market Intelligence, five of the largest US tech firms are projected to account for more than $1 trillion in capex from 2024 to 2027, spending primarily on AI. The volume of data/information created, captured, copied, and consumed worldwide is forecast to grow at a compound annual growth rate of 25% between 2023 and 2028*
*Source - AvidThink and DigitalBridge.
Listed vs. Private Real Assets
Listed real assets combine real and financial assets, allowing investors to gain exposure to physical assets by purchasing securities like stocks. This approach offers liquidity, diversification, and accessibility to professional and non-professional investors.
On the other hand, private real assets require direct ownership and large upfront investments. They are typically less liquid and are only accessible to professional investors.
Why Invest in Listed Real Assets?
-
Liquidity: Buy and sell shares on major exchanges.
-
Transparency: Clear pricing and transaction history.
-
Diversification: Access to a diversified portfolio of underlying assets.
-
High-quality portfolios and professional management.
-
Stable income and tax efficiency.
-
Lower capital outlay: Initial investment is smaller than that required by private real assets.
Listed real assets provide a hedge against inflation, stable income via regular dividends, and growth potential while offering diversification benefits to a traditional stock and bond portfolio.
However, a range of risks also apply to investing directly in real assets:
-
Liquidity Risk: Real asset transactions can be lengthy, hindering quick buying or selling.
-
Valuation Complexity: Unlike stocks, real asset pricing isn't easily visible.
-
Management and Operational Risk: Physical assets need ongoing, costly repairs and maintenance.
-
Regulatory Risk: Real assets must comply with regulations, including permits and environmental laws.
-
Interest Rate Risk: Higher interest rates raise borrowing costs and lower asset values.
