Institutional investors warming to real assets
Institutional investors are seeking longer-term real assets with higher returns to address longer life expectancies, according to a BlackRock survey report.
The survey, conducted September 2014, involved polling 201 executives from institutional investment organisations in 30 countries.
According to the results, 46% of respondents had increased allocations to real estate, infrastructure, commodities, timber and farmland in the past three years, while 60% expect to do so in the next 18 months.
"Increasing life expectancies around the world are causing institutions to seek longer-dated assets to match their mounting liabilities," said Matt Botein, global co-head and CIO, BlackRock Alternative Investors.
"We believe real assets can provide this match, while also delivering attractive yields in the current environment."
Real estate and infrastructure appeal
The vast majority of respondents (96%) currently invest in real estate, with 59% of them opting for a conservative exposure to the asset class through core equity.
That said, 47% of investors are increasing allocations to value-added equity and 34% to opportunistic equity strategies, which are more capital intensive forms of real estate investing and have higher potential return profiles, according to the report.
The less mature asset class of infrastructure is owned by 66% of respondents.
Of those that are expecting to increase infrastructure allocations, 51% are somewhat interested in brownfield (existing) projects compared to 23% with interest in newer "greenfield" projects.
"The scale of the infrastructure need globally presents great opportunities, in our opinion, for investors who are looking for long-term income streams," said Jim Barry, global head of BlackRock's infrastructure investment group.
Interest rate influence
The survey also revealed that low interest rates influence investment decisions, according to 47% of respondents. If a significant hike in interest rates occurs, 62% said they would rethink some of their allocations to real assets.
More than half (59%) of respondents believed real estate to be most sensitive to rising rates, compared with 41% and 33% concerned about infrastructure and commodities exposure, respectively.
"Investors are becoming increasingly concerned about the impact of central bank policies and the subsequent impact on interest rates on property markets," said Marcus Sperber, global head of BlackRock real estate group.
BlackRock's position is that nominal risk-free rates should stay low for some time, and a hike in interest rates will likely be in line with strong economic growth and increasing employment. Property investments would therefore offer some protection against inflation.
"Expected inflation tends to be priced into nominal returns," said Botein. "Unexpected inflation is, however, exactly what one wants to guard against. Put another way, the time to buy insurance is not when one's house is on fire, but rather when fire is broadly thought to be impossible."
Despite the trend toward real asset investments, "Many institutional investors are exceptionally overweight financial assets and underweight real assets," said Botein.
"We believe real estate, infrastructure and other real assets will become core to investors' portfolios over the next few years."