Brookfield’s Flatt: real assets may reach 40% in 10 years

With three of its core business lines in real assets, Bruce Flatt, chief executive officer of Brookfield Asset Management, anticipates that the investment category will attract an increasing amount of capital from institutions in the next 10 years.

“With interest rates at historic lows, we believe real assets will continue to be a compelling alternative for institutional clients looking for superior overall returns,” Flatt wrote in his quarterly letter to shareholders, which was released today. Currently, institutional investors allocate an average of 5 percent to 10 percent of their funds to real assets, but “we expect that, over the next 10 years, most institutions will increase their allocations to 25 percent to 40 percent, which means many trillions of dollars of capital allocated to real assets in the coming years.”

Increasing institutional interest in real assets – which include real estate, power, infrastructure, timber and natural resources – is the result of two factors, Flatt said during an earnings call today. One is the emergence and development of investment vehicles focusing on real assets over the past decade, and the other is that low interest rates and the volatility of public equities have led investors to look elsewhere to meet their return thresholds.

“We believe and we continue to see, based on evidence of people giving us money and their conduct and interest in our products, that those allocations will continue to increase,” Flatt said. The move toward real assets will likely be “as dramatic a shift as when funds switched from bonds to equities,” he claimed. “It’s a very significant movement over the next 5 to 10 years.”

Flatt acknowledged that the institutional shift to real assets may not be as dramatic if long-term interest rates were to rise significantly. Despite that, he said he expects institutions would want to continue to diversify their allocations, noting that some global investors’ allocations to real asset already are at 30 percent to 50 percent of their portfolios.

In his shareholders’ letter, Flatt wrote that “major capital shifts can often crowd out good returns.” While real assets also could be subject to such a risk, he said investment opportunities in real assets were likely to grow significantly as governments undergo major deleveraging.

As Brookfield’s performance, the firm had $158.3 billion in total assets under management as of 30 June, of which $87.6 billion was in property; $17.9 billion in renewable power; $20.4 billion in infrastructure; $25.9 billion in private equity; and $6.5 billion in asset management services and corporate. During the earnings call, Brian Lawson, Brookfield's chief financial officer, said he anticipated that the firm would launch its publicly-traded company for real estate, Brookfield Property Partners, during the fourth quarter. Brookfield previously has launched similar spinoffs for infrastructure and renewable power in 2008 and 2011, respectively.

During the second quarter, Brookfield’s property business reported funds from operations (FFO) of $172 million, up from $119 million during the second quarter of 2011. The asset manager’s overall FFO was $244 million, down from $309 million during the same period one year ago.

Brookfield’s net income attributable to shareholders plummeted from $840 million at end of June 2011 to $272 million as of 30 June. The decline was largely the result of a change in valuation gains, with Brookfield reporting a total of $110 million in valuation gains during the second quarter, all of which came from improved commercial property values. By contrast, valuation gains of $665 million during the second quarter of 2011 reflected gains in commercial properties, renewable power assets and infrastructure.