EDITOR'S LETTER: The realest of the real

It is hard to argue against institutional investors’ appetite for infrastructure assets.

Benchmark provider EDHECinfra has measured total returns from private equity investment in infrastructure of between 10 and 12 percent over the last decade, comfortably ahead of a typical investor’s overall return requirement of circa 7 percent.

Such performance is also often higher and, crucially for liability-matching capital, more consistent than the total returns available from private equity investment in real estate. Ten years of returns from the INREV Global Index features notable volatility. There have been some years of relative outperformance, 13.6 percent in 2014, for instance. But there have also been years of relative underperformance, 4.5 percent in 2013 and 4.8 percent in 2011, to mention two.

However, while it makes plenty of sense for infrastructure to feature more prominently on an institution’s real assets bucket list, the reality in that market is a distinct lack of assets to buy. They also do not trade as often. A 97-respondent survey of sovereign wealth funds by Atlanta-based asset manager Invesco last month revealed a 2 percent gap between the returns they are collecting right now and stated targets. Though it should be a big part in bridging that gap, infrastructure investment is being less often seen as the solution.

Invesco’s sovereigns have found their deployment rate in the asset class edge out from three-and-a-half to four years in the last 12 months, making it increasingly hard to fulfil allocation. Herein lies real estate’s trump card: the same report revealed that deployment in property has, year-to-year, remained at just two years.

The relative scale and liquidity of these markets is stark – $1.7 trillion of infrastructure traded in the decade to 2016, according to PwC. Cushman & Wakefield, meanwhile, reckons $1.4 trillion of real estate will transact this year alone. At a time when low interest rates and institutionalizing hard assets are provoking investors to include a far greater real assets component in their holdings than before, real estate remains the realest of these assets. Even if the performance of bridges, toll roads and power stations is better suited than their bricks-and-mortar bigger brothers, their allure is moot if they are so hard to buy.