Investor appetite for real assets has skyrocketed over the past decade, with private fundraising almost tripling from $126 billion in 2011 to $312 billion last year, according to data from PERE and Infrastructure Investor.

Central bank quantitative easing in the wake of the global financial crisis, which drove institutions out of bonds and into alternative assets, has been one of the primary contributors to this astonishing growth story. The appeal of real assets, in particular, was a fixed-income substitute providing both steady cashflows and the yield that investors were craving.

Allocations quickly climbed from the mid-single to double digits, even hovering around 20 percent in some cases. “We have seen appetite for real assets increase dramatically over the past decade as investors have searched for fixed income substitutes in an environment of anemic rates,” says Brad Hyler, head of European real estate for asset manager Brookfield.

And that demand continues to grow. Indeed, as we transition into a new era, likely to be dominated by rising interest rates and inflation, the appeal of real assets – with their resilience, long-term stable returns, inflation protection and lack of correlation to other asset classes – is only set to increase.

“Historically, real assets have performed strongly in an inflationary environment,” says Jeremy Anagnos, CIO of listed infrastructure strategies at CBRE Investment Management. “The prospect of higher inflation is certainly causing some consternation in the broader markets, but we feel confident that real assets will continue to do well.”

Meanwhile, the world of real assets is not only growing, it is changing. Once dominated by real estate, infrastructure now plays a prominent role, and investors are broadening their exposure to include credit products and listed market allocations.

Real assets’ meteoric growth is also taking place against a backdrop of unprecedented societal change. The pandemic not only brought the longest bull run in history to a screeching halt – albeit briefly – it also accelerated mega-trends from digitalization to decarbonization.

Meanwhile, an aging population has combined with two years of rolling lockdowns to fundamentally alter attitudes toward where we live, work and play – with dramatic consequences for both the real estate and infrastructure supporting those communities. Real assets managers are therefore having to reimagine risk assumptions and place fresh bets on the sectors and locations that are going to perform going forward.

Real estate firms are also overhauling their asset management philosophy. A passive approach will not deliver requisite returns in a highly competitive and climbing interest rate environment. Nor will it facilitate the digital and ESG transformations that will preserve value and guard against obsolescence.

As yields have compressed, the value of asset management has reduced somewhat, says Adrian Baker, CIO of APAC direct real estate strategies at CBRE Investment Management.

But with yields now bottoming out, the spotlight will soon return to income-driven performance. “Asset management is going to be more important than ever,” Baker claims.

Adapt or die

Furthermore, firms that fail to adapt may struggle to survive. Institutional investors are rationalizing their manager relationships and will coalesce around the best performers, balancing those managers that offer the full spectrum of real assets exposures with niche specialists in key areas. Increasingly, the also-rans will be subsumed or else fade away.

“The market is going to be harsh in terms of who it deems to be performing,” says Chuck Leitner, chief executive officer of CBRE Investment Management. “Large-scale platforms that can offer solutions across the real assets spectrum and also bring alpha to the equation will do well, while niche players will also be rewarded. But a lot of managers in the middle may struggle. That is where we will see consolidation.”

Stefan Wundrak, head of European research at manager Nuveen Real Estate, agrees: “The future belongs to super competent big investment machines, which can navigate tightly regulated financial markets and complex real assets solutions. There is also space for nimble specialists. The in-betweeners will find it hard to compete.”

Against this tumultuous backdrop, we address five fundamental trends that both fund managers and investors must keep front of mind if they are to stay on the right side of change and benefit from the incredible growth trajectory the industry is experiencing. Here are the big ideas shaping the future of real assets.