Digital infrastructure and long income offer investors the best growth opportunities, says Aviva
New-build digital infrastructure is expected to deliver the highest returns, whilst the UK looks set to outperform Europe across several real asset sectors and strategies in the medium term, according to the second annual Real Assets House View from Aviva Investors, the global asset management business of Aviva.
The Real Assets House View, which brings together the views and analysis of investment teams in real estate, infrastructure and private debt, provides a foundation from which Aviva Investors can make relative-value decisions regarding multi-asset allocations.
Aviva Investors expects new-build digital infrastructure such as rural fibre broadband to deliver the highest total return over five years for institutional investors. This view reflects the findings of Aviva Investors’ 2020 Real Assets Study, where pension fund and insurance companies surveyed said that capital growth is increasingly viewed as an “integral” or “important” part of their real asset investments.
Mark Versey, Chief Executive Officer at Aviva Investors, says: “Whilst resilience and cashflow-matching remain strongly favoured characteristics of real assets, investors are increasingly aware of the return diversification benefits on offer, and that is reflected in how investment strategies are evolving. Digital infrastructure is a good example of this trend in action, which also carries a significant societal benefit, for example better connecting communities and helping to support businesses in rural locations.”
Aviva Investors also expects UK levered long-lease real estate to deliver high relative-value, with the sector’s cashflow stability and the availability of competitively priced, long-dated debt allowing high-quality assets to be levered without unduly increasing risk. The result has seen long-income strategies benefit from relatively secure income and returns over the last twelve months. Looking at real estate sectors, Aviva Investors identified logistics as being the most attractive on a risk-adjusted basis, driven by both cyclical and structural factors.
Chris Urwin, Director of Research, Real Assets, at Aviva Investors, says: “Long-lease real estate assets let to highly creditworthy counterparties have proven their resilience over the last twelve months. Looking ahead, low capital expenditure and inflation-linked rental growth, makes the sector look attractive. With more investors recognising the attractiveness of long income, we are seeing greater competition for smaller assets. As a result, larger assets could offer relative value in many sectors; for these reasons, we expect long-lease assets to play an important role in real estate portfolios. The pandemic has also focused minds on establishing resilient supply chains and the value of holding inventory. We expect that to last and are very supportive of the logistics sector in the medium to long-term.”
With decarbonisation of buildings an essential component of achieving net zero emissions, one challenge for the real estate industry is that the benefits of these initiatives materialise over longer time periods than typical lease lengths, making it unclear whether landlords will be compensated for such investments. Aviva Investors believes long-income investors are well-placed to tackle this misalignment: due to tenants’ long-term occupation of buildings, they often have more interest in an asset’s sustainability criteria as it reduces their energy costs over time.
Aviva Investors also expects low-carbon assets to continue to deliver value for infrastructure investors, which has been a resilient sector through the pandemic and offers an expanding range of opportunities. It expects better value to be found in more complex areas, with investors holding expert knowledge in these sectors and technologies likely to gain most advantage.
Versey adds: “When we published our first Real Assets House View a year ago, the economic outlook was vastly different to today. As we contend with the changes in economic outlook, our expectation is that ESG factors will increasingly be a key underpinning of long-term performance. With businesses, industries and nations committing to net zero emissions by 2050 or earlier, investing in decarbonisation of the built environment is essential, with real estate markets not yet sufficiently pricing in differentials in buildings’ sustainability credentials. As appetite for real assets grows, we are seeing more clients wishing access to more complex or niche sectors, increasing the importance of specialist knowledge, sophisticated portfolio construction and research-based investment approaches.”