The Case for Listed Real Assets

Listed real assets exposure provides an important complement to private markets, say CBRE Investment Management’s listed infrastructure portfolio manager Jeremy Anagnos and CIO, listed strategies Joseph Smith

Q: To what extent are you seeing investors with separate allocations for listed and private real assets today, and why is it important to have exposure to both?

Jeremy Anagnos: In many ways, listed and unlisted real assets offer similar attributes. They are relatively uncorrelated to the broader equity markets. Cashflows are underpinned by either long-term contracts or regulation and, of course, we are in an environment where income-driven returns remain highly attractive. There is little volatility in the underlying earnings profiles of the assets, which drives consistency of returns, and then there is rising demand for the services provided by those assets.

However, the listed market offers additional advantages in terms of both liquidity and the ability to put capital to work quickly. It can be difficult for investors to reach their target allocations on the private side. The listed markets also offer immediate diversification. We can access thousands of real estate and infrastructure investments, across multiple sectors, on a global basis, in a one-time investment. In addition, we are at a point in the cycle where valuations are attractive relative to similar assets that are privately owned, so investors can look to arbitrage or even complement their private allocation, when pricing differentials favor the public markets.

Joseph Smith: Another benefit of listed real assets is that there are companies, property types, sectors and regions that we can invest in through the public markets that the private markets would struggle to access. We are at an inflection point right now, where approximately 65 percent of the investable market on the listed side involves what might be considered alternative, ‘growth-oriented’ asset classes. In the private markets, that might be just plus or minus 15 percent. Towers, data centers, manufactured housing, single-family rental, storage – public markets tend to be highly inclusive about what constitutes institutional-quality, core real estate. This is one reason why a public allocation can match nicely with a private allocation. It is complementary because you are accessing two different types of investment universes.

Q: Does listed real assets primarily mean listed real estate?

JS: I think the lines are blurring in terms of how we define infrastructure and real estate. Take an airport, for example. We consider that to be infrastructure, but you could reasonably argue that it is real estate. Meanwhile, currently we consider hospitals and senior housing to be real estate, but we have peers that are buying healthcare assets and categorizing them as human infrastructure. Increasingly, the two asset classes are becoming one asset class.

Q: How does the listed real assets opportunity set vary by geography?

JS: Those sectors that our private colleagues would call alternative, but we increasingly view as core, have become prevalent and well defined in the US market. Outside of the US, however, adoption has been slower. There are data center and tower companies in other geographies, but the market cap and therefore the exposure tend to be quite small. In part, that is because many of these companies are global businesses, headquartered and listed in the US.

In fact, securitized real estate has been widely adopted in the US and also Australia as a form of institutional investment. But, if you use GDP as a measure of how much listed exposure a market should have, Europe is underrepresented in the public markets. There is huge potential for the listed opportunity to grow in Europe because you are starting from such a low base.

Q: What role does quantitative research play in your success?

JS: The proof is in the performance. We have been using forms of quantitative modeling for 15 years, grading companies on a relative basis. In Q4 2016, we created a dedicated quantitative research team to work side by side with our fundamental investment team.

We recognized that simply having proprietary data is no longer enough. We need to apply that data in a sophisticated fashion to optimize portfolio construction. Marrying data analytics with our fundamental capabilities has transformed our performance. In the public markets, we see it as a key differentiator to beat benchmarks and offer our clients top-quartile performance.

Q: ESG has clearly been a key component of public markets governance frameworks for some time, in contrast to private markets. But how is a dramatic increase in the focus on sustainability impacting what you do?

JA: The physical structures of real estate and infrastructure have a tremendous impact from a carbon perspective. If you include production of energy from infrastructure assets, it actually equates to more than 60 percent of total carbon emissions. Clearly, therefore, real assets have a significant role to play in reaching those climate goals that have been set globally.

Meanwhile, listed companies have been talking very publicly about the Paris Agreement and their own carbon emissions objectives. They are using science-based targets and are increasingly able to monitor and then communicate that data, as well as develop solutions to improve their environmental performance.

We see encouraging best practice as an incredibly important part of our role as a manager of real assets. We also believe it helps to reduce the risk profile of those assets in the long term, while also, in many cases, increasing the return potential. Tenants are demanding high standards of their properties. Regulators are demanding high standards of infrastructure. ESG offers long-term financial benefit and risk reduction, and obviously it is good for the future of the planet as well.

Q What keeps you awake at night as a listed real assets investor?

JA: I can tell you what doesn’t keep me awake. We are clearly seeing some signs of inflation, and it is likely that central banks around the world are going to have to start increasing rates. But that isn’t a scary environment for us. When inflation starts to pick up is when real assets really start to shine.

I do think we have to be mindful about build costs getting too high for consumers. Utility bills pay for converting electricity systems to renewables and for upgrading roads and airports, and at some point we may start to experience pushback, which will reduce the potential for new investment. It is something we continually monitor on a regional basis. But that doesn’t appear to be on the cards right now because the need for this investment is so great.

JS: I completely agree. There is a huge amount of asset modernization and digital transformation investment required for our 21st-century digital economy. That should support the performance of public real estate and infrastructure, which remain significantly underrepresented in most allocation models, providing substantial opportunity for growth.