Alternative property and other real assets are surging in popularity after the COVID-19 pandemic created new headwinds and tailwinds across different asset classes, bolstering the returns on some while also reducing the risks.
The risk-return profile of traditional property types, including offices, apartments and retail, is linked to economic growth, but alternatives, like last-mile logistics facilities, data centres and multi-family rental properties are bucking that trend. That has propelled real assets into the mainstream, as increasing funds flow into infrastructure and large-scale developments. The momentum will build further as governments around the world step up their spending in a bid to kick start their economies. With an estimated USD15 trillion of projects needed around the world, Asia is set to become a hub for these financing structures.
“In a low interest rate environment, real assets have been providing institutional investors with new ways to earn returns and also to preserve their capital,” says Swati Roy, Managing Director, Financing Solutions at Standard Chartered. “Since they generate predictable cash flows and offer a way to protect against inflation, these assets are increasing in stature and value during the pandemic. Now investors are looking for broader diversification across different real asset sectors which will deliver attractive risk-adjusted returns in the future.
Becoming an asset class
As COVID-19 accelerated the shift to digital living and working, it also brought logistics and data centres to the fore. Multi-family rental properties and other property assets also grew in popularity.
While already a trend underway, data-centre construction exploded as more and more digital services moved to the cloud. Broadband network use increased to facilitate the move from office to home working, and e-commerce and streaming media services boomed.
Against this background, VIRTUS Data Centres, part of ST Telemedia Global Data Centres, has expanded its UK data centre facilities,1 and its parent group now has more than 120 data centres with over 1.4GW of IT load across five geographies. Demand for such services is set to expand, with professional-services firm JLL forecasting that data-centre construction deals in 20212 will exceed last year’s record of 80 megawatts of capacity.
Another trend accelerated by COVID-19 is the move to logistics. Shopping habits were shifting to online well before the pandemic set in, adding to the need for storage space and logistics. With this in mind, investment firm Blackstone began acquiring assets in North America, Europe and Asia in 2010 and now has nearly 1 billion square feet of logistics space3 around the world.
Financing real asset deals
Recognising the trends that are set to continue, banks as well as public and private equity markets are stepping up their support, enabled by low borrowing costs. Institutions, with investment coffers swollen by surging asset valuations and record government stimulus, are allocating capital into the space, while asset managers have been putting together real-asset debt funds.
The transformation of the sector has not only lifted the quality of lenders and borrowers making deals, but also the sophistication of the financing structures.
At Standard Chartered, we’ve seen the adoption of new capital structures and terms, including unitranche debt – hybrid loan structures that combine senior and subordinated debt into one instrument – and term-A loans – senior-term loans that usually mature within five to six years.
The range of funding options is set to keep growing, with innovative and different capital and security structures appealing to investors across the board. Asia, particularly China, is going to play a significant role in the developing sector.
Transitioning to a green future
No discussion of infrastructure financing would be complete without considering environmental, social, and governance (ESG) factors and safeguards, and in this regard the real asset sector has work to do.
The real estate sector has a high carbon footprint, contributing around 30 per cent of global annual greenhouse gas emissions, according to the UN Environmental Programme.4 Data centres amount to around 1 per cent of global electricity demand,5 and their rapid growth means the proportion could grow to between 15 and 30 per cent in some countries by 2030, according to Imperial College London.
While these figures are undoubtedly high, the companies involved are taking action and data centres already aggregate computing power, making them more efficient than a disbursed network. Singapore-based ST Telemedia Global Data Centres says its data centres will be carbon neutral6 by 2030.
Banks are also helping to facilitate change, by funding green-led initiatives and by combining real asset and power projects together, offering investors the chance to capitalise on the trend toward real assets and green finance at the same time.
Global investors managing almost USD7 trillion are planning to double their spending on renewable energy infrastructure7 over the next five years, as they seek to capitalise on the opportunities that are emerging.
Harnessing capital for good
And ESG goes beyond power, to areas where real asset financing can make a difference.
By funding affordable housing, Blackstone is helping to address a significant undersupply of homes8 across the globe. New housing construction has declined in the US and Spain, and in England the supply of housing is around 50 per cent lower than it needs to be. The company’s investment in the sector adds thousands of multi-family, affordable and rental homes, helping to address a critical social need while also delivering strong returns.
“ESG and sustainability is critical from a social perspective – it is the right thing to do – but it also makes investment sense,” says Roy. “Institutional investors can play a critical role in this, given their large pools of long-term capital, and we know that private investment is vital to bridge the infrastructure investment gap.”
This article is based on themes discussed during a panel at Standard Chartered’s recent Global Credit Conference: Opportunities from Disruption. View the recording.