Institutional investors are increasingly turning to real assets to increase investment returns and manage macro-environment risks but would rethink allocations if interest rates rose significantly, finds a BlackRock survey.
The survey finds 46% of respondents had increased allocations to real estate, infrastructure, commodities, timber and farmland in the past three years, while 60% expect to do so in the next 18 months.
“Increasing life expectancies around the world are causing institutions to seek longer-dated assets to match their mounting liabilities,” says Matt Botein, global co-head and chief investment officer with BlackRock Alternative Investors. “The growing number and magnitude of recent real asset allocations clearly represents more than short-term, tactical decisions. We believe real estate, infrastructure and other real assets will become core to investors’ portfolios over the next few years.”
Read: Investment strategies for 2015
Real estate
Survey results show real estate continues to gain traction among investors, but sectorial and geographical distinction—along with a clear definition of objectives—remains crucial to rewarding risk exposure.
Real estate is the most common form of real asset investments—96% of respondents currently invest—with 59% of them opting for a conservative exposure to the asset class through core equity. That said, many investors are also increasing allocations to value-added equity (47%) and opportunistic equity strategies (34%), which are more capital-intensive forms of real estate investing and have higher potential return profiles.
Cautious about interest rates
Low rates have been a tailwind for real asset investments.
Nearly half (47%) of respondents say that low interest rates influence their investments. Almost two-thirds (62%) say they will rethink some of their allocations to real assets if a “significant” rise in interest rates were to occur. This sensitivity to interest rates varied by sector: 59% of respondents believe their real estate to be most sensitive to rising rates, compared with 41% and 33% concerned about infrastructure and commodities exposure, respectively.
Read: The impact of interest rates on equities
Building opportunities in infrastructure
Infrastructure is comparatively less mature than other real assets examined by the survey but a faster-growing category with 66% of respondents owning assets.
A large number of investors are interested in additional equity investments (72%), while the newly emerging institutional infrastructure debt opportunity is already on the radar of many investors (38%). Of those that are expecting to increase allocations, 51% are at least somewhat interested in brownfield (existing) projects compared with 23% that are interested in newer greenfield projects.
Read: The real deal: Infrastructure and real estate investing
Protecting against inflation
Inflation protection is one of the main the reasons investors own real assets. Of the respondents increasing investment in infrastructure, 29% cite inflation protection as their motivation.
Many institutional investors are exceptionally overweight financial assets and underweight real assets. Expected inflation tends to be priced into nominal returns. Unexpected inflation is, however, exactly what one wants to guard against, he says.
“Put another way, the time to buy insurance is not when one’s house is on fire, but rather when fire is broadly thought to be impossible,” Botein adds. “We believe that investors in real assets today are generally able to obtain competitive returns while benefiting from significant inflation protection.”