Real assets open up for new investments
Lize Griffiths, Deloitte Luxembourg’s Real Estate Industry Leader, on the new opportunities in real estate.
Infrastructure as an asset class was one of the “hot topics” of your Real Estate Symposium. Why is this asset class attractive for investors?
Infrastructure has proven to be very resilient and to provide stable, secure returns. Both target and actual IRR are most commonly 10 percent to 12 percent with targeted annual cash yields in the 5 percent to 9 percent range. An investment in infrastructure can contribute to the diversification from equity investments and more core real estate investments.
Investors like sovereign wealth funds, pension funds and insurance companies are therefore keen investors into infrastructure funds. There has been a recent focus to encourage private funding into these infrastructure investments to complement the public investments.
Infrastructure comprises social and economic assets like hospitals, social housing, care homes and water supply, wastewater treatment, ports and airports which have clear social benefits. Development projects often have a positive impact on unemployment as well.
The results from the recent European Infrastructure Investors Survey conducted by Deloitte indicated that renewables are becoming increasingly popular with investors as an asset class. Although there have been some regulatory changes in this sector that impacted returns, investors are keen to see the regulatory environment stabilise.
There has also been a move into the debt market, with a number of infrastructure debt funds being raised focussing on junior/mezzanine lending. As infrastructure debt funds are considered more akin to passive investing, the asset management activities required are less, which leads to lower asset management fees—which in turn makes it more attractive for investors as it optimizes return on investment.
What could be the impact of the Brexit on the real estate market – both in UK and in Luxembourg?
The fact that the UK’s vote to leave the European Union came as a surprise in June 2016 caused some disruption in certain aspects of the real estate industry.
However, many foreign investors are trying to benefit from the drop of the British Pound and are increasing their investments into the UK. This resulted in increased investment activity in the UK real estate market.
This has also resulted in real estate asset managers making strategic decisions on how to expand their operations within the European Union to ensure access to various markets. Various real estate asset managers have announced recently to expand their operations to Luxembourg, recognizing the benefits as an established fund jurisdiction with more than €3,7 trillion assets under management as of 31 December 2016.
The next couple of months will be important as the practical implications of Brexit become clearer.
Asset Managers continue to face increased regulatory requirements. How do real estate asset managers deal with these regulatory requirements whilst focussing on optimizing returns for investors?
As real estate investments are attracting increased investors, it also increases the need from investors for more transparency and extensive reporting. In addition, with the recent increased regulatory requirements, asset managers are faced with the challenges to provide more information with more efficiency to investors.
This resulted in asset managers analyzing their operating models to drive out greater efficiency. Digitalization and optimizing the IT operating systems is currently high on the agenda of real estate asset managers. Asset managers are also reviewing their strategy of outsourcing non-core activities.
There is a clear trend that digitalization will become an important evolution for real estate asset managers in the future.
Editorial note: The interview was originally published by Paperjam in French on 28 March 2017: “3 Questions à Lize Griffiths”