AMP Capital, a long-term investor in real assets, expects further demand for prime real estate and infrastructure assets in 2015 as institutional investors such as global pension funds, insurers and sovereign wealth funds continue to search for more consistent income and capital preservation.
AMP Capital expects the real assets sector – incorporating listed and direct real estate and infrastructure – will be shaped during the next 12 months by:
- The end of quantitative easing in the US and that economy’s focus on growth
- The sheer weight of available capital continuing to drive markets
- Strong demand and competition for core assets
- Large mandates targeting large, lower-risk, higher-yield investments
- Major infrastructure investment in Australia and the state governments’ asset sales programs
- Continued investment in the US energy sector and its changing energy mix
Key trends for 2015: listed real estate
AMP Capital Deputy Head of Global Listed Real Estate James Maydew said: “Sovereign wealth funds and pension/superannuation funds will continue to lead the charge for both listed and direct real estate in 2015. Most major pension funds around the world have recently lifted their allocation to real estate, some as high as 15 per cent, using a mix of direct and listed. We expect to see continued deep pools of capital from all over the globe, especially China and Japan. The world’s largest pension fund, Japan’s Government Pension Investment Fund, is increasing its foreign equity allocation from 12 to 25 per cent and many Chinese investors are also increasingly mandated to invest offshore.
“For 2015, investors should look at the global gateway cities that are attracting both capital and growth such as London, San Francisco and New York. In an improving economic environment, investors should also be looking for economically-sensitive exposure with high growth such as the lodging and hotels sectors. Japanese developers are also an interesting proposition as they continue to recycle capital through their business amongst the back drop of rising asset values, rental growth and occupancy and falling capitalisation rates.”
Key trends for 2015: direct real estate
AMP Capital Head of Real Estate Capital Tim Nation said: “The fundamentals for office and retail markets in Australia are looking more positive than 12 months ago with the Sydney and Melbourne office markets having seemingly bottomed and green shoots now evident, and retail sales improving nationally. While yields are not expected to revert to pre-Global Financial Crisis levels, we believe there will be further yield compression in 2015. The majority of total returns can be delivered via income and so while cap rates are fluid, a long lease to a strong covenant with fixed annual rental increases remains an attractive cornerstone in a diversified portfolio.
“We believe there is still relative value in the industrial sector where risk can still be priced, particularly for assets poised to benefit most from the huge infrastructure investment program currently underway on Australia’s east coast. For both offices and shopping centres, creating ‘places’ that people want to visit will be increasingly important for the real estate market in 2015 and beyond. Office buildings must provide a flexible working environment and a wide range of amenities and shopping centres must create experiences that cannot be commoditised or replicated on the internet.”
Key trends for 2015: listed infrastructure
AMP Capital Head of Global Listed Infrastructure Tim Humphreys said: “US growth and its impact on interest rates will have the biggest effect in 2015. Rising interest rates should be an indicator of economic activity picking up, which in turn increases the demand for infrastructure. The US has experienced a rapid increase in natural gas and oil production from shale deposits and is the now the largest producer of petroleum and natural gas in the world. We expect these trends will require vast amounts to be spent on infrastructure, approximately $35 billion during the next 12 months alone.
“US energy infrastructure, specifically pipelines and other assets that have long-term secure contracts, offer a safe way to play the increased production of oil and gas in the US and Canada and offer the upside without the sensitivity of a direct exposure to the oil or gas price. Quality and diversification remain key fundamentals for 2015. High-quality companies have better managements and better assets and as a result they outperform over the longer term. Investors should focus on diversifying across regions and stocks. By looking globally, you have a much bigger pond to fish in.”
Key trends for 2015: direct infrastructure
AMP Capital Global Head of Infrastructure Equity Boe Pahari said: “Around the world, we continue to see direct infrastructure investment focused on utilities and other cash-yielding assets in 2015. In Australia, ports will also be strong while in the US, the power and midstream energy infrastructure sectors are likely to attract a lot of interest driven by excess gas supply and improving economic conditions. In Europe, airports and telecommunications infrastructure are expected to be hotspots of activity and we expect to see both increasing deal flow and greater investor confidence in countries such as Spain, Portugal, Italy and Greece.
“We’re expecting deal flow to be particularly strong in Australia, driven by the asset sale programs flagged by the New South Wales and Queensland state governments, and the US, particularly in the energy and utilities sector as well as in secondary markets. Europe, however, will likely have significant capital flows chasing relatively limited deal flow particularly for large-scale ‘trophy’ assets. We believe mid-market assets, which represent the biggest market, to offer the greatest opportunity for bilateral or negotiated sales processes and best relative value for investors.”