New-build digital infrastructure is expected to deliver the highest returns, whilst the UK looks set to outperform Europe across several real asset sectors and strategies in the medium term, according to the second annual Real Assets House View from Aviva Investors.
The Real Assets House View, which is produced by the global asset management business of Aviva, founds new-build digital infrastructure such as rural fibre broadband will deliver the highest total return over five years for institutional investors.
Mark Versey, chief executive at Aviva Investors, said: “Whilst resilience and cashflow-matching remain strongly favoured characteristics of real assets, investors are increasingly aware of the return diversification benefits on offer, and that is reflected in how investment strategies are evolving. Digital infrastructure is a good example of this trend in action, which also carries a significant societal benefit, for example better connecting communities and helping to support businesses in rural locations.”
The report also found UK levered long-lease real estate will deliver high relative-value, with the sector’s cashflow stability and the availability of competitively priced, long-dated debt allowing high-quality assets to be levered without unduly increasing risk. The result has seen long-income strategies benefit from relatively secure income and returns over the last twelve months. Looking at real estate sectors, Aviva Investors identified logistics as being the most attractive on a risk-adjusted basis, driven by both cyclical and structural factors.
Chris Urwin, director of Research, Real Assets, at Aviva Investors, added: “Long-lease real estate assets let to highly creditworthy counterparties have proven their resilience over the last twelve months. Looking ahead, low capital expenditure and inflation-linked rental growth, makes the sector look attractive. With more investors recognising the attractiveness of long income, we are seeing greater competition for smaller assets.”
Aviva cautioned that with decarbonisation of buildings an essential component of achieving net zero emissions, one challenge for the real estate industry is that the benefits of these initiatives materialise over longer time periods than typical lease lengths, making it unclear whether landlords will be compensated for such investments.
The report suggested long-income investors are well-placed to tackle this misalignment and that due to tenants’ long-term occupation of buildings, they often have more interest in an asset’s sustainability criteria as it reduces their energy costs over time.
Aviva Investors also expects low-carbon assets to continue to deliver value for infrastructure investors, which has been a resilient sector through the pandemic and offers an expanding range of opportunities. It expects better value to be found in more complex areas, with investors holding expert knowledge in these sectors and technologies likely to gain most advantage.