Real assets – a once in a lifetime opportunity

At the Jersey Finance Funds Conference last week we heard from Bill Hughes, head of real assets at Legal and General Investment on the rise of real assets as an investment opportunity. He acknowledged that real estate and infrastructure have traditionally been seen as the ‘poor cousin’ of other asset classes but with the world changing rapidly around us there has never been a better time to look at investing in real assets.

He said opportunities, particularly in the UK, are increasing not decreasing and this is due to the increasing importance of relations between the public sector and private capital. Real assets are important and appealing due to investors and investment funds de-risking and large pension funds thinking about flight to stable assets. There is an illiquidity premium on real assets and also inflation matching characteristics that make them ideal investments in an uncertain world.

However, there are funding sources pulling out. A lack of public money is leaving some projects looking for finance. Banks are pulling out of much of the market. Bill thinks this is a ‘once in a lifetime opportunity for private capital to invest in social infrastructure’. This is infrastructure that is crucial to society – hospitals, schools, prisons, transport and energy infrastructure. Its importance (and therefore value as a real asset) is not going anywhere anytime soon.

We are at a point, according to Bill, where most social assets, and especially those needed to be built in the next 10 years, can be owned by the private sector. Renewables, HS2 rail stations etc all still need building.

Legal and General also see huge potential in the build to rent sector. The UK has a housing shortfall of hundreds of thousands of homes every year. Elsewhere in Europe the build to rent sector is booming and L&G think there is an opportunity to develop professionalised rental property in UK cities – a fantastic opportunity for real estate funds, a traditional strength of the Jersey finance industry.

In fact, L&G’s issue is not finding capital for projects; it is finding projects for the ‘wall of capital’ ready to invest in the sector. But, like anything else, there is the looming shadow of Brexit. Decisions are being delayed, according to Bill, to wait and see what the future will hold.