While real estate and infrastructure have co-existed under the umbrella of ‘real assets’ for some time, the adoption of this term has grown significantly of late. Back in 2021, we witnessed the first signs of convergence between the two asset classes when Patrizia acquired Whitehelm Capital, while Nuveen and Schroders also made moves into infrastructure. Fast forward three years and we are seeing a renaissance of the trend, with BlackRock’s proposed acquisition of Global Infrastructure Partners the clearest sign yet of this strategic shift among managers.
On the one hand, this M&A activity is no surprise. While real estate is regarded as a larger and more mature market than infrastructure, there are strong synergies between the two. Resilient income with inflation protection, close alignment with long-term mega-trends, and the ability to drive value from a physical asset are just three shared characteristics, all of which are highly complementary in a holistic real assets strategy.
With this in mind, it is no surprise to see managers coalescing under the real assets umbrella to leverage these synergies and create long-term value for clients. For GPs, a combined investment platform undoubtedly strengthens portfolio diversification and lowers risk, which is invaluable in these volatile times. Real estate is notoriously cyclical, and last year represented arguably the nadir of the current cycle, while liquidity in infrastructure remained much more resilient.
But when we talk about the convergence between real estate and infrastructure, we believe it goes beyond an M&A trend. It is far more embedded than simply two similar investment options being offered by the same manager. Instead, we are witnessing a fundamental evolution in what it means to be an investor in real assets, with managers becoming much smarter in leveraging the two asset classes to offer innovative investment solutions for their clients. And the smartest among them are the ones unlocking these solutions at both the asset and fund level.
Leveraging an integrated real assets platform
With a fully integrated real assets platform, the opportunities to drive long-term value creation are enormous. For GPs, it’s about harmonising the real estate and infrastructure value chains to generate value at every stage of the investment lifecycle. While for LPs, it’s about accessing new avenues for allocating capital that focuses on innovative assets and products underpinned by the major transition mega-trends: digitalisation, urbanisation, the energy transition and modern living. So, where do we see the smartest managers actively driving these synergies?
On an asset level, infrastructure is both a value driver and decarbonisation strategy for real estate portfolios. While photovoltaic panels have been applied to real estate for decades, the successful installation and management of large-scale solar farms on the roof space of major logistics hubs requires specialist knowledge and asset management expertise.
In the Netherlands, one of the country’s largest logistics assets – the Maasvlakte distribution centre – is home to one of Europe’s biggest rooftop solar installations. The 120,000-square-meter PV system generates a capacity of 25MWp a year of clean energy – enough to meet the annual energy needs of roughly 8,000 households. This smart combination of real estate and infrastructure not only facilitates an industrial-scale renewables project, but it also delivers significant upside potential for the underlying asset, which now makes a meaningful contribution to the energy transition.
A similar story can be seen in the electrical vehicle space where charging infrastructure has been installed in car parks since the dawn of EVs. In isolation these assets are relatively simple to manage, but rolling out a pipeline of ultrafast EV chargers across a portfolio of prime food-anchored retail stores requires a much broader skill set.
To give an example, in Germany our real estate heritage is playing an important role in our investment in the delivery of 400 ultrafast Numbat EV charging stations across a portfolio of Tegut supermarkets. To drive further synergies, we are exploring installing solar panels on the roofs of the stores, with the energy generated fed back into the batteries in the EV charging stations. By bringing the two asset classes together in an intelligent way, we are enhancing the value of our investments in a much more holistic manner.
A shift to thematic investing
With this blending of assets comes the question of where these investments sit at a fund level. We believe more thematic investment strategies can complement single-sector funds in a broad product mix.
A great example is an investment strategy based around the theme of smart cities. While its core proposition is digital infrastructure-like fibre networks to help communities become better connected, it could also invest in tech-enabled real estate like smart buildings that plug into this underlying digital infrastructure. A thematic strategy like smart cities generates real value by leveraging a GP’s footprint and expertise across multiple real asset disciplines, such as sustainability, technology and real estate. When successfully combined, you have a product that plays a leading role in driving the major transitions to digitalise and decarbonise our expanding urban communities.
However, a thematic approach comes with its challenges. One fundamental hurdle to overcome is around how LPs are structured, with individual real estate and infrastructure teams commanding separate allocations. Without a clearly defined core offering of either infrastructure or real estate, a blended strategy risks finding itself without capital from either pot. But merging LP teams to have one real assets allocation would certainly support thematic investing, and the early movers in this space, such as AustralianSuper, are the ones who stand to benefit the most.
But change won’t happen overnight, so GPs must do more to clearly articulate how thematic strategies can work for LPs. There will always be assets that sit in a grey area like data centres, but from our perspective what should matter most for clients is that they like an investment’s risk profile, its long-term cashflow and its position within their wider real assets portfolio. It’s then our job to explain how it supports a holistic investment strategy.
But ultimately, the market will always move to where the demand is. We live in a world in transition where both infrastructure and real estate are fundamental in shaping the way we live in the future – so we firmly believe the most attractive investment solutions over the coming decades will combine the two. And it will be the managers who can best leverage the synergies at both the asset and fund level who will be in pole position for driving the smart real asset sector of the future.
James Muir is head of strategic investments at Patrizia, a real assets investment firm headquartered in Germany