Real Estate - JUNE 2, 2015

Why invest in real assets?

by Alexis Petrakis

Increasingly, investors are gravitating to real assets for the powerful role they can play in an overall portfolio. Real assets  — investments in real estate, infrastructure, energy and commodities, for example — can provide portfolio diversification, inflation hedging, yield potential and enhanced long-term total returns.

But what’s behind this growing demand for real assets? There are several impressive macro trends supporting the investment thesis and contributing to the growing optimism for this emerging mainstream asset class. Consider:

• In January 2013, McKinsey Global Institute published a report estimating that the world needed to invest $57 trillion in global infrastructure from 2013–2030. Governments around the world are coming to this realization and are working to create policies to attract and support funding for socially beneficial infrastructure assets.

• Demographic trends are also constructive for real assets investing. World population is projected to grow from 6.1 billion in 2000 to 8.9 billion in 2050, according to the United Nations report World Population to 2300. Who will feed, clothe and house all these people? Who will power their energy needs? The gross numbers alone are compelling for many real assets, but the bullish case only becomes more persuasive when considering the compounding impact of the wealth creation happening in the burgeoning middle classes of China, India and other parts of the developing world.

• An aging population craves income. According to a report from the Pew Research Center, the number of people 65 and older is projected to triple by mid-century, from 531 million in 2010 to 1.5 billion in 2050. In the United States, the population of seniors is expected to more than double, from 41 million to 86 million. This graying of the population is likely to boost demand for income-producing investments. Many investments in real assets — including infrastructure, real estate and renewable energy investments, among others — are being structured to meet the dearth of income-producing investments in the current low-yield environment.

• Population growth and urbanization trends in China and other developing nations are fueling housing demand globally.

• Many commodities are supply constrained. The cost of many hard assets is on the rise, and satisfying even current levels of demand could prove challenging for some natural resources. Rising labor costs, environmental concerns, geopolitical strife and increasing nationalism/protectionism are all adding challenges to the supply side of the equation.

All of these factors make a compelling macro case for including real assets in an investment portfolio.

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