I was at the annual INREV conference in Berlin a few weeks ago. For those of you who don’t know about INREV, it is the European trade association for nonlisted real estate vehicles, i.e. pooled funds, joint ventures and club deals. This is the event for real estate managers and investors.
Yet, although the attendees were all real estate professionals, the conversations I had during breaks, at meals and on the bus were about infrastructure. The CEO of a large, global real estate investment firm sat next to me at the networking event. After catching up on each other’s families, he paused, leaned in and whispered conspiratorially, “Tell me about infrastructure.” Turns out the firm had hired someone to launch an infrastructure investment group several years ago but abandoned the effort. They are now thinking it might be time to try again.
For the past couple of years, I’ve fielded questions about infrastructure at a variety of real estate events. But those questions seemed to come from a place of bemused puzzlement: “What’s all the fuss? It’s just financing, right?”
Now, the interest seems serious — if no less puzzled. Real estate managers really do want to know about infrastructure. What’s its attraction? What does it offer investors? How do real estate investment skills translate to infrastructure investment skills? How can we get a piece of that pie?
Why the apparent change of heart from real estate professionals?
My theory is they see capital that in the past likely would have been allocated to real estate (i.e. them) now being allocated to infrastructure (i.e. someone else). Investors are leading the charge to infrastructure, and real estate managers are beginning to think they might be left behind if they don’t make an effort to get out in front of this shift.
But why now? Why is infrastructure suddenly becoming top of mind for real estate managers everywhere? I think the obvious answer is the amount of capital infrastructure is raising. According to the IREI FundTracker database, real estate funds experiencing a final closing in 2013 raised $79.7 billion. In contrast, closed-end infrastructure funds that closed in 2013 raised $55.7 billion. In other words, the new, emerging infrastructure class raised nearly 70 percent as much capital as the well-established real estate class — 41 percent of the total capital raised by both classes.
That would make anyone sit up and notice — especially the entrenched asset class that sees a newcomer nipping at its heels.
Further bolstering the contention that real estate managers and service providers have begun to take infrastructure seriously is the move by Indirex, which bills itself as “the knowledge manager for the private real estate funds market,” to begin tracking “real estate–backed” infrastructure. In explaining what this means, the data and index provider writes: “We attempt to only include in our statistics those funds which have a clear involvement with real assets and where we consider that equity could come from an investor’s real estate allocation.”
Using this limited definition for the inclusion of infrastructure funds, Indirex found that real estate–backed infrastructure took almost 10 percent of all equity raised for real estate–related vehicles in the first quarter of 2014. That’s $4.3 billion to infrastructure worldwide for those that like their numbers neat. And that’s only in funds that could be described as real estate backed.
The amount of capital flowing to infrastructure is all the more remarkable, given the lack of “infrastructure” normally needed to attract investors to an investment. There are no accepted indexes, benchmarks or best practices. If an investor is looking at infrastructure from an absolute return basis, the inability to make comparisons among and between other investments probably doesn’t matter. But if the class is being compared to other possible investments on a risk/return basis, it is going to have to provide the means to do so.
The infrastructure class is certainly working toward developing the tools needed by investors. IPD just released its Australia Unlisted Infrastructure Index covering first quarter 2014. When Anthony De Francesco spoke at IREI’s Institutional Investing in Infrastructure conference last year, he made it clear that IPD was moving toward a global unlisted infrastructure fund index and would be there sooner rather than later. Others are also working to provide the data needed for credible benchmarks and comparisons. For example, the Dow Jones Brookfield Infrastructure Indices and the Macquarie Global Infrastructure Index Series aim to measure the stock performance of companies worldwide whose primary business is the ownership, management and operation of (rather than service of) infrastructure assets. Our own FundTracker database is adding fund and transaction data daily.
We’re getting there on the data side.
The harder hurdle to overcome might be arriving at a set of best practices for the industry. No one has grown up in infrastructure. The managers come from real estate, from private equity, from fixed income — even from engineering development firms. And all bring their own best practices and biases.
Talking to a real estate placement agent in the Lufthansa lounge at Tegel Airport as everyone was heading home after the conference, the conversation again veered to infrastructure. His dismissive synopsis of the infrastructure class — it doesn’t have any good managers. The best of the infrastructure managers are inferior to the average real estate manager.
Can that be true? It doesn’t seem right to me. But if this is the view of someone who talks to investors on a daily basis, then it would behoove infrastructure managers to develop a set of best practices and change that view.
And if infrastructure managers have any questions on how to do that, it appears real estate managers would be more than happy to jump in and help — for a small fee of course.
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Sheila Hopkins is managing director – Europe and infrastructure with Institutional Real Estate, Inc.
