5 key themes for real assets in 2016
Global investor demand for real assets is expected to continue to strengthen in 2016.
In this article, AMP Capital experts from across infrastructure equity, infrastructure debt, listed infrastructure, listed property and direct property provide insights on the outlook for 2016.
Among the themes influencing real assets in 2016 are:
- Intense competition for ‘trophy’ assets and high-quality Australian property
- The US Federal Reserve’s movements on rates
- Increased mergers and acquisitions (M&A) activity and privatisation
- A ‘lower for longer’ yield environment
- Urbanisation and infrastructure spend
Insights from direct infrastructure (equity)
“Looking to 2016, we believe deal flow will remain highest in the largest and deepest infrastructure markets of Western Europe and North America although we are seeing more and more investors looking to Eastern Europe for value due to the competitiveness of deal flow in other regions and subsequent pricing pressure. Investors are continuing to recognise the value in infrastructure’s attractive combination of stable yield and strong potential for capital growth. While we continue to see a preference amongst the largest investors to invest direct directly in assets, unlisted funds still remain the preferred route to market for the whole investor universe.”
Insights from direct infrastructure (debt)
“Sectors where we anticipate strong activity and investment opportunity during 2016 include the energy sector in the US where continued market volatility is creating deal flow and a strong pipeline of regulated opportunities across Europe. Our sweet spot will continue to be assets in utilities, energy and transport in OECD countries.”
Insights from listed infrastructure
“Much focus has been on the changes in the global oil market and the ‘lower for longer’ crude oil environment, but our view is that we are in a ‘lower for longer’ yield environment globally and despite an inevitable first rate hike, we think the Fed will be cautious not to go too far as the rest of the world is still weak. Our view is that the strong demand that we’ve experienced over the past decade for real assets that offer high and sustainable yields will continue in 2016.”
Insights from direct property
“Double-digit returns from unlisted core funds are likely to continue for a little longer but funds need to be positioned for the next downturn. We have been divesting non-core assets to ensure portfolios are defensively positioned both in terms of asset quality and location. Going into 2016, we have a strong bias to Sydney and Melbourne office, and high quality regional shopping centres.”
Insights from listed property
“M&A is also likely to ramp up in 2016 globally as US Fed rate hikes create volatility and dislocation in the markets. This will present companies with a strong balance sheet and cost of capital to acquire publicly listed real estate trading at discounts to the direct market, given the ongoing arbitrage between the private and public markets.
“Urbanisation and infrastructure spend in global, gateway cities is also a strong theme. Companies with assets or development expertise in markets positively impacted by this structural trend will continue to benefit in 2016 as rental values grind higher. London West End, Mid/Downtown Manhattan and Central wards of Tokyo are large beneficiaries of this momentum, and can be accessed via retail, office and residential depending on the city or infrastructure project. In Japan, there is also value in the lodging sector, given the country is preparing for the Olympics and the Rugby World Cup during the next four years and the government has an explicit target to increase international visitors.”