BNY Mellon Alternative Investment Services
Why has interest in real estate investment, and other ‘alternative’ assets, increased over the last 10 years? Is this set to continue?
In the past ten years, the real estate, private equity and infrastructure industries have enjoyed exponential growth. While this is welcome, we believe the investment landscape for alternative assets is on the brink of a significant, long-term shift.
The alternative investment industry has been presented with a unique historic opportunity. A combination of disparate, but profound and deep rooted forces—macro-economic, demographic, environmental—are driving an unprecedented, broad-based demand for investment in real assets, property and infrastructure, in both developed and emerging markets. At the same time, institutional investors are hungry for yield, but starved of attractive investment options.
Low interest rates and asset-price inflation fuelled by quantitative easing are forcing investors to look further afield for returns, but periodic financial market shocks and a rolling programme of capital, prudential and market structure reforms are fraying investors’ nerves. As such, institutional investors are increasingly looking to the alternative sector to guide them through fast-changing and sometimes unfamiliar terrain, and to shed light on new opportunities that meet their investment criteria.
To meet this challenge effectively, alternative investment managers will not only need scalable investment expertise to identify and value a wide range of assets and businesses, but also a flexible business model that enables them to deliver on heightened expectations for transparency and client service, while achieving sustainable growth.
Are there any particular geographies that have seen growth in real estate investment? Where, and why?
Post-2007, higher-yielding US capital initially retreated back to the US and focused on core global cities. The gap this has left has, to a degree, been plugged by the rise of Middle Eastern money, fuelling investments such as the recently acquired stake by Qataris in New York’s Empire State Building. Investors chasing yield have also driven an increasing interest in secondary cities.
Which sectors are seeing the most interest, for example, residential properties, offices or retail?
We are seeing increasing demand driven within developed economies from the millennial generation. Millennials make up around a quarter of the world population and a large proportion prefer smaller, city centre, multi-occupier dwellings, which they currently rent in large numbers.
This increased demand for city centre and periphery housing is already affecting the availability and value of rented apartments in thriving cities. Overall, multi-family construction now accounts for half of all US residential construction, which is a significant shift from historical norms. The rented apartment sector has grown from 20 percent to 45 percent of all new residential buildings in the US and we expect this demand to continue to remain strong.
What kind of effect do global demographics have on real estate investment?
Increasing urbanisation trends are putting more pressure on transport, communication and social infrastructure as well as housing in all regions. Rapid growth and low existing levels of development are increasing the need for planning and investment. Slowing fertility rates and advances in medical sciences, resulting in ageing populations in both developed and emerging economies, are compounding the problem.
Population growth will inevitably bring greater pressure to bear on existing social and economic infrastructure. In countries with rapidly ageing populations, especially those witnessing the phenomenon at scale for the first time, hospitals and other medical facilities will need to be expanded and upgraded, alongside residential property developments that cater for a wide range of care and dependence needs.
What kind of trends would you expect to see between now and 2020?
Some of the key trends we expect to continue to affect the alternatives space over the coming years are:
∙ Fundamental demographic and macro-economic shifts are creating investment demands that far outstrip the reach of government finances, and therefore create opportunities for alternative capital sources.
∙ Greater urbanisation will increase pressure on transport, communication and social infrastructure as well as housing in all regions, but the more rapid the growth, and the lower the existing levels of development, the greater the need for planning and investment.
∙ Population growth in Africa and parts of Asia will be a strong driver of GDP levels, increasing demand for transport and communications infrastructure to support commerce, and driving up consumer spending. Population ageing in all regions will affect medical and social infrastructure needs.
∙ In developed economies, the large millennial cohort will favour multi-family, rental accommodation in thriving urban centres over traditional suburban home-ownership, while also driving a radical repurposing of retail and office real estate.
∙ Long-term shifts in public finances are creating a severe infrastructure funding gap, but are also providing a widening range of opportunities for private investment in energy—especially green initiatives, utilities, transport and communications infrastructures.
∙ Over the last few years, absolute returns in traditional asset classes have been challenged. This, coupled with the need for diversification, will continue to drive investors to increase allocations to real assets, including infrastructure.
∙ Alternative investment managers must adopt more flexible business and operating models to channel investment flows into a widening range of opportunities, addressing the funding gap and meeting institutional investors’ need for yield.