AMP Capital expects global investor demand for real assets to continue to strengthen in 2017, with a number of themes set to influence the sector.
AMP Capital is one of the world’s most experienced real estate and infrastructure managers, with capabilities including infrastructure equity, infrastructure debt, listed infrastructure, listed real estate and direct real estate.
According to AMP Capital, among the themes influencing real assets in 2017 are:
• Infrastructure pricing trends will continue to reflect the investor hunt for yield.
• Privatisation programmes and M&A activity in Europe and Australia contributing to a healthy pipeline of opportunities.
• Political events expected to be a continued focus in 2017.
• Rate increases as a result of an improving economy ultimately a positive for real estate fundamentals.
Key trends for 2017: direct infrastructure (equity)
AMP Capital Global Head of Infrastructure Equity Boe Pahari said: “We expect infrastructure pricing trends in 2017 will continue to reflect the investor hunt for yield. In a ‘lower for longer’ interest rate environment, infrastructure assets where cash yield (as opposed to capital growth) constitutes a high proportion of return will continue to be highly priced, particularly in the core infrastructure space.
“Our focus for 2017 remains on what we refer to as thematic infrastructure, which has common infrastructure characteristics but typically has a higher level of complexity and requires deep sectoral and transactional expertise to buy it at the right price, and ongoing active management to maximise value for investors.
“Around the world, governments are looking at ways to re-energise private capital as a source of infrastructure funding. President-elect Trump has indicated support for increased infrastructure spending, even highlighting it in his election night victory speech. For direct infrastructure investments in the US, it’s likely the Trump rhetoric will encourage more deal flow, although he has not yet proposed a strategy for funding additional spending. We will closely monitor any potential issues relating to foreign ownership of assets.
“The pressure to improve infrastructure is not unique to the US. During the coming years, we expect there will be increased opportunities globally in primary deals though it may take time to flow through. In the shorter term, we expect sales of mature or at least post-construction assets as large contractors and infrastructure companies look to position their balance sheets for the next five years of what could be a significant pipeline of primary opportunities.
“Buyers need to be careful of pricing in Western Europe, which is one of the most competitive markets globally. We believe the best value will be found in the Mediterranean markets and Scandinavia in Europe, parts of North America, and emerging markets such as Latin America and Asia should not be ignored. India’s current government is looking at infrastructure in a fresh and dynamic way, Indonesia continues to evolve in the infrastructure space, Thailand has been focused on developing infrastructure for some time now and of course China’s investment is significant. In Australia, there is potential for deal flow as a result of privatisation but also in the middle market. Our focus remains on the mid-market, with sector, geography and ticket size the three key elements we consider in the search for high-quality assets.”
Key trends for 2017: direct infrastructure (debt)
AMP Capital Global Head of Infrastructure Debt Andrew Jones said: “2017 is shaping to be another active year for the infrastructure debt sector globally with institutional capital continuing to target the space as insurance companies and pension plans worldwide resume their search for yield. Investment activity is expected to remain strong in all key markets with privatisation programmes and M&A activity in Europe and Australia in particular contributing to a healthy pipeline of opportunities. In the US we expect to see more transactions coming to the market in the energy sector with the renewables space expected to represent a significant contributor while investment opportunities in Asia will continue to expand as the region rolls out its infrastructure development programme. While core infrastructure assets are expected to continue to command full prices from an equity perspective in 2017, we expect the banking market to continue to maintain the discipline which has been evident over recent years in terms of the amount of leverage available to borrowers, although we expect spreads in the senior debt space to remain tight through next year. We expect this combination of factors will continue to support attractive market dynamics for mezzanine investors in 2017.
“Notwithstanding our expectations for strong debt markets in 2017, we do expect investors will be challenged by the uncertainty created by a number of the key events of 2016. In particular, investors will need to consider the medium to longer term impacts of the Brexit decision, potential further political uncertainty following the Italian referendum in Europe and the potential impact of Trump’s infrastructure plans for the US as these become clearer. Each of these events will create uncertainty but will also throw up opportunities through 2017 for experienced managers.”
Key trends for 2017: listed infrastructure
AMP Capital Head of Global Listed Infrastructure Giuseppe Corona said: “Political events such as Brexit, the US election and the recent Italian referendum have been a focus for markets in 2016 and this will likely continue, with elections in key countries such as France and Germany already planned for 2017.
“The election of Donald Trump as President of the US was positive for North American infrastructure companies, particularly in the energy infrastructure sector as President-elect Trump is more supportive of further domestic fossil fuel production and favours reducing regulations, which should provide a tailwind for energy infrastructure companies’ capital expenditures programs. We believe that the energy infrastructure sector represents one of the most attractive sectors within listed infrastructure, given the dislocation between price and fundamentals in 2015/16, which has created an opportunity to increase the allocation to higher quality companies.
“Additionally, Mr. Trump’s pro-growth fiscal policies, and potentially protectionist agenda, could result in a rising inflation environment leading to potentially higher nominal interest rates in 2017, not just in the US but also globally. We will monitor these developments closely. In this context, lower growth pure-play interest rate sensitive sectors, such as transmission and distribution, are not offering favourable risk / reward given unsupportive valuations following the recent strong performance fuelled by a search for yield.
“As far as Europe, despite the recent volatility and uncertainty created by the political and economic environment, we continue to believe the region represents a compelling investment opportunity given attractive valuation and secular and cyclical tailwinds in sectors such as communication and transportation. Particularly, in the communication sector, we also see M&A as an opportunity for companies to achieve operational synergies and financial accretion.”
Key trends for 2017: direct real estate
AMP Capital Global Head of Property, Carmel Hourigan said: “The AMP Capital House View suggests the property clock has actually gone back an hour in 2016! The lower for longer thematic and continued volatility in global capital markets has seen this real estate cycle potentially extended a little longer and we see compelling risk adjusted returns delivered out of the Australian market in 2017, particularly on a relative basis globally. Sydney office markets would be our top bet during the next 12 to 36 months, followed by Melbourne office. High quality regional shopping centre assets will continue to perform strongly and defend against structural retail headwinds. Recent developments completed during the last few years at Macquarie Centre in Sydney and Pacific Fair on the Gold Coast are prime examples of what the future shopping centre must look like in order to succeed and our investors have benefited from these significant investments. We have been shaping our client portfolios to position them for income growth as the days of investment performance driven purely by cap rate compression will come to an end during the next 12 to 18 months. Our mandates have sold a lot of non-core assets into the strong capital markets to ensure portfolio construction is optimised towards our preferred rental growth markets.
“Outside Australia, we are strong advocates of a US core-plus real estate investment strategy. We have been investing now for more than 10 years and have provided the strongest investment returns for our clients of all our unlisted real estate funds over 1, 3, 5 and 7 years as a result of this strategy. The depth of the US market and access to more established industries (such as technology) and sectors (multi- family) allows us to execute an active investment strategy with compelling diversification benefits for Australian investors. We believe at this point in the cycle the greatest risk actually lies in the gateway markets such as New York, Boston and Washington DC, which have re-rated to unprecedented levels, and instead we prefer non-gateway primary markets such as Portland, Phoenix, San Diego and Philadelphia to name a few exhibiting strong employment growth and constrained supply. Here, opportunities can be originated and asset management strategies executed resulting in strong outcomes for investors.”
Key trends for 2017: listed real estate
AMP Capital Head of Global Listed Real Estate James Maydew said: “As reflationary expectations have emerged from Q3 2016, the market has turned on anything deemed to be a bond proxy. Pleasingly, real estate is not a bond, has solid growth metrics and in our opinion has been unfairly caught up as a proxy for lower growth. This is ultimately a misperception, as growth is still strong, and especially when history proves that listed real estate actually outperforms equities on average over the subsequent 12 months from a rate rise. Over the long term, real estate is a proxy for the strength of the underlying economy, and importantly an inflation hedge. So as we see rate increases as a consequence of an improving economy, this is ultimately a positive for real estate fundamentals. More growth means more jobs, which means more real estate is needed to facilitate that expanding economy. We see the real estate market to still present many of the goldilocks characteristics it has maintained over the last five or so years including: 1) low relative constriction supply, 2) strong demand as the wall of global institutional capital continues to chase higher real estate locations, 3) access to credit, 4) although the cost of debt is rising, it is at a considerably lower cost to historical levels, 5) robust fundamentals from tenants.
“Globally we see strong opportunities in many markets, and continue to look for opportunities in infill urban markets with strong population and economic growth. We are one year further on, but continue to see expanding opportunities from a growing retirement boom – for example in manufactured housing and medical office buildings in the US and the full continuum of aged care in Australia and New Zealand – and technology growth. The technology story can be accessed by investing in logistics companies globally for e-commerce (but with a key focus on the US and Japan), through technology-based office markets such as San Francisco, Midtown South in New York City and London’s East End tech belt, and also through A++ malls where landlords are ahead of the curve and embracing e-commerce and digital technology given retailers need an omni-channel approach in the US, Australia and Europe.
“These are global, multi-year, market trends and exposures we are accessing through our clients’ portfolios. We see great opportunity globally in assets that have been oversold during a volatile 2016, which is not limited to one market, but broad brushed and in some areas focussed on the highest quality real estate.”
