Brett Christophers is a professor in the Institute for Housing and Urban Research at Uppsala University and author of ‘Our Lives in Their Portfolios: Why Asset Managers Own the World’
The recent kerfuffle around Blackstone’s real estate investment trust has served as a timely reminder of one of the more notable developments in finance in recent times — the large-scale move of investment institutions into ownership of the physical world around us.
The days of asset managers owning only financial assets are long gone.
This of course matters for a ton of reasons, but mostly because in owning “real assets”, asset managers directly influence people’s everyday lives in a way that isn’t true with their ownership of financial assets. Those that control assets that provide services we simply can’t do without — such as energy, shelter and water — are particularly powerful.
One key question — not easy to answer — is how much of this essential physical stuff asset managers actually own?
Well, a recent-ish estimate pegged the assets under management (AUM) of the world’s 100 largest infrastructure investment managers at over $1.65tn. Does this mean the infrastructure that they own is worth $1.65tn? No, it’s actually far more than that.
AUM refers to the market value of the invested equity, but most asset management investments in infrastructure will be leveraged. Conservatively, let’s assume average leverage of 45 per cent. That would imply they control $3tn in physical assets.
Housing is harder to get a handle on. Surprisingly hard. But reverse-engineering from data from the likes of INREV, the European Association for Investors in Non-Listed Real Estate as well as individual asset managers like Axa Investment Managers and Blackstone, and we’re probably looking at a number somewhere north of $1tn.
So if we can conservatively estimate the value of housing and infrastructure controlled by asset managers at $4tn, the obvious follow-up question is how the “new” era of higher inflation and interest rates will affect things. Will investors stick, twist or fold?
There’s an argument that they will pull back. After all, one of the biggest reasons investment in housing and infrastructure boomed in the post-financial crisis years was the relative attractiveness of steady yields in a low-interest-rate environment. Now you can get almost 5 per cent in triple-A rated corporate bonds. Moreover, the leverage an asset manager would use to juice returns is no longer cheap as chips.
But here’s the thing. There is (for now at least) zero evidence of investors folding on housing or infrastructure, or even just sticking. On the contrary; they seem to be doubling down.
Barely a day goes by without news of this or that investor increasing their allocation to housing, infrastructure or both. The average current allocation to infrastructure was 4.6 per cent as of the end of 2021, but the average target allocation has crept up 6.6 per cent, according to Institutional Investor.
It makes sense that investors want to keep shovelling money into housing and infrastructure. Residential real estate is certainly a better inflation hedge than commercial property. And infrastructure is a better hedge still, especially in the case of regulated assets, where rate increases linked to inflation are often contractually guaranteed.
Meanwhile, anyone who thought the increased cost of debt might prove an obstacle clearly hadn’t reckoned with the endless ingenuity of asset managers. ‘Our traditional sources of debt are more expensive? OK then, we’ll just supply the debt ourselves!’
Back in 2018, Brookfield Asset Management head Bruce Flatt told mainFT that we were only a decade into a half-century “transformation” of the infrastructure world, and predicted that in 50 years “most infrastructure in the world will be transferred to private hands”.
In short, the world should be braced for more asset manager investment in the physical foundations of the global economy and our own lives — not less.