KPMG’s Report Cards on Real Assets

KPMG’s Report Cards on Real Assets

KPMG has posted a new paper looking at the role of real assets (defined as “anything where there is a tangible/physical asset being traded”) within a portfolio, with a focus on opportunities for U.K. based institutional investors, especially pension schemes.

It begins with a brief survey of the field. Real assets include:

Property funds. The report is concerned with two variants here, balanced property funds, which invest in a diversified range of U.K. real estate, and Long-lease property funds, which, as the name implies, invest in the leases (of up to 25 years) rather than the land properly speaking.  The demand is growing for these funds, and sometimes an investor waits two years or more before he’s allowed to take a position.

Infrastructure equity. Aging infrastructure systems and “decades of underinvestment” have led to an increasing demand that governments can’t satisfy from public funds. For investors willing to abide by the illiquidity implied, KPMG believes that infrastructure “offers a good opportunity for accessing long term, real income streams.”

Private rented sector. Long-term renting is becoming more common in the major cities of the U.K. The developers of purpose built, professionally managed residential  developments offer these rents in a way designed to take advantage of economies of scale. Their success has in turn created room for investors to jump on board.

Timberland.  Timberland funds “buy and manage forestland with the aim of producing a return by maximizing harvest yields, and selling the timber to the construction and parcel/soft goods industries.” Many investors consider that existing fund structures are a hurdle here.

Global real estate secondaries (GRES). GRES funds bought up assets at distressed prices in the wake of the global financial crisis less than a decade ago. That has allowed them to deliver strong returns of late, but they will now have to show staying power, and investors may want to re-assess whether GRS is right for them going forward.

We’ll say something more about KPMGs view of two of these sub-classes of asset.

More on Infrastructure

On a scale of 1 to 4 (1 worst, 4 best) infrastructure gets a 3 from the KPMG investment advisory team on expected return.  It gets another 3 for its inflation linkage and an outright 4 on income yield.

Governments have been going into debt at levels “previously considered unsustainable,” and one consequence of that is that they have to rely on private investors to keep the roads and bridges maintained.

Of course each underlying project requires considerable due diligence from the investors . This will result in investment across a fairly narrow range of projects, those that have been fully vetted. That in turn will mean that the fund will be less diversified than another could be through other less diligence-demanding real estate investments.  Investors should be aware of this, KPMG cautions.

More on the Private Rented Sector (PRS)

As to PRS, the report observes that investors looking for socially responsible investing may be attracted to this space, where for example, asset managers often take the energy saving initiatives in a particular residential development into account in their own due diligence.

A PRS fund manager may also manage the property, or it may outsource that task. Either way, the properties are actively managed with an eye to net operating income.

What says the advisory team’s scorecard for this investment? It gets a 3 on expected return and on income yield, a 4 on the “shape of outcomes” (where a 4 stands for the most contractual, that is, bond-like, outcome, well a 1 would stand for equity like). Its weak point is volatility. It gets only a 2 there. It is a volatile sub-class because it has exposure to a number of unpredictable factors: house prices, interest rates, and planning risk. It is also a relatively new record, so the track records of fund managers in this field will be limited.

Nonetheless, a small allocation ”should be considered within a portfolio.” PRS has a risk/return profile similar to that of a balanced LLP allocation. If a pension manager has grown tired waiting for an opening to invest in an LLP, then this may be a more accessible alternative. It allows the investors to benefit from a broad life-style shift in the U.K. as property ownership becomes more elusive for much of the population.

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