Participants:
- Sayad Baronyan Ph.D, director of multi-asset research, FTSE Russell
- Francis Chua, fund manager, Legal & General Investment Management
- Robert Fullerton, senior investment analyst, Hawksmoor Investment Management
- Amir Amini, sectors & thematic investing, BlackRock
- Ian McKnight, outsourced chief investment officer, Cartwright
- Sarah Murray, head of listed real estate & infrastructure securities product strategy, BlackRock
- Jamie Norris, investment manager, Walker Crips
- Michael Steingold, global unlisted infrastructure portfolio manager and director, private markets, Russell Investments
- Umang Rajbhandari, investment consultant, Barnett Waddingham
The slightly mythic ‘Crane Index’ is an informal measure of economic prosperity which posits that the number of cranes poking into a city’s sky reflects the prosperity of the inhabitants and businesses below. Economic factors permitting, the years ahead will see this index surge.
According to the United Nations back in 2021, nearly 75% of infrastructure that the global population will be using by 2050 was still to be built. The same goes for around 40% of the future total global real estate inventory.
Sayad Baronyan, director of multi-asset research at FTSE Russell, said this signals a massive need for investment in the real estate and infrastructure sectors and in some countries where there are high debt-to-GDP ratios, private sector participation is crucial.
Governmental policy is supportive. In the US, the Inflation Reduction Act (IRA) has funnelled significant resources into infrastructure, while similar government-backed initiatives are emerging in Europe and other markets. The European Union allocated nearly €800 billion in 2022 for infrastructure projects, with countries like Spain and Italy receiving substantial funding for sustainable development.
Investors themselves appear ready to jump in. Baronyan points to the Mercer Large Asset Owner Barometer 2024, a survey that revealed approximately 60% of asset owners plan to increase their allocations to infrastructure, while 30% anticipate increasing their exposure to real estate. The survey is just one of many in the past few years that reflect how investors are allocating greater sums to real estate and other ‘private’ assets that offer great potential for outperformance against traditional, public investments, but which also offer lower levels of liquidity.
Baronyan was speaking at a Funds Europe-convened seminar about how real estate investors could access real estate and infrastructure through active and passive funds that invest in equities and offer considerably more liquidity than private-market equivalents. The event featured speakers from BlackRock and a host of fund selectors. The discussion ranged through topics including the macro drivers for real estate investments, correlation levels, and the importance of sustainability for new and existing buildings.
US dominance of the index
The appeal of real assets such as property and infrastructure are well-known: they provide a hedge against long-term liabilities and offer a stable inflation buffer within a diversified portfolio. These are essential features for long-term investors such as pension funds and other institutional asset owners.
Working at FTSE Russell, a major index provider, Baronyan has a real index to work from, not a mythic one, namely the FTSE EPRA Nareit Developed Index. With structural changes in the macro environment and shifts in investor demand, he expects this to lead to different price returns among infrastructure and real estate sectors, and therefore changes in sector weights and characteristics over time. He adds that fiscal policies in many countries have been supportive of these structural shifts and there is recognition of a need for more infrastructure.
The US currently makes up 65% of the index, mirroring broader equity index trends. This high US exposure has been beneficial to the index return, given the substantial funding driven by the IRA. Baronyan says, however, that the index remains well-diversified, with no other country exceeding a 10% allocation. The US will likely continue to hold a dominant position, but emerging markets, particularly China and India, are also investing heavily in infrastructure projects.
Further, in the past year, shifts in correlations have revealed “intriguing trends”, Baronyan says.
“Traditionally, real estate was more closely linked to equities, but this has decreased and correlations with bonds have increased.”
According to Baronyan, this is a response to rising interest rates and broader structural changes in financial markets – for example, post-Covid office-occupancy levels, which have fallen.
Additionally, real estate and infrastructure exhibit some characteristics that are in tandem with both bonds and equities. For instance, real estate yields are at around 4.1%, while infrastructure offers 3.5%, aligning closely with fixed-income products. In terms of total returns, real estate has yielded approximately 7.5%, whereas infrastructure has delivered 14%—comparable to global equity markets.
Infrastructure investments, in particular, tend to have long-term leases and government contracts, leading to stable earnings. In contrast, real estate returns have been impacted by declining property valuations.
Partly, these declining valuations stem from the declining office occupancy rates since the Covid pandemic, although the rate of decline appears to be slowing and signals a potential stabilisation.
Industrial and apartment sectors have experienced decreases, but only moderate, noted Baronyan.
However, supportive of real estate valuations is the weakening of net new supply. Few significant projects have entered the market compared to the past decade, particularly in the retail and office sectors. This supply constraint could create a supportive backdrop for real estate prices, especially if occupancy rates stabilise and interest rate pressures ease, said Baronyan.
Critical data infrastructure
The spending by China and India on infrastructure includes, significantly, spending on data centres. It’s the same in the US and elsewhere.
As a sector, the importance of data centres to infrastructural needs springs from fundamental shifts that are shaping the market, such as the rise of remote work, e-commerce and AI. The sector does not yet offer high dividends; but earnings from the sector have outpaced other sectors and lead to sectoral diversification within the index, which fosters a healthier and more lucrative investment environment by setting the stage for sustained growth in the years ahead as digital infrastructure becomes more critical, said Baronyan.
Data centres have grown to approximately 10% of the FTSE EPRA index, primarily at the expense of traditional office space. In fact, whereas traditional sectors such as retail and offices represented 77% of the index back in 2012, in 2024 this had shrunk to 53%, with modern sectors – such as data centres, healthcare and self-storage – growing from 23% in 2012, to 47% in 2024.
However, while the public markets have adapted to this shift, private investors are facing significant challenges in accessing these assets.
One participant in our discussion highlighted this issue, noting that although some major private equity firms are actively investing in data centres, transaction data tells a different story for the industry at large. Over the past 12 to 18 months, private real estate transactions remain evenly split across traditional sectors—industrial, retail, office and residential. This is despite an expectation that capital would increasingly flow into high-growth sectors like data centres and healthcare.
The primary constraint is supply. Private investors are eager to enter the data centre market, but they struggle to acquire assets due to limited availability. The demand far outweighs supply and existing operators are reluctant to sell unless private investors are willing to pay a premium price. This creates a bottleneck where private capital is ready but unable to deploy at scale.
Despite these hurdles, the long-term trajectory is clear: data centres – the need for which is expanding globally – will continue to reshape the real estate landscape, says Baronyan. Data centres are poised to become even more integral to real estate investment strategies.
Building on Net Zero strategies
With private investors navigating access challenges, the public market remains the most direct way to gain exposure to this fast-growing sector. Historically, real estate and infrastructure investments were only accessible to large institutional investors, usually through illiquid, private-markets vehicles. However, the introduction of liquid real estate products – most notably real estate investment trusts (Reits) – has allowed investors to access these markets more freely, benefiting from daily pricing and improved correlation tracking with traditional asset classes.
And, given a focus that developers now have on sustainability, the real estate and infrastructure sectors can fold neatly into the net-zero goals of institutional portfolios. According to Baronyan, “sustainability is taking centre stage”, with 75% of future infrastructure expected to incorporate ‘green’ properties.
A major supply and demand imbalance exists for green buildings. Baronyan pointed out that the built environment contributes around 42% of global CO2 emissions, with around 27% stemming from building operations. This underscores the urgency of transitioning to greener buildings and so looking ahead to 2050, the expectation is that a significant portion of existing structures will be replaced with more sustainable alternatives.
This shift is driven by regulatory initiatives and rising corporate demand for environmentally friendly spaces. However, supply has struggled to keep pace, creating a gap that could drive up the value of green real estate assets – the so-called “greenium”, where high corporate demand and limited supply sees green buildings – whether new builds or conversions of older stock – becoming premium assets.
In Europe, there is a significant surge in investment, said Baronyan, which could have a major impact on the market. However, uncertainty remains a key factor. As a thought experiment, consider a scenario where a green index sees higher investment in Europe but less in the US, perhaps owing to political changes there. This shift would inevitably influence index components and pricing. Conversely, if the US experiences greater investment but with fewer green initiatives, that would alter the market landscape, too.
Sarah Murray, head of listed real estate & infrastructure securities product strategy at BlackRock, said sustainability factors in real estate investment are rising partly in response to the increasing frequency of natural disasters.
She pointed out that 2024 was the hottest year in human history, with devastating effects like the California fires that caused over $1 billion in losses per event—27 such events in total, compared to 23 in the previous five years.
“This is no longer a distant issue; it’s happening now and is impossible to ignore,” said Murray.
Sustainability fundamentally affects asset values, she added. For example, a company holding significant assets in regions like Southern California – an area now prone to more frequent and severe natural disasters – will see a depreciation in asset value. As these risks increase, insurance costs rise, and occupancy rates may fall as people reconsider moving to these areas.
These factors directly influence the net asset values of real estate companies.
Murray said that older real estate stock faces higher redevelopment costs as buildings are required to meet new sustainability standards. This creates delays in private transactions. Listed companies, on the other hand, are under intense pressure to ensure their properties meet these standards and remain competitive, making them more responsive to sustainability demands.
A shift away from retail and office space? Not so fast
Murray agreed that data centres are “undoubtedly” at the forefront of investors’ minds. These facilities are essential to the ever-growing digital economy, particularly in light of the surge in demand for cloud computing, artificial intelligence and data storage.
Yet, while modern sectors like data centres are capturing much of the investment spotlight, Murray said that sectors traditionally seen as underperforming (office and retail, for example) should not be written off just yet.
“It’s fair to say, and I think it might be quite controversial, that office and retail are not dead!” she said.
The rise of e-commerce, coupled with the impacts of Covid-19, has hit bricks-and-mortar businesses hard. However, the narrative isn’t all bleak.
Murray pointed to recent reports, including one [Clare Perry?] that highlighted a resurgence in demand. “Offices are seeing higher rents and better occupancy than they have ever seen before. These companies are not dead. Some of them are just having a lot of product to work through and which is specific to each market.”
Developers are reimagining office space and retail property. This – along with the growth in data centres and higher demand for single-occupier homes in residential sectors, for example – could shift the characteristics of the FTSE index over the next decade. Allocations will not be static, said Murray, and this offers opportunities for active investors.
“The key with listed assets is the ability to move between sectors and understand how they evolve over time,” she explains.
Real estate in four “Ds”
Murray identifies four key trends shaping the market: decarbonisation, digitalisation, de-globalisation, and demographics.
Digitalisation is essential for the continued growth of AI, while de-globalisation – driven by trade wars and rising nationalism – underscores the need to have logistics assets closer to consumers. Lastly, the global housing shortage, especially for an aging population, continues to drive demand for residential properties.
The benefit of listed real estate lies in its strong correlation to private returns, particularly when held for more than two years.
Murray believes the listed market often leads the private markets in responding quicker to interest rate changes or economic downturns. Moreover, the income generated by these assets is growing, providing superior, progressive dividends rather than fixed yields, which makes listed real estate a compelling choice for those seeking income in their portfolios.
Listed real estate companies can also deploy capital for growth more quickly than in private markets. Notably, listed companies are in a stronger position now compared to the global financial crisis, with significantly lower levels of debt—around 30% in Europe and 40% in the US. Listed real estate companies have the advantage over private markets in terms of gaining greater access to capital through equity and debt raises. While private companies face constraints in bank lending and capital fundraising, listed companies are more able to finance growth, making them an appealing choice for investors seeking long-term value, said Murray.
Turning to the broader market outlook, Murray points out that valuations in real estate are currently trading at a two standard deviation discount to the broader equity market. This means that real estate valuations are far below their historical relative valuations compared to broad equities. While the rally in major tech stocks has influenced this trend, she argues that the real estate market’s discount relative to shares is too great, considering the positive outlook for the sector. This underperformance is similarly reflected in listed infrastructure options.
The expanding growth from US-based firms to European and APAC markets indicates that real estate and infrastructure earnings growth is poised to close the gap with broader market growth in the coming years, said Murray.
Combining public and private investments enables institutional investors to make dynamic adjustments as market conditions evolve, said Murray. For example, some investors use liquid real estate investments to balance private, passive and active strategies.
“Clients are sophisticated and we’re seeing them use these investment tools dynamically. One client increased their real estate allocation via an ETF for quick and cost-effective access to the market. However, the client plans to shift into a more active portfolio of listed real estate in the next few months, anticipating higher returns over time.”
Listed infrastructure offers investors the ability to reduce the J-curve typically associated with private investments. Clients are increasingly using listed infrastructure to gain access to assets today, mitigating the volatility and long deployment periods that come with private infrastructure investments.
Murray emphasises that the listed infrastructure market is particularly strong in transmission and distribution (T&D), an area where private markets often struggle to gain access. The historical presence of companies like National Grid has created a robust market for these essential services. As governments and regulators continue to prioritise infrastructure upgrades, particularly in the T&D sector, Murray believes this will drive higher growth opportunities in the listed space because of the critical need for upgraded infrastructure as part of the global transition to more sustainable energy systems.
Sectors such as transport and regulated utilities have seen improved earnings growth. Telecoms, a highly regulated sector, is seeing a rebound in capital expenditure and it is possible that within infrastructure as a whole, said Murray, the sector could see a “step change” in earnings over the next decade.
“This golden age of infrastructure investment could usher in a new era of growth, one that investors have yet to fully grasp.”
Notable outperformance through ETFs
ETFs have also had a golden era of growth in the 25 years since the first ETF was launched in Europe. Having evolved way beyond core equities in this time, ETFs now not only tap the real estate market, but offer a deep level of granularity. Amir Amini, sectors & thematic investing specialist at BlackRock, says that through ETFs investors can choose from a broad range of strategies across global real estate markets, or in more specific regions such as the US, Europe and or Asia Pacific. Investors can even further narrow their exposure to particular countries like the UK or Switzerland.
ETFs can also harness the green themes that are prevalent now in real estate and infrastructure through sustainability rules employed in specialist indices that ETFs track. For example, BlackRock offers the iShares Global Real Estate Environmental Tilt Ucits ETF that tracks the FTSE EPRA Nareit Developed Green Low Carbon Target Select Ucits Capped Index.
According to Amini, the landscape for real estate-focused ETFs is in the ascendancy. Real estate ETFs witnessed more than 60% growth in 2024 through investor allocations compared to the previous year, with investors attracted to ETFs by scalability and liquidity.
Real estate is one of the most energy-intensive sectors and low-carbon indices – which aim to be sustainable but without compromising the efficiency of passive investing – can be optimised for ‘green certificates’ (essentially rankings for sustainability), carbon intensity, and energy usage.
Amini says: “The integration of sustainability criteria into real estate ETFs is a crucial development, enabling investors to pursue their sustainable investing goals without the need for complex, active management. Alternative data providers allow ETF issuers to incorporate real-time analytics and ensure that the sustainability characteristics of the underlying assets are closely monitored and optimised.”
He argues that the highly liquid nature of ETFs means they are viewed as flexible components of any portfolio, whether used for long-term investment or short-term tactical adjustments. When they are used as building-blocks within portfolios, ETFs can be employed in conjunction with other investments to rotate exposures across sectors as market conditions change.
Investors can even access the growing income potential from real estate. Amini says: “Broad real estate ETFs can provide annual dividend yields of around 4%, which, when coupled with favourable tax treatments—especially those domiciled in jurisdictions like Ireland—can lead to substantial income gains. The tax efficiency of ETFs, which allows for a reduced tax on dividends compared to traditional index funds, can result in a notable performance improvement.”
The future of liquid real estate
The future of active and passive real estate investing is undoubtedly tied to sustainability and the appearance of newer real estate sectors. Then there is the coincidence of a supportive public policy across the globe. Fortuitous, too, is the rising appetite among investors for private assets. But for those whose appetite for illiquidity risk might not be so strong, the integration of active and passive investment approaches facilitated by vehicles like ETFs and Reits still offer investors flexibility and liquidity when accessing the diverse range of real estate sectors and geographies.