How to invest in real assets

Pension plans and wealthy investors are looking for more than the paltry returns on offer in the bond market and the roller-coaster ride of equities. So they’re turning to real estate, roads, shopping malls that surround airports – all tangible investments.

That’s also because hedge funds have “stained their reputations,” suggests Vaino Keelmann, a partner at API Asset Performance Inc. And the returns on venture capital over the past decade have been “really appalling,” says Victor Scutaru, director of fund investments at BDC Capital, the Business Development Bank of Canada’s investment arm.

Read: Back to the land: Investing in real estate

Both spoke this week at IMN’s 12th annual Canada Cup of Investment Management in Toronto.

Investing in real assets requires digging. The obvious diversification choice is REITs, but Nancy Hoi Bertrand, director at Citi Private Bank, points out that U.S. REIT returns are closely correlated with the performance of the Russell 2000 and the Russell 2000 Value indexes.

Read: A real estate empire: Closing the deal

Perhaps it takes a different mindset. John Walker, managing director at Kensington Capital Partners Ltd., argues that infrastructure should be treated like a real return bond – but with a return expectation of 10% to 14%. That’s what the major pension funds are anticipating, but they have direct ownership stakes.

Smaller investors can choose listed funds and stocks (think Brookfield), which provide immediate liquidity but also market volatility. There are also private funds that may not have much volatility, but could lack liquidity.

Read: Real (estate) income: A haven from volatility

Types of portfolios

With real estate, the easiest entry point is a core portfolio, which includes well-kept, fully tenanted buildings. That market seems fully valued in North America, says Michael Rizzello, senior portfolio manager at the Canada Post Corporation Pension Plan, with returns on the order of 7% to 10%.

Read: How to build a real estate empire

Further up the risk scale are core-plus funds, which combine income with modest capital appreciation. Still, the majority of returns in real estate are derived from income.

That means returns on Class-A properties have been compressed. But Rizzello sees opportunity for downtown Class-B properties near transit hubs.

Read: Seeking yield? Think real estate

Different properties, different risk

Ports are risky. Ruo Tan, president of Segal Rogerscasey Canada, says if you were to buy a shipping line based in Kuwait, regularly sailing to South Korea, the ship would have to travel through five potential war zones.

If you’re considering a greenfield development, keep in mind a firm has to put up money before there’s positive cash flow – money that might’ve otherwise earned interest. By contrast, a brownfield site is already in production and has a revenue stream.

Read: The pros of private real estate

Another investment to consider is airports. Walker, who was involved in the redevelopment of Lester B. Pearson International Airport’s Terminal 3, says the biggest money maker is parking garages. Investors should choose properties that extract the most “dollars from the time customers hit the curb until the time they get on the planes.”