Renewable infrastructure and long-income real estate offer best relative value, says Aviva Investors

wind farm

Renewable infrastructure and long-income real estate look to offer investors the best relative value opportunities in the real assets universe over the medium-to-long term. This is according to the inaugural Real Assets House View from Aviva Investors, the global asset management business of Aviva.

The Real Assets House View, which brings together the views and analysis from across real estate, infrastructure and private debt, assesses the themes, opportunities and key risks that are likely to impact real asset markets over the next five to ten years. 

With investors typically allocating to real assets in order to achieve sustainable income according to the company’s recent Real Assets Study, Aviva Investors predicts unlevered UK renewables, such as onshore wind and solar power, and long-income real estate will offer the best income-generating opportunities, with the former outperforming all other equity asset classes roughly 75 per cent of the time when analysed under a range of market scenarios. Furthermore, Aviva Investors says both renewables and real estate can offer significant diversification benefits in an income portfolio given their idiosyncratic risk drivers of power prices (renewables) and rental growth. 

Mark Versey, Chief Investment Officer, Real Assets, at Aviva Investors, says: “While we still see value across all parts of the real assets market, our analysis reinforces the fact investors do not typically look at allocations in isolation, but instead how they can deploy capital across multiple areas to achieve their investment objectives. Given the increasing adoption of multi-asset approaches to allocations, we need to ensure our clients’ investments are managed flexibly in a way that optimises outcomes in their portfolios. The analysis in our House View will provide a foundation from which we can make those decisions.” 

Elsewhere, UK renewables were determined as offering the highest expected returns, albeit with a relatively wide range of potential outcomes. The report also highlights energy-from-waste and digital infrastructure as sub-sectors likely to see signficant growth. 

Although its House View ranked long income, income strips and renewables as more attractive relative to traditional commercial real estate overall, Aviva Investors continues to believe there are attractive opportunities in core locations benefitting from talent, clusters and constraints on new development. 

In the private-debt market, mid-market loans are expected to generate higher income than all other asset classes bar infrastructure. Floating-rate loans and fixed-rate debt are viewed as key elements in a diversified debt strategy. 

The research also highlighted three key macro themes that Aviva Investors expects to drive real assets investment and performance, including: • The continuation of a ‘lower-for-longer’ interest rate environment, which will underpin an extended investment cycle and support long-duration asset values:

• The unlocking of returns by exploiting complexity. As the volume of capital entering the sector drives yields down, investors will need to look at emerging areas of the market to unlock attractive returns; 

• ESG has become a critical component in investment strategies, used to identify material risks on one hand and deliver better outcomes for economies and society on the other. 

Versey adds: “As we start the new decade, investors continue to face macroeconomic and political uncertainties. In this environment, real assets offer access to a diverse range of opportunities that can deliver different risk exposures, levels of diverisification and investment outcomes. 

“Although we believe structural demand and supply drivers will support favourable returns across the spectrum of real assets, the presence of renewable infrastructure, long-income real estate and mid-market loans as the most attractive sources of income highlights the evolution of the sector away from more traditional strategies.”