Current Issues
Global financial markets
Real assets
June 6, 2012
A sought-after investment class in times of crisis
Authors
Josef Auer
+49 69 910-31878
[email protected]
Real assets are currently very much in demand by investors. The major drivers
of this are the high volatility in the financial markets since the start of the global
financial crisis and the concern many investors have about high rates of
inflation. Empirical studies show that real assets can actually provide effective
inflation protection.
Eric Heymann
+49 69 910-31730
[email protected]
Jochen Möbert
+49 69 910-31727
[email protected]
Claire Schaffnit-Chatterjee
+49 69 910-31821
[email protected]
Antje Stobbe
+49 69 910-31847
[email protected]
Editor
Antje Stobbe
Deutsche Bank AG
DB Research
Frankfurt am Main
Germany
E-mail: [email protected]
Fax: +49 69 910-31877
www.dbresearch.com
DB Research Management
Ralf Hoffmann | Bernhard Speyer
For many investors, real estate is the most important real asset investment.
Whereas numerous real estate markets in Europe and the USA are still
suffering the effects of overheating, rising prices are now evident in the German
residential property market. The environment for commercial property also
remains attractive.
Long-term trends, such as the growth of the global population, increasing
urbanisation and the growing economic importance of emerging markets, favour
investments in real assets such as infrastructure or agricultural land. Growth in
the volume of ships and aircraft is benefitting from growing world trade and
increasing international mobility. Low margins, e.g. in aviation, are a risk factor
in this segment, however.
Numerous investment options in renewable energies. The energy transition in
Germany, as well as the increasing use of renewable energy sources in other
countries, is creating new prospects for investors in real assets. Although
investors have been able to gain considerable experience of e.g. onshore wind,
biomass and photovoltaics, with hydroelectric power and, in particular, offshore
wind farms they are still entering largely new territory.
Individual case analysis is decisive. In contrast to homogenous real asset
investments like gold and other raw materials, for heterogeneous real assets
such as real estate, ships and offshore wind farms a comprehensive valuation of
the investment concerned, its earning potential and risk profile is of major
importance. Factors such as an attractive location, favourable market prospects
and stable political conditions – also in other countries – play a role in economic
success. Investors must also take account of ethical principles, e.g. when
investing in agricultural land.
Real assets with specific risks. Investment in real assets presupposes a wellinformed investor, capable of assessing the various alternative forms of
investment. This applies all the more because most real asset investments have
a very long investment horizon, they often have low fungibility and/or liquidity
and investors frequently have to take entrepreneurial risks. This can even result
in total loss of the investment.
Real assets: A sought-after investment class in times of crisis
The flight for security
1
A. Real assets: an overview
USD/troy ounce, EUR/troy ounce
2000
1500
1000
500
0
00
02
04
06
08
USD
10
12
The topic of real assets is currently being intensively discussed in the media and
among investors. The turbulence in the financial markets since the start of the
subprime crisis in 2007, together with latent worries about inflation resulting from
unorthodox financial policies, mean that investors are looking for alternatives to
investments in stocks or bonds. Preservation of capital has taken on a new
significance. Gold has benefitted from this in the last few years. The gold price
has almost trebled, from just over 630 USD per ounce at the start of 2007, to
almost 1,800 USD in February 2012 (see Fig. 1). This study discusses the
characteristics of investments in real assets (Part 1) and analyses various
investment options (Part 2). We have concentrated on categories of investment
that are usually illiquid and that are not normally traded in the financial markets.
EUR
Source: DB Research
What are real assets?
2
No simple demarcation
“Do you consider the following to be real
assets?" (%)
Real estate
Agriculture/forest
Gold
Precious metals
Agric. raw materials
Fossil raw materials
Infrastructure
Renewables
Water
Equities
Ships
Aircraft
Containers
Patents
0
20
40
60
80
100
Source: Steinbeis Studie, 2010
Open and closed-end funds
It is by no means clear what goods should be included in the real assets group.
A current survey shows that more than 90% of the institutional investors who
were asked classified real estate, land and forests, precious metals and fossil
and agricultural raw materials as real assets (see Fig. 2). The degree of
agreement starts to fall in the case of renewable energy, infrastructure, ships or
shares. Equities are frequently classed as real assets, because the purchaser of
shares acquires an interest in a company. Luxury goods such as clocks, art,
jewellery, vintage cars and wine are also often defined as real assets. Here,
however, there is a fluid boundary between hobby activities and investment
goods: the trend of prices is correspondingly opaque. Equities, luxury goods and
patents are outside the boundaries of this study.
3
“Closed-end funds, as financial intermediaries,
pool the capital from a number of investors in
order jointly to finance an economic good that
individual investors could not finance. They
therefore offer private investors the opportunity
to participate in large investment projects.
Unlike equities and open-ended funds, closedend funds are not involved in financing
indeterminate and open-ended projects. The
business model is typically centred on a projector property-related investment, for a defined
period, predominantly in real assets.”
In some open-end funds, e.g. a real estate fund,
by buying a share the investor also acquires
economic co-ownership of the fund’s assets.
Open-end real estate funds issue a
fundamentally unlimited number of shares,
which are normally acquired and redeemed on
each trading day.
Sources: http://www.vgf-online.de/rund-um-fonds.html and
It is not easy to give a clear definition of real assets. The equivalent German
term Sachwert refers only to the reproduction value (replacement cost) of a
good. In an investment concept, a real asset is defined as a good that is
1
independent from variations in the value of money. This definition alone
provides sufficient motive for the integration of real assets in portfolios. In times
of high inflation, real assets should protect financial resources against loss of
purchasing power.
Gold: A special role among raw materials
4
Gold has a special status among raw materials. For centuries it has served as a “money metal”.
During the gold standard in the 19th century, paper money was totally or partially backed by gold
stored by the central banks. Under the Bretton-Woods system (1944 to1973), various currencies
were linked to the gold-backed US Dollar. After the ending of the gold standard, gold still retained a
certain importance as a reserve. The central banks worldwide currently store around 30,500 tonnes
of gold as currency reserves. In contrast, in 2010 demand from the most important gold importing
countries, inter alia for industrial production and jewellery manufacture, was for only around 3,000
tonnes. Fluctuations in the gold price are therefore often caused by strategic changes in the central
banks’ reserve positions. However, gold’s role as a “safe haven” in periods of crisis, which has led to
the rapidly rising price of gold since 2007, is more important. In comparison, the prices of industrial
raw materials and oil are more strongly driven by economic trends.
There are various possibilities for investing in real assets. Firstly, direct
investment in a real asset is possible, such as the purchase of gold bars, real
estate, or a direct interest in a solar installation, a ship or a farm. Secondly,
there are various indirect investment schemes. These include open-end and
closed-end funds (see Box 3). The acquisition of stock in raw material
companies (e.g. gold mines) or real estate equities (REITs, see Box 6) are other
http://www.bvi.de/de/investmentfonds/fondsarten/offene_
immobilienfonds/index.html
1
2
| June 6, 2012
Cf e.g. Gabler Wirtschaftslexikon Online. http://wirtschaftslexikon.gabler.de/StichwortErgebnisseite.jsp, viewed on 23.2.2012.
Current Issues
Real assets: A sought-after investment class in times of crisis
Closed-end funds: Lower inflows
5
possibilities. Investors can invest in commodities that, unlike gold, are not easy
to store, through certificates or index funds (Exchange Traded Funds, ETF).
DE, EUR bn
REITs
25
6
REITs are stock-market traded real estate AGs (joint-stock companies). Investors benefit from their
high liquidity, with shares traded on the stock market, and the diversification possibilities of the real
estate portfolio. REITS can also be attractive for tax reasons. REITS are internationally established.
In the USA, this investment vehicle was successfully introduced as long ago as the 1960s. Since
being launched in Germany in 2007, however, this type of investment still has a shadowy existence.
20
15
10
Magnitude difficult to gauge
5
0
2000
2002
2004
2006
Equity capital
2008
2010
Debt capital
Source: VGF
Closed-end funds: Real estate
particularly sought-after
7
Equity capital placed by asset class, DE,
EUR m, 2011
The markets for open-end and closed-end funds provide an indication of the
general development and trends of investment in real assets. The Verband für
Geschlossene Fonds (VGF) estimates that the assets of closed-end funds in
Germany are EUR 199 bn (as at 2011). EUR 99 bn of this is invested as equity
capital. In 2011, EUR 9.9 bn passed into real assets through closed-end funds
in Germany (down 8% yoy, see Fig. 5). The volume has considerably declined
since the start of the financial and economic crisis and, since 2009, has been at
a low level. Last year, private investors made the vast majority of the equity
capital available: EUR 4.81 bn of the total of EUR 5.85 bn.
941
316
2,236
415
506
795
Real assets definitely play a significant part in the portfolios of both private and
institutional investors. The magnitude of the capital and current investments in
real assets can, however, be only roughly estimated as investors – as described
– can choose different forms of investment, the market volume of which is often
not transparent. The purpose of the investment is also not always clear. For
instance, an owner-occupied property is certainly a real asset investment.
However, the house owner does not necessarily purchase or build a home with
the aim of making a profit. It rather represents a permanent asset or a durable
consumer good. For the purposes of this analysis, we assume that investors
investigate alternative investments with the aim of achieving a return.
637
Other
Aircraft
Infrastructure
Ships
Energy
Foreign real estate
Domestic real estate
Source: VGF
Ships decline, energy in demand
8
Closed-end funds, inflows, DE, EUR bn
More than half of the equity capital collected flowed into domestic (up 38% yoy)
and foreign (up 10% yoy) real estate funds (see Fig. 7). This reflects investors'
fundamentally increasing interest in the German property market. Following, by
a considerable margin, were Energy (11%), Ship (9%) and Infrastructure funds
(7%). Cash flows into ship investment funds have collapsed heavily since 2008;
while equity capital investments into energy funds rose in the same period (see
Fig. 8). However, in 2011 the latter failed to fulfil expectations at only EUR
637 m (a 23% decline yoy). The fund volume fell by as much as a third yoy.
Private investors have also invested EUR 87 bn (as at 2011) in open-end real
estate funds in Germany. However, in the last few years there has also been a
decline in net inflows: in 2011 only EUR 1.2 bn, after EUR 1.6 bn in 2010 and
EUR 3.2 bn in 2009 (see Fig. 9). Institutional investors have invested almost
EUR 33 bn in real estate through open-end special funds (as at the end of
2011). In addition, the Bundesverband Investment und Asset Management (BVI)
reported an investment volume of EUR 5 bn by private investors in raw-materialbased investment funds (e.g. investments in commodity futures). Therefore at
least EUR 125 bn is committed to open-end real asset funds.
8
7
6
5
4
3
2
1
0
2000
2002
2004
Energy funds
Source: VGF
2006
2008
2010
Ship funds
Motive: why have real assets in the portfolio?
The survey shows that investors have differing motives for investing in real
assets. The factors frequently mentioned were diversification, inflation
protection, risk reduction and/or crisis resistance and increased yield, or a
mixture of these (see Fig. 10). To what extent are real assets appropriate for
achieving these objectives?
3
| June 6, 2012
Current Issues
Real assets: A sought-after investment class in times of crisis
Inflation protection
Open-end real estate funds:
Stagnating assets
9
EUR bn, retail funds on sale in DE
15
90
10
60
5
30
0
0
-5
-30
-10
-60
1990 1993 1996 1999 2002 2005 2008 2011
Assets (r.)
In/outflows (l.)
Source: BVI
Diversification and inflation protection
most important
10
In your view, what are the reasons for using real
assets? (%)
Investors favour real assets as a hedge against rising inflation rates. Whereas,
in an environment of higher inflation, financial assets such as bonds lose value
in real terms, the real prices of real assets remain stable or increase. During the
last 15 years, inflation rates in the industrialised countries have fluctuated at
moderate levels of up to 3% p.a. (see Fig. 11), although in some countries they
have been considerably less. In such an environment, investment in real assets
with a view to inflation protection typically offers hardly any advantages. For the
next two years, in our basic scenario we also expect moderate price increases
in the Eurozone: 2.5% in 2012 and 1.7% in 2013. Factors in favour of this are
the average utilisation of capacity and moderate wage increases.
Nevertheless, in the current environment inflation is an important topic for many
investors. In the last few months, the ECB has made a great deal of liquidity
available to market participants through various vehicles – most recently by two
3-year refinancing options. At the moment, however, this liquidity is not finding
its way into the real economy and therefore is not leading to commodity price
inflation. A few investors are however concerned that this could take place in the
medium term, e.g. as a result of increased inflationary expectations. There is
also the risk of so-called asset price inflation, i.e. increasing prices for individual
investment classes. Investment in real assets is a logical conclusion for
investors who expect inflation rates to increase in the future.
Empirical investigations confirm that investment in real assets can be a good
choice in phases of high inflation rates. In a long-term observation from 1959 to
2007, Gorton and Rouwenhorst show that the yield on commodity futures has a
positive correlation with the inflation rate. The longer the investment period, the
greater is the correlation. In other words: In contrast to equities or bonds,
2
investments in commodity futures offer effective protection against inflation. As
the authors show, this is particularly valid for phases of unexpected inflation.
Diversification
Inflation protection
Risk reduction
Increased returns
Crisis resistance
Hedging against
undesirable market
trends
0
20
Agree
40
60
80
100
Partly agree
Institutional clients were surveyed
Source: Steinbeis Studie, 2010
Inflation at a moderate level
11
Consumer prices, % yoy
8
In the last few years, the financial markets have been characterised by crises
that have led to increased volatility (see Fig. 12). In view of this market
turbulence, for numerous investors preservation of capital has become an
important objective. To many investors, physical gold is the epitome of
insurance against geopolitical and economic risks, as well as those emanating
from the financial system. The historically high gold price impressively reflects
this. However, many people are also reassured by real estate – in particular a
private home of their own – which is regarded as “concrete gold”. However, by
no means all real assets can be categorised as traditional “safe havens”.
Instead, it is essential to analyse whether, and to what extent, the prices of real
assets and their current yields (if any) could be affected by shocks or could react
to economic trends (see the next section on diversification).
6
Diversification
4
The increasing global networking of the commodity and financial markets has
resulted in the economic cycles in Europe and the USA running in parallel for
many years (see Fig. 13). There is also considerable correlation of stock market
trends. Shocks, such as the collapse of the US bank Lehman Bros., have been
2
0
-2
90
94
US
IT
Source: OECD
4
| June 6, 2012
98
02
UK
JP
06
10
DE
ES
2
See: Gorton, Gary and K. Geert Rouwenhorst (2005). Facts and fantasies about commodity
futures. Yale ICR Working Paper No. 04-20. Investors must take into account that, for real asset
investments with regular incomes, the latter also have to rise in line with inflation in order to avoid
devaluation of the receipts in real terms over the term of the capital commitment (e.g. indexation
of rents).
Current Issues
Real assets: A sought-after investment class in times of crisis
12
High volatility at times
felt worldwide. Investors therefore integrate real assets in a portfolio because
they have a low correlation with the yields on equities and bonds.
Index (l.), % (r.)
3
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
80
70
60
50
40
30
20
10
0
06
07
08
DAX (l.)
09
10
11
12
VDAX (implicit volatility, r.)
Source: Bloomberg
Industrialised countries: Economies
closely connected over the long term
13
Real GDP, % yoy
6
4
2
0
-2
This connection can be shown empirically, e.g. for commodities. Gorton and
Rouwenhorst show that the yields on commodities futures have a negative
correlation with the yields on long-dated bonds and – for long holding periods –
with equities. Commodities futures could therefore be employed effectively in
4
order to diversify equity and bond portfolios. On the other hand, according to
Yee’s analysis, high correlation coefficients are evident in a comparison of the
yields on financial assets with those of metal or energy producers or with
5
REITs. The connection with the stock market therefore predominates in this
case. Investments in real assets by means of stock in raw-material producing
firms therefore do not contribute to diversification of the portfolio. The selection
of the investment vehicle is therefore a decisive factor for real asset investments
in order to minimise portfolio risks.
Diversification of the portfolio can only reduce the so-called non-systematic risk,
however. The systematic risk, i.e. the interdependence of returns on changes in
the overall market and/or shocks cannot be eliminated. For instance, the returns
on equities and investments in specific real assets are necessarily positively
correlated by the underlying economic determinants. The return on an investment in equities depends e.g. on company profits and therefore also on growth.
The return on investments in ships is dependent on inter alia, global economic
growth and the increase in world trade. Depending on the target market of the
investment, a positive correlation may result. An empirical investigation of seven
industrialised countries shows that the return from the value change of office
property has a positive correlation with GDP growth and a negative correlation
6
with real interest rates. However, the trend of rents was shown to be broadly
independent of the economic situation (see Part 2).
-4
-6
-8
2000
Increased returns
2002
2004
2006
2008
2010
US
DE
JP
UK
2012
Eurozone
Source: DB Research
Returns: varied influencing factors
14
The factors influencing the return on a real
asset investment depend on the class of
investment. For instance, the return on
investments in precious metals (e.g. gold) or
other raw materials is driven by price changes
on the spot and futures markets. In contrast, by
investing in a property or a ship, the investor
normally receives an additional regular income.
Investors are ever-increasingly resorting to real assets with the objective of
increasing the return from their portfolios. However, a comparison of the yields
on various classes of investment show that a premium must often be paid for
real assets, as a result of their limited marketability. The degree of liquidity is
dependent on the type of real asset and the investment vehicle selected. In
principle, higher yields also reflect the higher risks that are associated with an
entrepreneurial activity (such as interests in ships or energy production
facilities). Comparisons of the yields on different classes of investment are
therefore of only limited significance.
A rigorous comparison of yields across the various classes of investment is also
hampered by a lack of data. This also stems from the heterogeneity of the
assets and the funds. For example, the returns on closed-end ship funds vary
with the vessels selected and therefore depend on individual cases. It is therefore not possible to give a general statement of the profitability of particular
classes of investment in terms of yields. In Part 2 of this study we will thus only
present ranges of yields.
3
4
5
6
5
| June 6, 2012
See: Yee, Kenton K. (2011). Keeping Real Assets Real. Mellon Capital Management Corporation.
Yee determined a correlation of almost 0.3 between a portfolio with 60% equities and 40% bonds,
and the S&P GSCI commodity index. The analysis was carried out over the period January 2001
to December 2010.
It must also be taken into account that, logically, the real asset portion of a portfolio should also
be diversified.
See: Yee, Kenton K. (2011). Keeping Real Assets Real. Mellon Capital Management Corporation.
The analysis was carried out over the period January 1974 to December 2010.
Jäger, M. and M. Voigtländer (2007). Determinanten der Renditen von Büroimmobilien, in IW
Trends, No. 4/2007, pp 1-14.
Current Issues
Real assets: A sought-after investment class in times of crisis
Raw materials: high returns in
the last 10 years
15
Return on raw materials index, basis: Futures,
% p.a., 1/1/2002 to 25/4/2012
Oil/WTI
Oil/Brent
Heating oil
Gold
Silver
Investigations of historic yields are therefore mostly concerned with homogenous goods such as commodities, for which indices are available. These
show that certain real assets can achieve higher yields than investments in
equities or bonds. A comparison of the average historic yields on raw materials
over the last 10 years (2002 to 2012) shows that investments in commodity
futures have achieved double-digit annual returns (see Fig. 15). This consideration of averages over a long period however hides the fact that the profitability
of individual investment vehicles naturally depends on the time the investment is
made. For example, investors in aluminium futures achieved a return of 17%
between 2002 and 2007, whereas, due to the sharp decline in prices, the return
over the whole 10-year period of the study barely exceeded 3%.
Aluminium
Copper
0
5
10
15
20
25
Open-end real estate funds: better than
equity funds in the last 10 years
16
As at: 25/4/2012
Source: DB Research
Academic studies also show that statements about the profitability of individual
investment vehicles are decisively dependent on the macroeconomic environment. For instance, Yee showed that, for the US market, in a climate of increasing inflation rates (with a monthly rate of increase in excess of 0.3%)
commodities (measured by the S&P GSCI Index) achieved double-digit positive
7
annual returns. In contrast, equities and bonds suffered negative returns. In the
early phases of recessions, real assets also achieve positive returns, while
8
equities and bonds produce negative returns. This suggests that equities
anticipate the coming economic weakness, while raw material prices continue to
increase with inflation. By historical comparison, in the later phase of the
upswing investments in raw material futures also achieve higher returns than
equities or bonds.
Return % p.a., average of the last
10 years
European equity funds
Global equity funds
Equity funds Germany
Euro fixed-income
funds, long-dated
Open-end real estate
funds
German fixed-income
funds, long-dated
-2
There is also a good dataset for open-end real estate funds. Over the last 10
years, investors in this asset class have been able to achieve a higher average
annual return than on investments in equity funds (see Fig. 16). However,
compared with most bond funds, open-end real estate funds come off worse.
This relationship has also generally been maintained over longer periods of up
to 20 years: however it is probably also be affected by the poor performance of
the stock market in the last few years. On a 30-year average, equity funds with
an investment focus in Germany have produced higher returns than open-end
real estate funds.
0
2
4
Source: BVI
Long-term trends favour real assets
Open-end real estate funds: worse than
fixed-income funds in the last 20 years
17
Return % p.a., average of the last
20 years
— The growth in world population from its current 7 bn to more than 9 bn by
2050. While the populations of numerous European countries and Japan
are declining, primarily in Africa – but also in Asia – population figures are
rapidly increasing. This is driving growing demand for energy, infrastructure,
(higher quality) foodstuffs and agricultural land.
European equity funds
Global equity funds
Equity funds Germany
Open-end real estate
funds
Euro fixed-income
funds, long-dated
German fixed-income
funds, long-dated
0
1
Regardless of the short-term fluctuations and specific characteristics of the
different markets for real assets, several long-term trends favour investments in
real assets. These include e.g.
2
3
4
— The increasing economic importance of the emerging markets. Increasing
prosperity in the region is driving demand for raw materials as well as
investment and consumer goods. The extensive global networking of
production chains, taking into account the emerging markets, has positive
repercussions on the growth of global trade. This is growing faster than
global GDP and is resulting in investment in transport capacities and
infrastructure.
Source: BVI
7
8
6
| June 6, 2012
See: Yee, Kenton K. (2011). Keeping Real Assets Real. Mellon Capital Management Corporation.
The analysis was carried out over the period January 1974 to December 2010.
See: Gorton, Gary and K. Geert Rouwenhorst (2005). Facts and fantasies about commodity
futures. Yale ICR Working Paper No. 04-20, p 21. The analysis goes back to 1959.
Current Issues
Real assets: A sought-after investment class in times of crisis
— The increasing importance of cities as places to live and work, particularly in
the emerging markets. According to United Nations forecasts, by 2030
9
approx. 60% of the world population will be living in cities. In principle this
favours increasing demand for real estate and efficient infrastructure,
particularly in the emerging markets. Therefore “…in the future, particularly
in urban centres and growing conurbations, there will be considerable
10
requirement for investments in real assets.”
— The increasing importance of renewable energies. Rising global energy
requirements and the increasing scarcity and rising prices of fossil fuels
favour the use of renewables. In Germany, with the post-Fukushima
decision to abandon nuclear power, policies have also substantiated the
priority of improving renewable energy sources and the associated
infrastructure.
However, these trends do not have the same effects on all real assets and
regions. The example of real estate makes this clear. As well as the current
price level, the attractiveness of property investments depends on structural
factors for the location, such as whether it is a region of inward or outward
migration and/or a growing (or stagnating) industrial or services centre. The
fundamental importance of the trends outlined above therefore does not exempt
investors in real assets from carrying out a precise analysis of the target region.
The importance of the trends for specific real asset markets is discussed in Part
2 of this study.
Real assets with specific risks
Investments in real assets are associated with numerous risks that are
attributable, inter alia, to their basic characteristics.
— For example, investments in real assets are often coupled with entrepreneurial risks. This applies to e.g. investments in ships, aircraft or
agricultural operations. In these investments, investors could suffer a total
loss of the capital invested.
— Inelastic supply is typical of real assets. The implications of this
phenomenon are evident e.g. in the case of raw commodities. Unexpected
effects on short-term supply (e.g. in the form of unusual weather conditions
or geopolitical shocks), stocks or demand can lead to considerable price
fluctuations.
— Some of the real asset markets have relatively low fungibility. For instance,
it is not always possible to sell a direct interest in e.g. a commercial property
at the desired price. Even in the case of homogenous goods, such as an
interest in a closed-end fund, the shares might not be saleable at a
particular time (low liquidity or illiquidity). These features of real assets
normally limit the proportion of them in the portfolio, provided that the
investor has a preference for mainly liquid investments.
— The real asset markets are not without fluctuations and crises of their own.
The returns on real asset investments generally enjoy lower volatility than
e.g. those on equities, as can be seen from the returns on investments in
11
ship funds or the trend of German residential rents (see Part 2). However,
9
10
11
7
| June 6, 2012
See: United Nations (2006). World Urbanization Prospects – The 2005 Revision.
See: Bräuninger, Michael et al (2009). Langfristige Perspektiven von Anlagen in Sachwerten.
HWWI Policy Report No. 11 of the HWWI-Kompetenzbereich Wirtschaftliche Trends.
Cf e.g. Bräuninger, Michael et al (2009). Langfristige Perspektiven von Anlagen in Sachwerten.
HWWI Policy Report No. 11 of the HWWI-Kompetenzbereich Wirtschaftliche Trends. Fluctuations
in the value of a real asset investment are often less visible than with financial assets, as the
former are not continuously revalued. This says nothing about the actual fluctuations in value,
however.
Current Issues
Real assets: A sought-after investment class in times of crisis
this does not belie the fact that imbalances or speculative bubbles can occur
in some markets. In the past, this has been particularly true of the real
estate markets. The subprime crisis in the USA and the property bubbles in
some European countries are the most recent examples. The bubbles had
spectacular consequences for the global economy.
— Depending on the region in which the investor places capital, it is necessary
to take account of currency and country risks as well as differing tax
regulations.
Well-informed investors sought after
In view of risks described and the generally rather complex trends of the
relevant markets, a well-informed investor is a prerequisite for an investment in
real assets. For example, the selection and management of a real asset portfolio
necessitates extensive knowledge of the markets concerned and, in some
circumstances, operative capabilities. From the investor’s point of view, lack of
expertise is often a barrier to the choice of appropriate investments. In this
respect, investors’ experience with specific investment vehicles and knowledge
of the relevant products also play a part. The expertise of the asset manager is
of major importance in the choice of fund products and so should also be
incorporated in the selection of the product.
Real asset investors also need a longer investment horizon, as investments in
real assets normally require longer commitment of capital. Ship funds typically
have a life of 15 to 20 years; aircraft funds more than 15 years. From the
investor's point of view, it is therefore important to be able to assess the
potential of the investment vehicle reliably. In addition, private investors mainly
invest larger amounts. In 2011, the average subscription for investments in
closed-end funds across all asset classes in Germany was EUR 30,575 (up
from just over EUR 26,000 in 2010). Wealthy private clients with high investment
volumes can also invest in direct investments or special funds.
8
| June 6, 2012
Current Issues
Real assets: A sought-after investment class in times of crisis
B. Real assets: Numerous investment vehicles
Rent control by country
18
Scale 0-6: 0 = none, 6 = heavy regulation
4
3
2
1
0
DE
FR
IT
ES
JP
US
UK
Sources: OECD, DB Research
Affordability: rents
1. Real estate: reducing global imbalances
180
160
140
120
100
80
2002
US
2004
2006
ES
2008
DE
2010
UK
Source: OECD
Affordability: incomes
20
Ratio of house prices to incomes
Long-term average = 100
140
120
100
80
2002
US
2004
DE
For many investors, real assets are synonymous with real estate. This is a result
of both their everyday experience and the size of the market. In many countries,
for instance, the value of real estate assets considerably exceeds GDP. Real
estate is therefore often the focus of investment decisions. Compared with the
equity and bond markets, the two other large classes of investment, the real
12
estate markets are much more heterogeneous. Prices and transactions on
national real estate markets are heavily controlled by numerous local statutes
and institutional regulations (see Fig. 18). Financing rules, subsidy programmes
and the cultural attitude to debt are also country-specific factors that influence
the return on real estate investments. State subsidies were a driver of the US
housing market and, in the final analysis, the subprime bubble. In contrast, strict
rent control is one reason for the sluggish property prices in Germany.
During the last few years there have been corresponding variations in the
property price and affordability indices (see Fig. 19), defined as the ratio of
house prices to rental incomes. For example, in the years prior to the crisis,
investors in the UK, Spain and the USA profited from rising prices that were not
– or were only partly – reflected in higher rental incomes. This trend was not
sustainable in the long term: it was followed by a market correction.
The same pattern is evident in the ratio of house prices to disposable incomes
(see Fig. 20). In the years before the crisis, prices in Spain and the UK rose
disproportionately strongly relative to incomes. In the USA the affordability index
also rose considerably, while in Germany it fell.
160
60
2000
While the markets for real estate and ships have long histories, some of the real
asset markets have developed very recently or are still taking shape. These
include e.g. certain renewables, such as hydroelectricity and offshore wind
power. In the following analysis we will take account of this differing state of
development and therefore will not follow a predetermined list of criteria. It must
also be borne in mind that e.g. the real estate markets overall are considerably
easier to describe quantitatively than, for instance, investments in renewables,
for which hardly any aggregated data is available.
19
Ratio of house prices to rents
Long-term average = 100
60
2000
There are varied possibilities for investment in real assets. One of the most
liquid segments, which is accessible through the financial markets, is the
commodity market. As well as precious metals, investors also focus on industrial
and agricultural raw materials. It is relatively easy for investors to inform themselves about these homogenous markets. However, in this study we want to
concentrate on real assets that are mainly not traded on financial markets but
for which fund solutions or direct investment vehicles are dominant. In order to
make investment decisions in these inhomogeneous and, on first impression
often opaque markets, investors require more extensive information.
2006
ES
2008
2010
However, in the last decade house prices have been rising – sometimes rapidly
– and not only in the UK, Spain and USA, although the effects of the house
price correction on the economy were the strongest in those countries. Real
estate prices in other Euro countries also rose. House prices in all peripheral
countries, with the exception of Portugal, have experienced high growth rates in
the last decade. In France an almost double-digit annual growth rate was
achieved. Since 2000, prices have more than doubled (see Fig. 21).
UK
Source: OECD
12
9
| June 6, 2012
There is a very high correlation between US and German 10-year bonds. The German and US
stock market indices can also often be observed to move in parallel.
Current Issues
Real assets: A sought-after investment class in times of crisis
House prices have sharply risen in many
countries
21
2000=100
200
In Germany, however, prices declined by around 10% between 2000 and 2005
and then stagnated until 2009, before rising at 2 to 3% p.a. in the last couple of
years. By international comparison, house prices in Germany have therefore
been anticyclical and were less volatile. In our view there are numerous reasons
for moderate house prices to persist in Germany, while in other countries the
property market correction will continue. This is why increasing numbers of
investors have recently discovered the German real estate market as an
investment target.
150
The German real estate market: Residential property market
revived
100
00
02
04
IT
PT
06
08
10
GR
FR
Following years of stagnating or declining prices, in 2011 – as was already
noticeable in the previous year – German residential property prices rose. The
prices of single-family homes rose by an average of around 2.5% yoy. Condo
apartment prices rose by around 4%, considerably higher than the inflation rate
(2.3%). The most important reason is presumably the continuing uncertainty on
the financial markets. Fear of disruption from an escalation of the Euro crisis
and the massive amounts of liquidity made available by the ECB is increasing
the attractiveness of real assets, even though a large proportion of the liquidity
will be reinvested by the ECB and will not flow into the real economy. At the
same time, the Euro crisis means that interest rates will stay very low, so that
the cost of credit will remain at an extremely low level.
IE
Sources: BIS, DB Research
Net initial yields stable
22
DE, %
10.0
9.0
8.0
However, the strong economic growth in the last few years has also contributed
to the revival of the residential property market. For example, despite the deep
global recession in 2008/9, since 2005 Germany has experienced average
annual growth of 2%, while the growth rate was less than 1% between 2000 and
2005. The boost to growth has reduced the unemployment rate from over 12%
in 2005 to its current level of well under 7%. This small “economic miracle” may
also have contributed to rising property prices.
7.0
6.0
Investments in German commercial property are still attractive
5.0
91 93 95 97 99 01 03 05 07 09 11
Residential property analyses typically concern price trends, whereas for
commercial property the focus is on the trends of rents and yields. This practice
results from the differing investment objectives. While private households mainly
hold residential property for owner-occupation and as a direct capital investment, so that the purchase price is the top priority, institutional investors, which
mainly invest in commercial property, focus on achieving regular returns.
Offices, central location
Offices, peripheral
Warehouses
Retail, central location
Retail, peripheral
Sources: BulwienGesa, DB Research
Interest rates: downward trend
23
%
14
12
10
8
6
4
2
0
91
95
99
3-month Euribor
Source: DB Research
10 | June 6, 2012
03
07
11
10-year Bunds
As shown in Fig. 22, net initial yields (defined as the net rental income as a
percentage of purchase price, taking into account ancillary costs in the first year
of ownership) on German commercial property are very stable at an attractive
level. Most recently yields have slightly declined, as the trend of prices leads
that of rents. In view of the structurally declining interest rates (see Fig. 23), the
independence of the financial market is surprising. Investors who are currently
seeking refuge in real assets, or who would like to diversify their assets more
strongly, might withdraw funds from the bond market and restructure them in the
real estate market. This should tend to lead to increasing yields in the bond
market and declining yields in the real estate market, and hence to a narrower
difference in yields than before.
In view of the trend of yields, it is hardly surprising that rents in Germany have
also been very stable (see Fig. 24). The reason for this is once again the high
degree of regulation of the German real estate market. Globally, rents have
been much more volatile and cyclical. At the start of the last decade, rents in
Germany – like those worldwide – declined in the wake of the weakness in
global growth. The subsequent upswing, until 2007, only percolated to the
Current Issues
Real assets: A sought-after investment class in times of crisis
Commercial property: Rents in DE less
volatile
24
Q1 2000 =100, rents EUR/sq m,
most important city
180
A large number of factors influence the trend of rents, which is another
indication of the complexity of the real estate market, as the direction of their
effect is not always clear. For instance, our calculations show that changes in
interest rates could have both positive and negative effects on rental trends.
Surprisingly, the different segments of the German commercial property market
are only dependent on economic trends to a limited extent. For example, it is not
possible to assess whether economic growth and inflation have a direct or large
effect on commercial rents in Germany. A possible explanation lies in the belowaverage domestic demand in the last decade. The demand for commercial
property was also correspondingly weak. In the present economic environment,
with growing domestic demand and a flourishing labour market, the dependence
of commercial property on economic trends may have increased. As described,
however, we expect that prices will rise faster than rents and therefore that
yields will continue to decline slightly.
140
100
60
00
02
04
US
06
DE
08
10
ES
UK
Sources: CBRE, Deutsche Bank
Offices rents: low dependency
on economic cycles
German commercial property market to a limited extent, whereas in other
markets some rents doubled. Even in the upswing from the deep recession in
2008/9, German commercial rents lagged behind the trends in the UK and the
USA. The German real estate market for both commercial and residential
property can therefore be regarded as a conservative investment.
25
DE, EUR/sq m
Real estate as an asset class for private investors
Real estate investment opportunities are manifold and require expert knowledge. As well as the different basic investments, e.g. apartment buildings,
condo apartments, office buildings, retail properties and industrial buildings, the
investment vehicle is also of great importance to the success of the investment.
The investor can invest directly in bricks and mortar, or indirectly through
financial vehicles. Taxation aspects also play an important role in this respect.
17
14
11
8
5
00
02
04
06
08
Each property is unique. Real estate markets therefore often have low fungibility
and successful investments require a long investment horizon. Another factor is
that, particularly during an economic crisis, often properties cannot be disposed
of, or if so only at reduced prices. This is due to a lack of preparedness and
ability to invest, so that the market dries up.
10
Average office rent, city centre
Average office rent, city periphery
Top office rent, city centre
Top office rent, city periphery
Sources: BulwienGesa, DB Research
Retail rents
26
DE, EUR/sq m
160
When making direct investments in bricks and mortar, although investors have
the opportunity to make individual arrangements, transaction costs are involved.
According to the OECD, transaction costs in Germany payable by the purchaser
average 6.7%, with 1.1% on resale. Non-owner-occupied properties and shortterm investment horizons are also subject to a windfall tax. Also, many investors
shy away from direct investments due to the management costs and the
associated concentration risk.
140
Indirect investments, via funds or real estate stocks, provide an alternative.
Fund investments are mainly made in open- or closed-end funds. Table 27
provides an overview of the characteristics of the various indirect investment
vehicles: Open-end funds, closed-end funds, AGs (property companies) and
REITs (G-REIT in the table refers to German Real Estate Investment Trusts)
120
100
80
60
40
20
0
00
02
04
06
08
10
Top rents, prime (1a) locations
Average rent, prime (1a) locations
Top rents, district locations
The assets invested in German open-end real estate funds total more than
EUR 80 bn. (see Fig. 28). Of this, around EUR 20 bn – the sum doubled in May
2012 – is tied up in funds that have been wound up. At the moment, the
liquidation of the capital tied up in these funds is only possible with heavy
markdowns. Otherwise, investors might have a long wait, in some cases several
years, for the repayment of their funds.
Average rent, district locations
Sources: BulwienGesa, DB Research
11 | June 6, 2012
Current Issues
Real assets: A sought-after investment class in times of crisis
Characteristics of investment vehicles
27
Open-end real estate funds
Closed-end real estate funds
Real estate AGs
G-REITs
Unlimited divisibility
yes
no
yes
yes
Marketability
generally good
poor
generally very good
generally very good
tax transparent
Taxation of returns
tax transparent
tax transparent
liable to corporation tax and
business tax
Degree of specialisation
low
high
high
high
Information efficiency
low
very low
high
high
Management
external
external
internal
internal
Transaction costs
high
very high
low
low
Main risk
liquidity risk
liquidity/ concentration risk
stock market volatility
stock market volatility
Main investor group
private investors
wealthy private investors
so far usually existing shareholders institutional investors
Sources: ZEW, ebs, DB Research
Open-end real estate funds:
Units liquidated
28
EUR bn, DE, volumes
100
90
80
70
60
50
40
30
20
10
0
08
Open
09
10
Frozen+liqudated
11
Frozen
Liquidated
Source: BVI
29
Closed-end funds: inflows increasing
EUR m, DE
500
400
300
200
No early repayment of the investors’ capital in closed-end funds is planned. In
accordance with agreements, the fund assets are often invested in properties
for decades. Accordingly, liquid reserves like those of open-end funds are not
necessary. On the basis of this concept, closed-end funds are treated as
corporate investments for tax purposes. They can produce high returns.
Although there is a large supply of closed-end funds, in the absence of disclosure requirements it lacks transparency. The data provided by VGF nevertheless shows an increase in capital inflows (see Fig. 29), while the fund assets
of open-end real estate funds have tended to move sideways. Closed-end funds
appear to have gained in attractiveness to investors, in particular since the
closure of open-end real estate funds in winter 2008/9.
In addition to investing in funds, there is also the possibility of investing directly
in real estate stocks. So far, however, there has been a limited selection of
German real estate stocks. For example, the market capitalisation of the
German real estate stocks barely exceeds EUR 10 bn. The market volume of
German REITs, which were not authorised in Germany until 2007, is even
smaller. For the foreseeable future this investment vehicle will remain a niche
market. The trend of prices in the last few years has also been somewhat below
average, as shown by a comparison of the DAX with the EPRA Index, which
mainly comprises German real estate stocks, and the RX-REIT. The close
13
correlation with the DAX (see Fig. 30) however shows that real asset investors
holding real estate stocks do not achieve any effective diversification from
financial investments, despite investing in the underlying real estate assets.
100
0
08
09
10
Equity capital
11
Fund assets
Sources: VGF, Deutsche Bank
DAX, real estate stocks and G-REITs:
high correlation
30
15/09/2008 (Lehman collapse) = 100
120
100
80
60
40
08
09
10
EPRA Germany
DAX
RX REIT (quotation)
11
13
The correlation of the DAX with the EPRA is 0.73, and with the RX REIT 0.85.
Source: DB Research
12 | June 6, 2012
Current Issues
Real assets: A sought-after investment class in times of crisis
2. Renewable energies: global growth offers many
opportunities for real asset investors
Sources of energy contribute to the fulfilment of manifold human needs.
For long periods of the last century, fossil fuels were reliable resources in the
industrialised countries. In this century, in the wake of technical advances,
renewable energy sources are maturing as a viable basis for a better energy
future. An advantage of “green” energy sources is that they promise solutions
for challenges that have become more pressing in the last few years and which
could dominate the current century. This includes the growth in world population, which is indeed a reason for the continually increasing global energy
requirements. The accelerating prices of fossil fuels, particularly oil and coal, are
another factor. This trend will favour even those alternative energy sources that
appear to be hardly economic in their initial phases. Renewable energy sources
also improve the environmental balance sheet of energy production and
consumption: and they retard climate change.
PV is No. 1 in RE installation
investments *
31
DE, EUR m, 2011
Hydroelectricity
70
Biomass, heating
880
Geothermal
960
Solar thermal
1,050
Biomass, electricity
2,000
Wind energy
2,950
PV
15,000
0
10,000
20,000
* Investment in RE installations 2011: EUR 22.9 bn
Source: BMU
Admittedly, for investors renewable energy sources are nothing new. As early as
the start of the 1970s, hydroelectric power and biomass together contributed
14% of primary energy requirements. They were not infrequently financed by
private investors. In the future, regenerative energies will become even more
important, both nationally and internationally. Germany in particular is
ambitiously implementing the change in energy policy begun in the wake of the
two major oil crises in the last century, and given renewed impetus by last year's
nuclear power catastrophe in Japan.
In 2011, EUR 22.9 bn was invested in installations for the exploitation of
renewable energy in Germany (see Fig. 31). Although this was less than in the
record year of 2010, when investments reached EUR 27.8 bn, the main reason
was not due to quantity but to price. The precise cause was, in particular, the fall
in the prices of photovoltaic (PV) installations, strongly desired by politicians.
Although the amount of solar electricity capacity installed in 2011 was similar to
the previous year, falling prices meant that the investment in installations fell by
a quarter. Despite the lower prices, in 2011 PV still accounted for the lion’s
share, around two thirds, of the investment in renewable energy production
installations. Its contribution was therefore distinctly higher than the other
important sources of alternative energy: wind, biomass (electricity and heat),
solar and geothermic and hydroelectric.
Individual case analyses are essential
Biomass at the top of RE operating
turnover*
32
DE, EUR m, 2011
Solar thermal
230
Hydroelectricity
340
Geothermal, ground
source
700
PV
1,000
Wind energy
1,400
Biomass, fuel
3,650
Biomass, electricity &
heat
5,750
0
2,000 4,000 6,000 8,000
* Turnover from RE installations 2011: EUR 13.1 bn
Source: BMU
13 | June 6, 2012
Energy investors should, as a matter of principle, look at all alternative energies
and also abroad. In many countries having favourable natural conditions for
individual alternative energy sources, these have been successfully exploited for
many years. This is particularly clear in the case of geothermal energy and
hydroelectric power. For instance, in countries with relatively high volcanic
activity, such as Costa Rica, Kenya, El Salvador, Iceland, Nicaragua and the
Philippines, between a tenth and more than a fifth of electricity generation is
from geothermal energy. In a few countries, hydroelectricity also accounts for a
considerably higher proportion of electricity generation. In Norway, Brazil,
Austria, Canada and Sweden this ranges from 50% to as high as 99%.
In addition to natural circumstances, unexpected developments also play a part
in the relevance of foreign countries. For example, a favourable adjustment to
subsidy policies can lead to strong growth. Graphic examples of this are the PV
booms in Spain in 2007 and, more recently, in Italy, which also benefited from
positive PV subsidies in 2011. Admittedly, such developments always carry the
risk that, sooner or later, the subsidy will be “adjusted” downwards. In view of
the varied and extremely changeable policy directions associated with
Current Issues
Real assets: A sought-after investment class in times of crisis
renewables and the different technical trends, only deeper analysis of individual
cases can satisfactorily filter out the opportunities and risks presented by the
project concerned. This allows comparison and calculability of the individual
projects.
Photovoltaic shows the relevance of investment timing
Broader mix of RE electricity in DE
33
%
Bio &
Waste
30.3
Hydroelectric
16.0
Wind
38.1
While biomass and hydroelectric power are renewable energy sources with
relatively well-known risk/opportunity profiles, this is much less true of
renewables like offshore wind and solar energy. In our opinion, for investors
interested in real assets PV in particular can provide a very precise
demonstration of the effect of different investment timing and investment
vehicles:
— The pioneering phase that, in Germany and other parts of the world, was
conducted by major firms as well as university and extramural research
institutes, relied on the involvement of courageous early-stage and venture
capital investors. In this initial phase, specialist investors accepted high
levels of risk.
PV
15.6
— The way to the mass PV market was subsequently paved by German
politicians, with the “100,000 roof” programme and the Renewable Energy
Act (EEG). The founding and spinning-off of many small and medium-sized
companies then opened up opportunities for further types of investors in real
assets, wanting to take a share in PV manufacturers or installers. This
applied all the more because many PV companies discovered and exploited
the advantages of the stock markets for financing and the procurement of
capital.
Source: BMU
— At the same time, the high subsidies, guaranteed for 20 years by the EEG,
made PV installations interesting for builders and property owners, i.e.
typical real asset investors. Many banks facilitated investment by being
prepared to include PV installations in the loan principal for the property. As
a result, the various drivers induced a proper PV boom (see Fig. 34).
Much more electricity from new RE
in DE
34
GWh
50,000
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
Wind energy
PV
1 2 3 4 5 6 7 8 9 10 11 12 13
Source: AGEE
However, the latest figures show that there are limits. German politicians are no
longer prepared to continue the high levels of PV subsidies ad infinitum. This
has a number of consequences. EEG cuts can put a heavy burden on the
German solar companies and PV shareholders: not infrequently even leading to
heavy losses. Admittedly, real asset investments that have already been made
in solar roofs are secure: after all, the subsidy is guaranteed for 20 years. The
lesson to be learned by real asset investors is to pay even more attention to the
correct timing of investment and disinvestment, and/or purchase and sale. From
the investor’s point of view, the major advantage of the EEG is that the specific
subsidies for individual alternative technologies – whether PV, hydroelectric,
onshore or offshore wind - are guaranteed by statute. This means that a
reduction in the subsidy always only affects future projects. There is no way that
investments and/or projects that have already been implemented can be
devalued subsequently. For instance, if a PV installation is already in operation,
a subsequent cut in the PV subsidy will have no effect on the viability of the
existing installation.
In the longer term, photovoltaics will continue to grow worldwide. It is sensible
for investors to take greater account of the world market. For example,
competitive Asian PV companies, which can produce cells and modules very
cheaply, deserve more attention. In the last few years, solar parks and/or solar
funds, which invest in larger PV installations, have also been very successful
commercially. Such real asset installations are also interesting for investors with
medium-sized investment volumes: they do not require home ownership and
less capital is both needed and tied up.
14 | June 6, 2012
Current Issues
Real assets: A sought-after investment class in times of crisis
A variety of other investment possibilities
Global solar cell production increasing
35
World, MW
40,000
35,000
30,000
From the investor's point of view, investment in renewable energy is a complex
field. For instance, the choice of the different types of renewable energy (in
different countries) and possible investment vehicles creates a broad decision
matrix. Funds for almost all forms of renewable energy are now on offer. A few
examples:
— For some time, closed- and open-end funds have been used to finance
onshore wind farms. In contrast, the new offshore wind farms in the North
Sea and the Baltic are uncharted territory: cautious real asset investors
should await their outcome in order better to assess the relevant riskopportunity profile.
25,000
20,000
15,000
10,000
5,000
0
1999 2001 2003 2005 2007 2009 2011
Source: Photon
— So far, hydroelectric power stations have rarely been open to external
investors, as their private or public owners seldom dispose of these low-risk
but profitable installations. However, recently a couple of funds for
European hydroelectric power projects have been on offer. For long-term
investors this provides a new opportunity to profit from the energy transition.
— Property owners have further options in the field of direct investments in
renewable energy, e.g. in PV installations. Direct real asset investments in
the heating field are also extremely interesting. This applies both to homeowners and to retail and industrial property. For instance, the rising prices of
fossil fuels are making near-surface geothermal energy and heat pumps
increasingly attractive. Wood pellet heating systems, although they do not
sound particularly “sexy”, are a delight for penny-pinchers. The combination
of home insulation (e.g. of roofs, walls and basements) and the increased
use of “new” forms of energy is generally profitable over time, admittedly
with the help of state subsidies.
Returns dependent on type of energy, location and subsidies
Many factors influence the returns on investments in renewable energy.
However, least affected are all investments that are covered by the EEG, which
normally guarantees the payments for 20 years. In principle, therefore, the
return is not dependent on market prices for electricity and is guaranteed by the
state subsidy. Abroad, where there is no EEG-style statute granting subsidies or
where there are modifications to feed-in tariffs, they are admittedly less
dependable. Here, individual instances must be thoroughly examined, in
particular to assess country and foreign currency risks. In Germany, investments
in the heating segment carry more risks. In this case the return is also
dependent on the prices and/or the trend of prices of fuels such as natural gas
and coal.
Although the funds tied up in EEG investments are usually relatively clearly
regulated, there is considerable room for manoeuvre in the timing of “green”
investments not covered by the EEG. Investments in hydroelectric power are
particularly long-term: the investment horizon can extend up to 100 years. For
onshore wind, there is only a short period of experience, covering a few years.
Offshore wind is still in its infancy, and is therefore still in the learning phase. On
balance, there are numerous opportunities for real asset investments around the
topic of renewable energies. If the investment is made at the right time, the
opportunities for returns are extremely favourable.
15 | June 6, 2012
Current Issues
Real assets: A sought-after investment class in times of crisis
3. Ships and aircraft: Increasing demand
Strong demand for bulk goods
36
Global handling of bulk goods (dry bulk)
by marine navigation, m tonnes
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
95
97
Iron ore
99
Coal
01
03
05
Cereals
07
09
11
Minor bulks
Source: ISL, based on Clarkson Research
Container shipping has strong growth
in volume
37
Global container throughput, m TEU*
600
400
200
0
91 93 95 97 99 01 03 05 07 09 11
Source: Drewry
38
Air traffic volumes, 2000=100
160
140
120
100
80
00 01 02 03 04 05 06 07 08 09 10 11
Passenger transport (passenger km)
Freight transport (tonne km)
Source: IATA
16 | June 6, 2012
It can be expected that both modes of transport will continue to expand in terms
of volume in coming years. In global sea shipping – depending on the segment
– an average growth rate of between 3 and 7% p.a. is possible. Air traffic could
increase at an annual average of 4 to 5%. However, weak economic phases or
external shocks (e.g. terror attacks) could result in volatility also in the future. As
well as the trend of volume, achievable prices are also relevant to profits of the
companies concerned and the returns on investments in ships or aircraft. For
instance, although the aviation industry may be experiencing strong growth in
terms of volume, traditionally it has low margins, inter alia as a result of stiff
competition. Nevertheless: their sound volume growth prospects are a major
reason why ships and aircraft are included in the traditional investments in the
real asset spectrum. In the following we outline some of the current investment
options in this field.
Ships: closed-end funds the norm
The normal way for private investors to invest in ships is through closed-end
ship funds. In Germany these are mainly floated as a GmbH & Co. KG. As is
usual for closed-end funds, by participating in these ship funds investors
become limited partners, i.e. entrepreneurially active persons with
corresponding risks and opportunities.
* Twenty-foot Equivalent Units (unit of measurement for
standard containers)
Global air transport growing
Global sea shipping and international air traffic have been distinguished by high
growth rates in the last few decades. For example, between 2000 and 2010
freight transport of dry bulk goods by international marine navigation grew at an
annual average of 5% (see Fig. 36). In global container shipping, container
throughput increased by an average of more than 8% p.a. in the same period
(see Fig. 37). Global air traffic (passenger) has grown at an annual average of
around 4% in the last decade (despite 9/11, SARS, rising oil prices and other
external shocks, see Fig. 38). This dynamism reflects globalisation and the
increasing international division of labour. In addition, transport costs of
passengers and freight have tended to fall during the last few decades, as a
result of increased competition in the sectors, technological progress and the
achievement of economies of scale (e.g. larger ships and aircraft). However, for
some time higher oil prices have considerably weakened and even partly
reversed this trend.
Through the closed-end fund, the building or acquisition of one or more ships
(e.g. container ships, bulkers or tankers) is financed. Container ships dominate
the German market for ship funds. The investments made by the private
investors provide the company's equity capital. The investment company also
finances the investment using debt capital. The term of such a participation
normally lasts between 15 and 20 years. The total economic life of the ship is
approx. 25 to 30 years.
The ships are normally chartered out to liner shipping companies. Although the
ship itself is of course movable when in operation, the background and quality of
the shipping line operating the ship could be important for the investor. The liner
shipping company, as charterer, pays a charter rate to the fund for the use of
the ship. Any surpluses made are paid out to the investors. The charter rate is
usually fixed for an extended period (time charter).
What are the determining factors for the investor’s return? The most important
parameters are the purchase price and quality of the ship, the amount and
agreed term of the charter rates, the trend of operating costs of the ship, the
cost of interest and repayment of the borrowed capital, and the market value of
the ship at the end of the period (although in principle a ship could also be sold
before this). The, normally annual, payments to the investors are calculated, in
Current Issues
Real assets: A sought-after investment class in times of crisis
Baltic Dry Index* still at a low level
39
the main, as the charter rate less the operating costs of the ship, the costs of
interest and capital repayment, and the fund’s management costs.
Jan 1985=1,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
00
02
04
06
08
10
12
* Price index for bulk goods transport
Source: Global Insight
Charter rates at a low level
40
Trend of the HARPEX*
1,000
800
600
400
200
0
09
10
HARPEX
11
12
Average for this period
* Aggregated charter rate index for container shipping
The HARPEX reached a record high of over 1,800 in 2004.
The long-term average is just under 980.
Source: Harper Petersen & Co.
Market for closed-end ship funds
declined considerably recently
41
Inflows into closed-end ship funds in
Germany, EUR bn
8
7
6
5
4
3
2
1
0
99 00 01 02 03 04 05 06 07 08 09 10 11
Debt capital
Source: VGF
As a rule, the basic payment flows follow a pattern. At the beginning of the term,
the costs of interest and capital repayment are still high, as a result of which the
payments to the investors are lower or may even not be affordable during this
period. As an increasing proportion of the borrowed capital is repaid, a larger
proportion of the income from the charter rate is left over and can be paid out to
the investors. Normally the borrowed capital is repaid before the end of the term
of the fund’s participation in the ship, so that a higher proportion of the charter
rate can then be paid out to the investors. In addition, at the end of the term
there are also the proceeds from the sale of the ship, the amount of which
depends on the then current market environment.
It can be seen from the payment flows that there is no secured return for the
investor (as is usual with entrepreneurial activities). The actual payouts/returns
therefore significantly depend on the trend of the charter rate. This is, in turn,
influenced by the relationship between supply and demand for shipping
tonnage. Temporary surpluses of supply or demand are typical of the sector,
due to the long period between placing orders for new ships and their
completion and delivery. The charter rates at any time are therefore also subject
to strong fluctuations.
Although, for a specific investment, the charter rate is initially fixed for a set
period and is not usually renegotiated, on expiry of the first charter contract the
charter rate then applicable has to be agreed in the then current market
environment. Current charter rates, e.g. for container ships, are well below the
long-term average, primarily because a large number of new ships are coming
onto the market (see Fig. 40). This was one of the main reasons for the collapse
of the German market in ship investments in 2011 (see Fig. 41). In contrast,
between 2003 and 2008, inflows into ship funds were well above average.
During this period, fast-expanding seaborne freight transport coincided with
satisfactory prices. The achievable charter rates on subsequent charter
contracts can also be so low that full repayment of interest and capital is not
possible. Although in such circumstances the bank could defer repayment of the
borrowed capital, in principle the investment company (and therefore its
investors) have to stump up fresh equity, in order to raise the interest and capital
repayments. This market risk can, of course, provide opportunities in strong
charter markets, if the charter rates on subsequent contracts are high.
The other risks for the investor include interest rate risks, as the interest rate on
borrowed capital is normally fixed for a shorter period than the term of the ship
investment. From a European investor’s perspective there are also foreign
exchange rate risks: shipping is a US Dollar market.
With ship funds, as with all investments, the time of making the investment is the
dominant factor governing the investor’s chances of making a return. In view of
the manifold risk factors, intensive consultation and individual assessment of
each ship investment is advisable. Although double-digit returns are possible in
favourable periods, in extreme cases so is a total loss of the investment.
Although shares in closed-end funds can be sold, on the so-called secondary
market, before the end of the term, in crisis periods this can be very illiquid.
Price setting is also less transparent than e.g. for stock-market listed securities.
An advantage for investors is that, because of the flat-rate tonnage tax, in
Germany distributions by ship funds are virtually tax-free.
Equity capital
Aircraft funds are based on leasing contracts
Closed-end funds are also the usual option for private investors making direct
investments in aircraft. There are common factors but also differences from ship
17 | June 6, 2012
Current Issues
Real assets: A sought-after investment class in times of crisis
Post-tax net profits in the global aviation
industry
42
USD bn
20
15
10
5
0
-5
-10
-15
-20
-25
-30
00 01 02 03 04 05 06 07 08 09 10 11 12
Source: IATA
funds. Aircraft funds are also an entrepreneurial participation. The predicted
14
term of the funds is currently around 15 to 18 years. The aircraft investment
company, in which the private investor holds an interest, owns the aircraft
concerned. Mixed financing, with equity capital from the private investors and
borrowed capital from banks, is also usual in this case. The aircraft acquired is
normally leased to a well-known airline, under a so-called operating lease.
During the term of the lease, the airline pays a fixed leasing charge to the
investment company. After deduction of interest and capital repayments,
management costs and any taxes applicable at investment company level, the
remainder comprises the distributions to the investors as forecast in the fund
brochure. The airline pays all the operating costs of the aircraft (e.g. kerosene,
running repairs and insurance).
As with ship funds, increasing capital repayments mean that interest payments
reduce over time. The purchase price of the aircraft concerned is normally
depreciated over a period of twelve years. During the initial years, both these
components substantially contribute to an operating loss on the leasing of the
aircraft at investment company level. In the normal course of business, as the
amount of interest and loan capital repayments reduce or fall to zero over time,
the fund’s expected income rises, as therefore does the payout in relation to the
amount of capital invested. Over time, therefore, the forecast payouts increase,
although they may be partly consumed by tax charges, which are generally
higher towards the end of the term.
The decisive factors for the investor's return are the amount of the agreed
leasing charge in relation to the purchase price over the lifetime of the fund; as
well as compliance with the forecast interest, capital repayment and cost
schedules; and achieving the highest possible proceeds from the sale of the
aircraft at the end of the life of the fund. Factors governing this include the
attractiveness of the aircraft and the specific demand situation at that time. The
reliability of payment of the leasing charges largely depends on the creditworthiness and strategic positioning of the airline to which the aircraft is leased.
This must be taken into account in making investment decisions, in particular
because on average, for structural reasons, the aviation industry makes very
low margins. A fundamental factor to take into account is that the lease is
normally for a shorter period (e.g. ten years) than that initially planned for the
actual investment. It is therefore often necessary to agree a subsequent lease
with the same airline or with a new one. This so-called re-leasing risk presents a
further risk to this entrepreneurial participation.
The interest rate and currency risks referred to in the section on ship funds are
also relevant to aircraft funds, in the same way. Sale of the entrepreneurial
participation in an aircraft fund is also heavily restricted during its term. Sale of
shares before the end of the term is possible only to a limited extent, through a
very tight secondary market. Overall, the possible returns on aircraft funds also
range between a double-digit return on capital invested (before tax) and a total
loss. For this reason, and because of the various influencing factors that are not
easy for the investor to assess, it is advisable to obtain intensive information.
4. Infrastructure: enormous investment requirements
The increasing global population, higher disposable incomes and increasing
industrialisation and urbanisation are the major drivers of expanding demand for
infrastructure. According to the OECD, global investment demand in the field of
infrastructure (energy, transport, water, telecommunications) is in excess of
14
18 | June 6, 2012
This applies to so-called “asset management” structures. In the case of so-called “commercial”
structures, which are not more closely examined here, rather shorter terms are usual.
Current Issues
Real assets: A sought-after investment class in times of crisis
Extensive investments in infrastructure
needed
43
Global anual investment requirements* in various
fields of infrastructure, USD bn
Energy
Transport
Water
0
400
800
1,200
* Estimates partly based on older sources and can
therefore only give a rough indication.
Sources: IEA, OECD, DB Research
1,600
USD 3 bn p.a. (see Fig. 43). In the industrialised countries, investment on
maintenance, expansion and modernisation is more important than in the
developing and newly-industrialised countries, where major sections of the
infrastructure are yet to be built. This enormous demand for infrastructure is
encountering overstretched public budgets virtually worldwide. In the next few
years, therefore, private participation in financing infrastructure projects may
increase in importance.
For an investor, the fundamental advantage of an investment in infrastructure
could be that the high and/or increasing demand for infrastructure facilities
should allow very stable earnings and therefore low volatility of return. This
particularly applies to those projects that have the character of a monopoly due
to their location or particular supply characteristics, or if government regulations
restrict competition. In such instances, dependence on economic cycles can
also be low (and therefore also correlation with cyclically-influenced financial
investments). The potential disadvantages of infrastructure investments could
include tying-up capital for a very long period and, in many cases, at best
moderate expectations of returns. Changes in general political conditions can
also have a massive influence on the attractiveness of infrastructure projects. In
addition to these political risks, for many potential investors the additional
project-specific risks are difficult to assess. Their – always very different –
characteristics also mean that individual infrastructure projects can only be
compared to a limited extent.
There are numerous options open to investors to differentiate between investments in infrastructure, both regionally and according to the type of infrastructure. The spectrum of investment assets (areas of infrastructure) and
investment vehicles is so broad that a detailed description is beyond the scope
of this study. However, in principle it is possible to distinguish between two
major types of infrastructure projects: firstly those for which the user must pay a
charge or a price and which are frequently maintained by private operators (e.g.
a toll road); and secondly infrastructure that is financed by the government out
of tax income and for which the uses pays either no direct costs, or fees that do
not cover costs. Examples of this second type, which are often constructed
without private sector involvement, include water supply and sewerage networks
and railway systems. Investment in the first category of infrastructure is therefore easier.
Investors could participate directly in individual infrastructure projects, e.g. by
buying shares in a stock-market listed airport, although this involves a high
concentration risk. Investors could also participate in “infrastructure companies”
(e.g. operating companies, strategic investors). Investments in “suppliers” of
infrastructure projects (e.g. construction companies specialising in infrastructure;
manufacturers of necessary installations, e.g. from the mechanical engineering
or electrical technology sectors; through to raw materials suppliers) are also
possible. However, such investments no longer fall in the real asset category
and are normally more closely correlated with the stock market. A good
possibility for investors to limit the risk of an investment in infrastructure is to
acquire closed- or open-end infrastructure funds, which have the entrepreneurial
risks and opportunities already referred to. These could include firms in the
entire value-added chain around the field of infrastructure, as mentioned above,
with selection being carried out by professionals. Closed-end funds normally
invest in infrastructure projects with differing regional focus and, in principle,
covering all areas of infrastructure. Depending on their regional structure,
foreign exchange risks may therefore be possible. In view of the manifold
options outlined for investment in infrastructure, the generally-applicable
assertion, that the risk-return profile depends very heavily on the investment
concerned, is particularly relevant to them.
19 | June 6, 2012
Current Issues
Real assets: A sought-after investment class in times of crisis
5. Agricultural land: Risks, but also potentially high
returns
Wide-ranging use of acquired
agricultural land
44
In production or (mostly) intended, %
Other
21
Biofuels
21
Food
crops
37
Cash
crops
21
Strong fundamentals leading to high expectations
Other: conservation, hunting, forest, livestock
Sources: DB Reserach, World Bank, GRAIN
Uses of agricultural land acquired by
financial investors
%
Livestock
13
Other
4
Main
crops
83
Other: permanent crops (e.g. sugar cane, vine), on-farm
storage, set-asides, etc.
Sources: DB Research, OECD survey
In the last few years, investors’ interest in agricultural land has sharply
increased. There are fundamentally three broad groups of economic players in
agricultural land: 1) governments seeking to acquire agricultural land in other
countries in order to secure food and energy supplies, 2) agricultural
companies, that are either looking to expand or to integrate the supply chain
(including both up- and downstream processes) and 3) financial investors.
These groups do not act in isolation from each other: interest shown by
governments and agricultural companies increases the interest from financial
investors.
45
A number of macrotrends drive a tight supply and demand balance for
agricultural products. There are three main drivers of demand: the growing world
population; rising incomes in developing countries – resulting in increased
consumption of resource-intensive foodstuffs such as meat – and the increasing
use of agricultural products for biofuels. At the same time, supply is constrained
by limited availability of water and energy and this is exacerbated by climate
change. Bottlenecks in storage and distribution also limit supply in some
regions. Investment in agricultural land is particularly attractive for the following
reasons:
i.
Good prospects of achieving income – through returns from rising
agricultural productivity of the land acquired – and increasing future
revenue. The income accrues from rent or operation. Returns vary widely
depending on location, type of land, typically between high single-digits (e.g.
for initial investments in Africa) to over 20% or even 30% in Brazil.
ii.
Rising prices of agricultural land: The value of agricultural land might rise as
a result of its scarcity, as well as increasing demand. Possible returns from
carbon credits (CO2 sequestration) or payments for environmental services,
(e.g. biodiversity, availability and quality of water) could further increase the
value of agricultural land.
iii. Portfolio diversification due to the low correlation of the returns with equities.
This is another major advantage of investing in agricultural land, in view of
the high volatility of the financial markets in the wake of the financial crisis.
iv. Hedge against inflation: The literature is divided on this issue but the returns
from agricultural land are mostly uncorrelated with – and higher than – the
inflation rate.
Differing investment strategies and regions
In the past, the primary investors in agricultural land were wealthy individuals,
family offices and endowments. There has been a noticeable shift in recent
years, particularly with pension funds and hedge-funds entering this asset class.
In many industrialised countries, pension funds, which are now some of the
largest institutional investors, are increasingly investing in agriculture. Globally,
these funds – seeking long-term investment opportunities – manage investment
assets of approx. USD 23 trillion. According to estimates, USD 5 to 15 bn of this
is flowing directly into agricultural land. It is anticipated that this amount will
double by 2015. According to the OECD, agricultural investments by financial
investors globally amount to USD 10 to 25 bn. This amount will probably double
or treble by 2015.
20 | June 6, 2012
Current Issues
Real assets: A sought-after investment class in times of crisis
Location of head offices
46
Funds active in farmland and agric. infrastructure,
%
AsiaPacific
7
MENA
4
South
America
19
Europe
44
The majority of the funds are based in Europe (see Fig. 46). The investment
strategies pursued by the funds range from conservative (e.g. to acquire and
hold and/or develop currently productive permanent cropland in the USA)
through to aggressive (i.e. to acquire, and develop, as yet untapped cultivable
land in emerging agricultural regions). These strategies depend on the fund’s
risk/return profile, time horizon and governance structure but also – to a large
extent – on the level of development of the markets in which the fund operates,
in terms of e.g. infrastructure, legal systems and access to the capital markets.
Most of the funds that have started to invest in agriculture during the last ten
years have invested in mature markets (North America and Australia/New
Zealand) or in their own home markets. In the past approx. five years, interest
and investments have been spreading to emerging markets (South America,
Eastern Europe and Southeast Asia) and early stage ones (Africa). In fact, the
geographic focus of investment activity in the sector has shifted noticeably
toward South America (led by Brazil) and increasingly Africa. Both regions are
attracting an increasing amount of capital being raised for investment in the
sector. German investors looking at foreign markets must take into account the
country and currency risks of the target region.
North
America
25
Sources: DB Research, OECD
Multiple risks but also major opportunities
Terms and conditions are key
47
Private sector investments in land can bring
multiple wins. Required are:
— Clear property rights for farmers,
— Farmers participation before and during
project,
— Clear rules,
— Project transparency,
— Estimates of costs and benefits, also in
terms of social and environmental impact,
— Local demand before exports,
— Support smallholder agriculture: large is not
always better.
Principles for responsible investment in
farmland (PRI)
— Promoting environmental sustainability,
— Respecting labour and human rights,
— Respecting existing land and resource
rights,
— Upholding high business and ethical
standards,
— Reporting on activities and progress
towards implementing and promoting the
principles.
Source: UNPRI (2011)
48
Investments in agricultural land involve different risks. Some of these risks are
directly associated with agricultural production (e.g. in terms of agronomy or bad
weather) and others with volatile commodity prices. Political risks in the host
country and relationships with local interest groups are also important. Indeed,
the size of the land areas potentially involved, their concentration in a few
countries, especially in those with weak governance, have been subject of much
debate. Land tenure systems are often missing and the productive land
earmarked for potential investment is likely to be already claimed by farmers,
herders, hunters or foragers who do not have legal rights. According to World
Bank estimates, 60-70% of farms are run by people who do not have
contractual basis.
In some cases land acquisitions have deprived local people, especially
smallholders, of a key source of income without providing appropriate
compensation. Clear ownership rights for farmers and adequate involvement
before and during the project are therefore of decisive importance (see Box 47).
It is in the investor’s own interests to invest responsibly, thereby minimising risks
and increasing local benefits.
Investments in agricultural land offers enormous opportunities – through the use
of so far uncultivated land to produce agricultural crops which are in high and
increasing demand globally. Providing large numbers of smallholders confined
to subsistence farming with access to technology, infrastructure and capital can
have far-reaching development impacts: in terms of food security and poverty
reduction, GDP growth, increased government revenues and environmental
protection.
Ethical questions are therefore of great importance overall, although they can be
answered by investing responsibly and paying attention to engage local groups
at all steps of the project. Principles are being developed by various entities
(see Box 48), although consistent implementation of these is a decisive factor
for success.
Various fund structures
According to an OECD study, funds investing in agricultural land have different
legal and corporate structures, with none prevailing as the optimal platform for
21 | June 6, 2012
Current Issues
Real assets: A sought-after investment class in times of crisis
Mainly medium-sized funds
49
Size of funds focused on farmland and
agricultural infrastructure, USD m
operating in this sector. These funds can be categorized along the following
dimensions:
— Fund structure, e.g. private, publicly traded, closed end, limited
partnerships;
Less than 50
— Unit Trust: similar to a real estate fund or REIT, in that profit and losses are
directly passed on to the investors based on ownership interests;
50-200
— Corporate structure: 1) Private or listed companies that manage (private or
publicly traded) funds that in turn acquire and own agricultural land;
2) Private or listed companies that provide management services for
agricultural operations and also acquire and own agricultural land.
201-500
501-1100
0
5
10
15
20
25
Sources: DB Research, OECD
Fund differentiation on the basis of:
50
— Geographic area of focus (including
potential for production growth, level of
production costs, opportunity for scale
effects and growth of business platform),
— Ability to build a diversified portfolio of farm
holdings,
— Ability to leverage scale and standardization
in operations,
— Expertise in land acquisitions,
— Capabilities of management team,
— Ability to conduct due diligence on available
parcels of land.
Sources: DB Research, OECD
The sponsors of these investment vehicles are e.g. hedge funds or private
equity companies that manage the capital of pension funds, endowments or
wealthy investors (individuals and family offices). They either work together
with professional managers of agricultural operations or set up their own
organisations to purchase and manage agricultural land.
The private sector in Germany
Various investment vehicles are available to German private and institutional
investors seeking to invest in the agricultural sector, according to FIAN, the
Food First Information and Action Network.
Specialised mutual funds: These invest in the shares of listed agricultural
companies. On the German market they are offered by German and foreign
institutions. Most of these funds were founded between 2006 and 2008. The
firms in which they invest can be subdivided into three categories: 1) Companies
with large landownership; 2) Firms in the agricultural supply chain that acquire
raw materials from firms with landownership; 3) Agricultural companies and
chemical firms that are not normally directly involved in land purchase but that
benefit from the increasing value of the land.
Private equity: Private equity companies invest either directly in land or in nonlisted agricultural companies that own land outside Germany.
Listed German companies: A number of companies listed on the German stock
market own agricultural land outside Germany that they either operate themselves or let to tenants. Funds that invest in stock-market listed firms may however have a high correlation with returns from the investor's equity portfolio:
depending on circumstances the objective of effectively diversifying the portfolio
may not be met.
In view of the positive long-term fundamentals, we consider that, worldwide,
increasing private capital will flow into the agricultural investment class,
including agricultural land. The future potential growth of the sector will depend
on the outcome of public policy debates, e.g. on the amount of land to be turned
into productive farmland or the respective roles of public and private sectors in
financing and operating this transformation. In any event, the capital allocated
for investment in this field could double or treble in the next few years.
22 | June 6, 2012
Current Issues
Real assets: A sought-after investment class in times of crisis
C. Summary: a large number of interesting markets for
real assets
Real stocks are currently very much in demand by investors. The major drivers
are the high volatility of the financial markets since the start of the financial crisis
and the concern many investors have about high rates of inflation. Empirical
studies show that, in reality, real assets offer protection from inflation and could
contribute to the diversification of a portfolio. However, the type of investment
vehicle is also a decisive factor. If investors put funds into liquid instruments
such as stocks of companies that operate in the raw materials sector or in
REITs, the connection with financial investments through the stock markets is
mostly predominant. This means that there might be no effective portfolio
diversification. Direct investments and closed- or open-end funds, which are
available for most real assets, are alternatives (see Table 51).
51
Real estate (DE)
Investment vehicle
Direct or through funds
Investment horizon
Long-term
Size of market
Large
Liquidity
Low
Returns
Rental income gradually
increasing, small price
changes
Risks
For the next few years in
DE: limited risk
Regulatory environment
No significant changes
foreseeable
Renewable energy
Ships / aircraft
Infrastructure
Wide spectrum of
investment possibilities:
Direct or through funds
Closed-end funds dominant
direct; through funds or
through equities
Ship funds: 15-20 years,
Depends on investment
In DE e.g. EEG subsidies for
aircraft funds: approx. 15
vehicle: medium- to long20 years
years
term tendency
Ship funds: measured by
Limited, depending on the current volume in DE large, All forms of investment, but
type of energy
aircraft funds considerably low transparency
smaller
Depends on investment
Low
Low
vehicle
Agricultural land
Various investment vehicles
Medium- to long-term
Limited
Depends on investment
vehicle and region
Ongoing payouts according
Depends on the investment to the brochure, that are
Depends on the investment Depends on investment
vehicle and the product
however prone to risk. Value vehicle and the product
vehicle and region
growth of ship / aircraft
Entrepreneurial risk,
depending on the type of
energy and (if applicable)
subsidies
Regulatory risks depending
on the region and type of
energy
Buying closed-end funds is
an entrepreneurial
corporate investment: total
loss is possible
Depending on the
investment vehicle,
infrastructure investments
are generally low risk
Discrimination of local
groups, product risks, raw
material prices
Changes generally possible Changes generally possible Depends on the region
Source: DB Research
Depending on the economic environment, real assets can offer attractive, sometimes double-digit, returns. However, rigorous comparison of returns across the
various classes of investment is hampered by a lack of data. In contrast to
homogenous real asset investments like gold and other raw materials, comprehensive individual case analysis of the investment concerned and its earning
potential is of major importance for heterogeneous real assets such as real
estate, ships and offshore wind farms. Factors such as an attractive location,
favourable market prospects and stable political conditions play a role in
economic success – even in other countries.
For many investors, real estate is the most important real asset investment.
Whereas numerous real estate markets in Europe and the USA are still suffering
the effects of overheating, rising prices are a feature of the German residential
property market. The macroeconomic environment for commercial property also
remains attractive. However, for many real asset investments, investors need to
look beyond the domestic market. Long-term global trends, such as population
growth, increasing urbanisation and the growing economic importance of
emerging markets, favour investments in real assets such as infrastructure.
Dynamic growth in world trade and increasing international mobility favour
volume growth in ships and aircraft. Low margins, e.g. in aviation, are a risk
23 | June 6, 2012
Current Issues
Real assets: A sought-after investment class in times of crisis
factor in this segment, however. Investments in agricultural land could also
profit, from the long-term trends described. With global population continuing to
increase and rising incomes in the emerging markets associated with growing
consumption of higher-quality foodstuffs, the demand for agricultural land might
continue to expand. Observance of ethical principles is particularly important for
this class of investment.
In the last few years, renewable energy has moved into the focus of investors.
The energy transition in Germany, as well as the increasing use of renewable
energy sources in other countries, is creating new prospects for investors in real
assets. Although investors have been able to gain considerable experience of
biomass and photovoltaics with hydroelectric power and, in particular, offshore
wind farms they are still largely entering new territory. For the time being,
government subsidies of the new energy sources still frequently play an
important part.
Although real assets are often associated with the characteristic of crisis
resilience, investments in real assets nevertheless involve specific risks. Most
real asset investments have a long-term investment horizon. They often have
low fungibility and/or liquidity and require investors to take on entrepreneurial
risks (see Table 51). This can even result in total loss of the investment.
Investments in real assets presuppose a well-informed investor, capable of
assessing the various global alternative forms of investment and the financial
instruments that are available.
Josef Auer (+49 69 910-31878, [email protected]).
Eric Heymann (+49 69 910-31730, [email protected])
Jochen Möbert (+49 69 910-31727, [email protected])
Claire Schaffnit-Chatterjee (+49 69 910-31821, [email protected])
Antje Stobbe (+49 69 910-31847, [email protected])
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24 | June 6, 2012
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