The Convergence of Real Estate and Infrastructure
The Real Assets Umbrella is a Growing Trend Among Investment Managers and LPs
The divide between real estate and infrastructure is narrowing, with investment managers increasingly crossing into each other's domains. Real estate managers are building infrastructure capabilities, and infrastructure managers are expanding into real estate. This convergence reflects a broader trend of blending asset classes to capitalize on overlapping opportunities and meet evolving investor allocations.
Why the Convergence is Happening
Shared Investment Opportunities
Both real estate and infrastructure managers are targeting similar verticals, such as logistics facilities, data centers, and renewable energy assets (e.g., rooftop solar). These are some of the sectors that sit at the intersection of the two asset classes:
Logistics Facilities: Traditionally considered real estate, logistics assets are now being viewed through an infrastructure lens due to their role in global supply chains (and niche subsectors like cold storage). The rise of e-commerce and the need for efficient distribution networks have blurred the lines between real estate and critical infrastructure.
Data Centers: Once the domain of infrastructure investors, data centers are increasingly attracting real estate managers who see them as critical components of the digital economy. While some distinction exists between turnkey assets (generally considered more infrastructure) and powered shells (generally considered more real estate), managers across both asset classes are eager to deploy capital into the space. The explosive growth in data consumption, cloud computing, and AI has made data centers a prime target for both real estate and infrastructure investors.
Renewable Energy: Solar and wind farms have traditionally been infrastructure plays, but real estate managers are increasingly involved, particularly in rooftop solar installations on commercial properties. This trend is driven by sustainability goals and the potential for additional income streams from energy generation.
This overlap is driving competition for deals and prompting managers to broaden their capabilities to remain competitive both in capital deployment and capital raising.
Institutional Demand for Diversification
Institutional investors have historically allocated separately to real estate and infrastructure. However, there has been a growing shift toward consolidating these allocations under a "real assets" umbrella. As the market entered an inflationary period over the past several years, the real estate asset class suffered from increased rates that significantly impacted investment returns. Meanwhile, the infrastructure asset class generally performed as expected - it benefited from inflation participation and contracted cash flows which delivered resilient returns. For many institutional investors, this was the “proof of concept” they had been waiting for to start allocating to a relatively young asset class.
As institutional demand for infrastructure is expected to continue growing, investment managers are adapting by diversifying their offerings to capture capital across both infrastructure and real estate. This trend is particularly pronounced among larger asset managers seeking to benefit from the scale and synergies generated by offering products across both asset classes.
Real Estate Managers Entering Infrastructure
Real estate firms are increasingly building in-house (or acquiring) infrastructure capabilities to expand their reach.
Key drivers for this expansion include:
Desire to capture a larger share of institutional allocations
Recognition of the long-term, stable cash flows associated with infrastructure assets
Opportunity to leverage existing investor relationships and operational expertise
These moves highlight how real estate managers are positioning themselves to compete for institutional capital that might otherwise flow into infrastructure. However, this expansion also presents challenges, including the need for specialized expertise and potential conflicts with existing real estate strategies.
Infrastructure Managers Expanding into Real Estate
On the flip side, infrastructure managers are also broadening their scope to include real estate investments:
Infrastructure investors are investing directly in logistics and industrial properties due to their critical role in supply chain networks.
Some are exploring opportunities in social infrastructure, such as student housing or healthcare facilities, which blend characteristics of both real estate and infrastructure.
This trend reflects a growing recognition that many infrastructure projects have significant real estate components - and vice versa. Infrastructure managers are attracted to real estate for several reasons:
Potential for higher returns compared to core infrastructure assets
Opportunity to offer a more diverse range of investment products to LPs
Ability to capitalize on urbanization trends and the increasing integration of infrastructure into the built environment
Implications for Investment Managers
Competition for Allocations
One of the most significant implications of this convergence is the growing competition for institutional allocations. While some real estate investors may not view infrastructure as a direct competitor for deals, they should recognize that the two asset classes are competing for LP capital. As more institutions consolidate their allocations under a "real assets" umbrella, managers must differentiate themselves by offering unique capabilities or blended strategies.
This competition is likely to intensify as the lines between asset classes continue to blur. Managers who can demonstrate expertise across both real estate and infrastructure may have a competitive advantage in attracting institutional capital.
Need for Expertise Across Asset Classes
To remain competitive, investment managers must develop expertise across both real estate and infrastructure. This includes understanding:
The relative value of different strategies within each asset class
How macroeconomic trends (e.g., digitization or energy transition) impact both sectors - access to affordable power is major consideration
How to structure investments that leverage synergies between the two
The regulatory and operational nuances of each asset class
Developing this cross-sector expertise may require significant investment in human capital and potentially new organizational structures. Managers may need to recruit specialists from outside their traditional talent pools or invest in training programs to upskill existing staff (which can be a tall order).
Evolving Risk-Return Profiles
As managers expand into new asset classes, they must carefully consider how this impacts the risk-return profile of their funds. Traditional infrastructure investments typically offer lower returns but with more stable cash flows compared to real estate. Blending these asset classes can create new risk-return profiles that may appeal to certain investors but may not align with the expectations of others. LPs are increasingly scrutinizing “infrastructure-like” strategies and carefully reviewing the underlying investments across real assets strategies to determine suitability.
Managers must be transparent about how their evolving strategies impact risk and return expectations. Clear communication with LPs about the implications of this convergence will be crucial for maintaining investor trust and alignment.
The Future of Real Assets
As the lines between real estate and infrastructure continue to blur, the concept of real assets is becoming more prominent. This shift requires investment managers to be more agile and adaptable than ever before. Whether you're a real estate manager exploring infrastructure or an infrastructure manager entering real estate, understanding this convergence will be critical to staying ahead in an increasingly competitive market.
For institutional investors, this trend offers new opportunities to optimize portfolios—but it also demands a deeper understanding of how these asset classes interact. Investors may need to reassess their allocation strategies and due diligence processes (or in some cases organizational structure) to account for the increasing overlap.
Looking ahead, we can expect to see:
More managers offering blended real estate and infrastructure products
Increased focus on operational expertise across both sectors
Growing emphasis on technology and data analytics to identify cross-sector opportunities
Continued evolution of the "real assets" bucket, potentially encompassing additional alternative asset classes
For investment managers, it's clear: the future belongs to those who can bridge the gap between real estate and infrastructure effectively. Success will require not only financial acumen but also a deep understanding of the operational and strategic nuances of both sectors.