On the surface, it might appear the opportunity set in publicly-traded real assets is similar to what it has been in the past – natural resources, real estate, infrastructure, etc. To a certain extent this is true. But advances in technology have also created important new growth opportunities for the real asset strategies in which Oxford clients invest.
Within infrastructure, prolific domestic natural gas production enhanced by advanced drilling techniques as well as the lifting of US export bans has created new opportunities for investors. Midstream energy companies are pursuing liquefied natural gas (LNG) terminal projects to take advantage of the US position as the world’s low-cost producer of gas. According to the US Energy Information Administration (EIA), US capacity for LNG exports will rise from 4.9 Bcf/d to 8.9 Bcf/d by the end of 2019. To put this in context, 1 Bcf (billion cubic feet) of natural gas meets the needs of approximately 10,000 US homes for 1 year. Given the price differential of natural gas in the US compared to other countries, this is a sustainable opportunity going forward.
Companies focused on alternative sources of energy are also gaining more prominent allocations within natural resource equity strategies. Importantly, this is occurring not simply because of an investor preference for clean energy technology, but because select companies in the space are generating impressive free cash flow and trade at reasonable price multiples within a high-growth segment. Even more traditional resources, like copper, have experienced greater demand from technological advances within clean energy. Consider the fact that copper intensity for an electric vehicle is approximately 3.5 times greater than a vehicle with a gasoline-powered engine1.
Finally, let’s take a closer look at one way technology is impacting real estate investing.
When most investors hear “REITs” it invokes images of shopping malls, office buildings and industrial warehouses. But this well-established and mature asset class is also at the center of a significant growth market in support of high-tech industry and cloud services.
Data centers are facilities dedicated to organizing and storing critical systems and large amounts of data. Physical component parts – primarily computer servers – are stored in these tightly controlled and secure buildings. In a world that is becoming more connected, companies have a growing need to secure and store valuable information in various locations, leading to opportunities for REIT investors. The largest technology companies will typically build their own data centers (the picture below is of a Google data center in Oklahoma), but REITs have come into the space as well to specialize in developing data centers that serve the needs of tenants focused on outsourcing this data storage requirement.
The specialization of these data centers creates a natural barrier to entry for those companies that build and manage these assets. Most importantly, data centers need abundant power supplies and adequate redundancies for power outages. A typical enterprise-level data center requires 5 megawatts of power2. For context, 1 megawatt can simultaneously power approximately 750 homes! Sophisticated cooling and fire suppressant systems must also be in place to maintain a stable environment for the equipment.
Rental rates of data centers are expressed in terms of kilowatts and as you might expect, prime locations to build them are areas with both cost-effective energy sources and proximity to users as a way to reduce latency. Examples of major data center markets in the US are Northern Virginia, Chicago, Northern California and Dallas.
While still relatively small compared to the total US REIT market, this sector has grown to represent 4.8% of the US REIT market as measured by total funds from operations (FFO). This is up from 2.8% of total FFO in 2013. Cloud services are the most prolific users of data centers and will likely drive future growth. Cisco estimates cloud data traffic through data centers will increase 83% from 2018-2021.
From an investment perspective, valuations of data centers are in-line with broad real estate and offer investors a diversified exposure from other REIT sectors. While historically more volatile, this sector has outperformed broad US REITs the last 3 years ending 4/30/19.
Strategic exposure to real assets remains an important component of client portfolios. The allocation objective of capital growth, inflation hedging and diversification remains the same, but the opportunity set within real assets to achieve that objective is expanding thanks to technological advances. Oxford clients are participating in this evolving landscape and we expect these trends to continue into the future.
2Source: Real Estate Issues
Statistical data is derived from third party sources believed to be reliable and has not been independently verified by Oxford.
The above commentary represents the opinions of the author as of 6.25.19 and are subject to change at any time due to market or economic conditions or other factors.
The information above is for educational and illustrative purposes only and does not constitute investment, tax or legal advice.