Real AssetsThe New Essential
A Global Alternative Asset Manager
Real Assets — The New Essential 1
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Brookfi eld believes this pursuit of a new alternative is creating a secular shift toward increased investment in Real Assets. Importantly, we
believe that Real Assets off er a relatively unique combination of yield, stability and growth that can provide downside protection as well as
upside value creation. Over the course of Brookfi eld’s experience as an owner and operator of these assets and based upon an analysis of
their historical performance, Real Assets have demonstrated a proven ability to enhance overall risk-adjusted returns across market cycles.
Looking ahead, as investors recognize the benefi ts of Real Assets, we expect a meaningful shift in asset allocations to occur, which may rival
the historic transformation of institutional investment from fi xed income to equity securities. We expect this trend to accelerate materially
over the course of the next decade, with allocations to Real Assets reaching 20% to 30% of portfolios by 2030, with some institutional
investors allocating upwards of 50% to the asset class.
Based upon recent investment trends and fundraising activity, we believe this transformation is underway and expect that it will continue to
grow as investors recognize and appreciate the attractive, long-term benefi ts of Real Asset investment. Within the constraints of the current
market environment and across future challenges, we believe Real Assets can generate compelling risk-adjusted returns, provide attractive
capital appreciation and deliver important diversifi cation benefi ts. Accordingly, as investors move beyond the “New Normal”, we expect Real
Assets to emerge as the New Essential.
In this piece, we provide an assessment of recent investment trends as well as an overview of the attractive characteristics of Real Assets.
Following this discussion, we off er a detailed introduction to the asset class.
EXECUTIVE SUMMARY
The current market environment is leading investors across the globe to seek an alternative to traditional equity and fi xed income investments. Following a multi-year decline in interest rates and recent global fi nancial upheaval, the ability to invest for yield has diminished and the outlook for growth has been generally subdued. With interest rates beginning to rise and the potential for infl ation looming, investors are seeking a New Essential portfolio investment to help navigate the market cycles that lie ahead.
Note: An investment in Real Assets involves signifi cant risks, including loss of the full amount invested.
Potential Benefi ts of Investment in Real Assets
Stability Steady cash fl ow streams supported by regulated or contractual revenues and attractive operating margins
Income Reliable current income with long-term capital appreciation potential
Upside Potential Meaningful leverage to economic growth
Visible Growth Drivers Positive growth momentum led by signifi cant fundamental trends
Attractive Performance Compelling absolute and relative returns
Low Volatility Attractive risk-adjusted returns
Infl ation Protection Cash fl ows tend to increase in an infl ationary environment
Investment Diversifi cation Diversity of geography, currency and asset type
Portfolio Diversifi cation Low correlation to traditional equity and fi xed income investments
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PART I
THE CASE FOR REAL ASSETS AS THE NEW ESSENTIALIn our view, the current market environment is presenting numerous
challenges to navigate, leading investors across the globe to seek new
alternatives to enhance overall returns while mitigating volatility and
risk.
LOW BOND YIELDS
In the years since the global fi nancial crisis of 2008 and 2009,
central banks across the globe have fl ooded capital markets with
liquidity, driving government and corporate bond yields to historic
lows. Accordingly, these instruments no longer provide suffi cient
current income to keep pace with growing liquidity needs or liability
requirements, particularly when considering the potential for rising
infl ation.
Exhibit 1: Falling Bond Yields
Source: U.S. Federal Reserve, Barclays; data as of June 30, 2013
TAPERING OF CENTRAL BANK SUPPORT ON THE HORIZON
Given the historically low level of nominal yields as well as recent
improvements in global economic growth, rates have begun to rise.
Importantly, this move in rates has been exacerbated by central bank
activity, as the U.S. Federal Reserve appears poised to begin tapering
asset purchases in the near term, with a full end to quantitative easing
possible in the next few years.
While the Federal Reserve’s potential tapering of accommodative
monetary policy does signal a return to more normalized growth
in the U.S., the drawdown of this meaningful support will almost
certainly lead to a further increase in Treasury rates and bond yields.
As a point of reference, both instruments witnessed a signifi cant rise
in rates following the mere announcement of the Federal Reserve’s
intentions – in just four months’ time, from the end of April until
the beginning of September 2013, the 10-year U.S. Treasury rate
increased by over 120 basis points or more than 70%, while the
average yield on U.S. investment grade bonds increased by over
80 basis points, or more than 45%1.
Exhibit 2: U.S. Federal Reserve Assets on Balance Sheet
Source: U.S. Federal Reserve; data as of June 30, 2013
INFLATION CONCERNS ON THE RISE
The prospect of rising interest rates is leading to a corresponding
increase in concern over infl ation. While current levels of infl ation
remain modest and do not appear to represent a near-term threat, the
potential for rising costs over the medium-term is expected to lead
investors to seek alternatives that off er a greater degree of infl ation
protection.
LOW GROWTH ECONOMIC ENVIRONMENT
Although the global economy has recovered from the recent
fi nancial crisis and pockets of growth have begun to re-emerge,
overall growth remains subdued, with few visible catalysts to
ignite a meaningful change in trend. Despite this low growth
environment, interest rates are on the rise. In such an environment,
we believe that investors will likely need to look beyond traditional
equity and fi xed income investments to generate attractive returns.
Exhibit 3: Subdued Global Growth
Source: World Bank; data as of June 30, 2013
1 U.S. Federal Reserve; Barclays
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INCREASING DEMAND FOR ASSETS OFFERING STABLE INCOME
AND GROWTH POTENTIAL
At the same time that yields have fallen and the outlook for growth has
declined, demand for income-producing assets with upside potential
has increased. Among both institutional and retail investors, liquidity
needs are on the rise. For instance, the aging U.S. Baby Boomer
population is nearing retirement and is seeking a stable source of
income to weather the market cycles that lie ahead.
Exhibit 4: Aging U.S. Population
Source: U.S. Census Bureau; data as of December 2012
Additionally, many institutional investment plans that service long-
term liabilities are signifi cantly underfunded, due in large part to the
inability of investment returns from traditional asset allocations to
keep pace with rising liability requirements. In particular, public and
private pension plans have witnessed ballooning defi cits and widening
shortfalls as investment yields have fallen while liabilities have
increased. Importantly, the number of retirees serviced by these plans
continues to grow, due to the overall aging of many developed market
populations as well as increasing life expectancies across the globe.
This combination of accelerating demand for benefi ts and decelerating
growth in pension assets is leading to signifi cant fi nancial strain.
Of note, recent studies of the funding status among U.S. state and
municipal pension plans have estimated the current aggregate
shortfall at over $2 trillion1. Interestingly, while the methodology
underlying these studies assumed investment returns on pension
assets would range from approximately 4.0% to 6.0%, U.S. states are
assuming much higher rates of return, in the range of 7.25 to 8.25%.1
In view of the current low yield environment, such returns are not likely
to be achieved through investment in traditional asset classes, which
may require these pension plan sponsors to look elsewhere for more
compelling returns.
THE PATH FORWARDAs institutional investors seek to fund liabilities and navigate the
challenges of the current landscape, we believe Real Assets are
emerging as a new alternative – one that can provide attractive
yield, stability and growth irrespective of market cycles and
macroeconomic volatility. Accordingly, as investors move beyond the
“New Normal”, we believe the stage has been set for a strategic shift
in asset allocations, with Real Assets becoming the New Essential.
Importantly, we believe this transformation of traditional portfolio
allocation has only just begun. Over the next decade, we expect this
trend to accelerate materially, as investors come to recognize Real
Assets as a fundamental component of portfolio investment. Indeed,
we expect that by 2030, allocations to Real Assets among institutional
investors will reach 20% to 30% of total portfolio value, with some
institutions allocating upwards of 50% to the asset class.
A historical precedent for such a meaningful transformation can be
found in the equally signifi cant shift from fi xed income to equities that
has occurred over the last 30 years. As recently as the early 1980s,
nearly 60% of assets held by U.S. institutional investors were allocated
to fi xed income securities (Exhibit 5). However, challenging investment
trends and macroeconomic factors, including double digit infl ation, led
investors to seek a higher growth alternative. Accordingly, over the
subsequent 20 years a dramatic shift in asset allocations occurred,
whereby fi xed income investments fell to only 30% of portfolio value
by the year 2000.
Defi ning the Real Asset Investible Universe
Real Assets are often defi ned as physical or tangible assets that tend
to provide a “real return”, often linked to infl ation. This defi nition
encompasses a wide range of potential investments, including real
estate, infrastructure, timberlands, agrilands, commodities, precious
metals and natural resources. Additionally, real-return fi nancial
instruments, such as infl ation-protected bonds, are often included in
the Real Asset conversation as well.
Based upon Brookfi eld’s experience as an owner and operator of Real
Assets, we have sought to focus our defi nition of the asset class in order
to capture several key characteristics – a pure-play emphasis on long-
lived, hard assets that generate stable and growing cash fl ow streams,
provide enhanced current yield, off er protection against infl ation and
produce attractive risk-adjusted returns. Importantly, this defi nition
generally does not include commodities or fi nancial assets, which
tend to experience greater volatility and are more susceptible to global
capital market trends.
Within our narrower defi nition of the Real Asset investible universe,
we classify assets in four major categories: Property, Infrastructure,
Timberlands and Agrilands. For a detailed description of these
categories, please refer to Part II of this piece, entitled “An Introduction
to Real Assets.”
1 Center for Retirement Research at Boston College and Moody’s Investors Services:
“Adjusted Pension Liability Medians for US States”, June 2013
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Exhibit 5: Shifting Institutional Investor Asset Allocations
Source: Pensions and Investments; data represents average asset mix of top
1,000 U.S. public defi ned benefi t pension plans since 1991 and average asset
mix of top 200 U.S. public defi ned benefi t pension plans from 1984-1991; data as
of September 30 of each respective year. “Alternatives” includes private equity
and hedge fund investments.
Today, investment trends and macroeconomic factors are converging
once again to lead to another potential shift in asset allocations – this
time to Real Assets. At a time when investors are struggling to fund
long-term liability requirements, protect current wealth, participate
in a recovering economy and defend against the potential for rising
infl ation, Real Assets can off er an attractive alternative. Through
a unique combination of steady current income, leverage to an
improving economy and protection against infl ation, Real Assets may
provide the foundation for institutional investors to navigate current
and future market environments.
Investors appear to be recognizing these attractive characteristics,
as demonstrated by recent trends in institutional allocations and
fundraising activity. For instance, over the last 10 years, real estate
allocations by public defi ned benefi t pension plans have increased
from just over 3.0% of portfolio value to nearly 8.0% (Exhibit 5).
More recently, fundraising activity has demonstrated a signifi cant
acceleration in demand for Real Assets. During the fi rst half of 2013,
18% of the nearly $210 billion raised globally by private equity funds
was targeted towards Real Asset investments (Exhibit 6).
Exhibit 6: Recent Momentum in Real Asset Fundraising Activity
We believe these indicators demonstrate the potential for a long-term
trend, as awareness of and appreciation for Real Assets continues
to accelerate. Over the next decade, we expect Real Assets to be
embraced by the global investment community as a compelling
alternative to traditional fi xed income and equities and emerge as the
New Essential.
Measuring Real Asset Performance
Throughout the analysis included in this piece, the following indexes have been utilized to measure and represent the performance of Real Assets, unless
otherwise noted. Please refer to the disclosures at the end of this report for a detailed description of each index.
Property NCREIF Property Index (data availability begins in 1Q 1978) Agrilands NCREIF Farmland Index (1Q 1991)
Infrastructure Dow Jones Brookfi eld Global Infrastructure Stocks MSCI World Index (1Q 1978)
Composite Index (4Q 2002) Bonds Barclays Global Aggregate Bond Index (1Q 1990)
Timberlands NCREIF Timberland Index (1Q 1987)
Of note, as private investment in infrastructure has only recently begun to accelerate, a private market infrastructure performance index with a meaningful
track record does not currently exist. Accordingly, the Dow Jones Brookfi eld Global Infrastructure Composite Index was utilized as the chosen proxy for
the asset class. Currently comprising more than 125 companies and with a market capitalization of over $1.0 trillion1, the Dow Jones Brookfi eld Global
Infrastructure Composite Index includes publicly-listed infrastructure companies traded on developed market exchanges with historical data dating
back to December 31, 2002.
A key measure for inclusion in the index is that 70% of cash fl ows must be derived from the ownership or operation of infrastructure assets. This
is a signifi cant diff erentiator from other indexes, which have a broader defi nition of infrastructure and are often dominated by infrastructure service
companies, such as energy utilities, construction companies and mining companies. In contrast, the Dow Jones Brookfi eld Global Infrastructure
Indexes focus on companies that are more likely to generate stable and predictable cash fl ow growth and are typically less cyclical in nature.
Additionally, to be eligible for inclusion in the Dow Jones Brookfi eld Infrastructure Indexes, a company must have a minimum fl oat-adjusted market
capitalization of $500 million as well as a minimum three-month average daily trading volume of $1 million. Securities also must be domiciled in a
country with a liquid market listing.
For more information on the Dow Jones Brookfi eld Global Infrastructure Indexes, please visit www.djindexes.com/infrastructure.
1 As of June 30, 2013
Source: Bloomberg; data as of June 30, 2013
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OPTIMIZING AN ALLOCATION TO REAL ASSETSIn considering the optimal allocation to Real Assets, modern portfolio
theory can serve as a guide. Using tools such as the Effi cient Frontier,
it is possible to create hypothetical portfolios which contain the
“optimal” allocation to selected asset classes. The “optimal” allocation
is defi ned as that which maximizes the expected return for any given
level of risk based upon historical performance results. Combining
each of these “optimal” portfolios across the spectrum of risk and
return creates the Effi cient Frontier.
It is also possible to compare Effi cient Frontiers, to determine if the
addition of a certain asset class provides higher or lower potential
returns for each level of risk. In doing so, the portfolio benefi ts of
including a certain asset class, and the optimal allocation to that asset
class, become increasingly clear.
Exhibit 7 presents such an analysis, comparing the Effi cient Frontier
of a portfolio containing only bonds, equities and cash with that of a
portfolio which also includes Real Assets.
Exhibit 7: Effi cient Frontier Analysis
Source: U.S. Federal Reserve, Barclays, Bloomberg, NCREIF, S&P Dow Jones
Indexes; data as of June 30, 2013; the “Real Asset” category is comprised
of performance results (over the duration of available data) generated by
the previously defi ned indexes for Property, Infrastructure, Timberlands and
Agrilands, weighted by the investible universe of each; the “Stocks” category is
represented by the S&P 500 Total Return Index, the “Bonds” category consists of
the Barclays U.S. Aggregate Bond Index and the “Cash” category is comprised of
the 3-month U.S. Treasury bill.
As demonstrated above, the Effi cient Frontier for the portfolio
containing Real Assets is “higher” than that of the more traditional
portfolio, indicating that returns are greater across the spectrum of
risk. For example, assuming a standard deviation of 4.5%, the portfolio
of traditional investment options generates a return of 7.5% while the
portfolio including Real Assets produces a return of 9.5%. As such,
the portfolio including Real Assets generated 200 basis points of
incremental return for the same level of risk. While the value of this
incremental return varies across the risk spectrum, it remains positive
throughout, indicating that the addition of Real Assets to a mixed-
asset portfolio improved overall risk-adjusted returns throughout the
time period of historical performance captured by this study.
Additionally, the Effi cient Frontier suggests that the “optimal”
allocation to Real Assets can be found along the upward slope of the
curve, highlighted in Exhibit 7. The target allocation to Real Assets
refl ected in this portion of the curve ranges from 25% to 80%.
While investor risk preferences and return needs may vary and asset
allocations may include a more diverse set of opportunities than
those included above, the Effi cient Frontier confi rms our belief in the
attractiveness of Real Assets and the potential for meaningful growth
from current allocation levels.
The Growth Potential of Real Assets
While we expect investor allocations to Real Assets to accelerate
in coming years, the global investible asset base is expected to
grow exponentially as well. Current estimates of total global assets
managed by institutional investors stands at $71 trillion, of which
$45 trillion is invested to meet long-term fi nancial obligations1. We
expect this long-term invested asset base to increase in size to over $70
trillion within the 2020s, producing $25 trillion in new capital fl ows2.
Should investor allocations progress as we expect over the same time
horizon, 20% to 30% of these new capital fl ows may be targeted
towards Real Assets, leading to nearly $10 trillion of capital seeking Real
Asset investment opportunities over the next 15 years.
Importantly, as demand for Real Assets continues to rise, the supply
of Real Asset investment opportunities is expected to expand as well.
Global population growth and increasing urbanization around the world
are leading to rising demand for new development. When combined
with the overdue refurbishment or modernization of existing assets
in many mature markets, a signifi cant need for capital has become
apparent. Recent estimates indicate that this need may total as much as
$55 trillion through 2030 in the infrastructure asset class alone3. Over
the same time period, an analysis of global property markets reveals
that over $15 trillion will need to be spent in order to simply maintain
existing ratios of property investment relative to Gross Domestic
Product (GDP)4. Given the current strain on government balance sheets
around the world, public fi nancing will not be able to subsidize this
$70 trillion price tag alone, creating a signifi cant opportunity for the
investment of private capital.
Furthermore, the ability to invest in existing Real Assets is expected to
increase as well. In recent years, privatization of state-owned assets
– including toll roads, airports and seaports – has accelerated, as
governments across the globe seek to increase liquidity. Additionally,
diversifi ed owners of Real Assets are increasingly selling their holdings
in order to become more capital and cost effi cient, such as mining
companies divesting their captive railroad systems. We expect these
trends to continue to expand in the coming years, leading to a growing
opportunity to invest in existing Real Assets.
This combination of population growth, strained public fi nances and
increasing monetization of in-service assets provides many options
for investment. Whether investors seek opportunities for new
development or existing assets in mature markets or emerging growth
economies, the Real Asset investible universe appears poised for
meaningful growth.
1 OECD; Climate Policy Initiative, March 20132 Brookfi eld Asset Management estimates3 OECD: “Strategic Transport Infrastructure Needs to 2030”4 EPRA, World Bank, PricewaterhouseCoopers, Brookfi eld Asset Management
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REAL ASSETS – AN ATTRACTIVE INVESTMENT OPPORTUNITYOur belief that Real Assets will emerge as the New Essential portfolio
investment is driven by the powerful combination of relative stability
and growth off ered by the asset class. Importantly, Real Assets can
provide downside protection in a recessionary climate due to the
duration and generally predictable nature of their cash fl ow streams,
while also participating in the upside of a growth environment
through meaningful exposure to a recovering economy. As such,
we believe Real Assets are uniquely positioned to provide value
and enhance overall risk-adjusted returns across the current market
cycle and those that lie ahead.
LARGE-SCALE, LONG-LIVED ASSETS PROVIDING ESSENTIAL
SERVICES
Real Assets tend to serve as the foundation for the delivery of goods
and services that are necessary to support the global economy. As a
result, drivers of end-user demand for these assets tend to be relatively
predictable, sustainable and inelastic.
STABLE, BOND-LIKE CASH FLOWS
Real Assets off er investors relatively steady cash fl ow streams,
often supported by regulated or contractual revenues and attractive
operating margins. Many Real Assets are subject to long-term lease
or concession agreements which frequently include pricing provisions
that seek to ensure a predictable return over time. As a result, these
assets tend to generate consistent, stable cash-fl ow streams with
lower volatility than other traditional asset classes.
Additionally, while macroeconomic trends can aff ect Real Asset
operations, the impact tends to be relatively muted by the long-term,
contractual nature of the underlying revenue streams. Therefore,
we believe attractive cash fl ow growth can be achieved across
market cycles. While asset-level fi nancial performance is not always
readily observable, the cash fl ow streams produced by publicly
listed companies that own and operate Real Assets are provided
on a consistent basis through quarterly reporting and disclosures.
Importantly, these fi nancial results demonstrate the relative stability
of the underlying asset cash fl ows over time.
Exhibit 8: Comparative Cash Flow Growth Rates of Listed Infrastructure
and Global Equities
Source: Brookfi eld Investment Management research and estimates; FactSet;
S&P Dow Jones Indexes; Merrill Lynch Global Quantitative Strategy; MSCI; IBES;
Worldscope; data as of December 31, 2012 and refl ects median EBITDA growth
in each respective time period.
Source: Brookfi eld Investment Management research and estimates; FactSet;
S&P Dow Jones Indexes; Merrill Lynch Global Quantitative Strategy; MSCI; IBES;
Worldscope; data as of December 31, 2012 and refl ects median EBITDA growth
in each respective time period.
B
Exhibit 9: Stability of U.S. Listed Property Cash Flow Streams
Source: Brookfi eld Investment Management research and estimates; projected
Same Store NOI Growth is based on proprietary Brookfi eld Investment
Management research and fi nancial analysis and is subject to change without
notice; data as of June 30, 2013 based upon fi rst quarter 2013 earnings
announcements.
ATTRACTIVE YIELDS WITH LONG-TERM CAPITAL
APPRECIATION
The relatively steady and predictable cash fl ows produced by Real
Assets support attractive current income streams. As indicated in
Exhibit 10, the average historical income return across Real Assets has
meaningfully outpaced equities and compares favorably with bonds.
Additionally, current Real Asset yields remain signifi cantly higher than
both traditional asset classes. These attractive income streams may
protect the value of an investment during recessionary environments
and can also provide an important cushion against rising interest rates.
Furthermore, the sustainable and predictable nature of these income
streams leads Real Assets to off er a compelling option for investors
with regular cash distribution requirements.
Exhibit 10: Comparative Income Returns and Current Yield
Source: MSCI, Barclays, Bloomberg, NCREIF, S&P Dow Jones Indexes; data as
of June 30, 2013; represents average annual returns over the duration of data
available for each index.
As demonstrated in Exhibit 10, investment in Real Assets also provides
meaningful capital appreciation potential. These long-lived, hard
assets tend to increase in value over time, as replacement costs rise
and operational effi ciencies are achieved, particularly for well-located
assets with high barriers to entry.
Source: Brookfi eld Investment Management research and estimates; projected
Same Store NOI Growth is based on proprietary Brookfi eld Investment
Management research and fi nancial analysis and is subject to change without
notice; data as of June 30, 2013 based upon fi rst quarter 2013 earnings
announcements.
Source: MSCI, Barclays, Bloomberg, NCREIF, S&P Dow Jones Indexes; data as
of June 30, 2013; represents average annual returns over the duration of data
available for each index.
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EQUITY-LIKE UPSIDE
Although a signifi cant portion of Real Asset revenue streams are
subject to long-term, contractual agreements, the asset class also
retains exposure to an improving economic environment. Whether
it is realized in the form of improved leasing of vacant property space,
growing throughput on toll roads, rising volumes of energy demand,
expanded harvesting of timber assets, or climbing food prices, Real
Assets reap the benefi ts of a strong global economy. While Real Asset
current income protects value on the downside, operational leverage
enhances value on the upside.
Exhibit 11: Average Annual Returns during Periods of Economic
Recovery
Source: MSCI, Barclays, Bloomberg, NCREIF, S&P Dow Jones Indexes; data as
of June 30, 2013; represents average annual returns during periods of economic
recovery, as defi ned by the National Bureau of Economic Research, over the
duration of data available for each index.
GROWTH POTENTIAL
In addition to meaningful leverage to an improving economic climate,
fundamental trends in each underlying asset class are leading to
attractive growth momentum. While several of these trends may
require a longer time horizon to materialize, we believe they provide
a clear and sustainable path upon which Real Assets can continue to
produce compelling income and capital appreciation.
Exhibit 12: Growth Drivers for Real Assets
Source: MSCI, Barclays, Bloomberg, NCREIF, S&P Dow Jones Indexes; data as
of June 30, 2013; represents average annual returns during periods of economic
recovery, as defi ned by the National Bureau of Economic Research, over the
duration of data available for each index.
Property
• Employment growth leading to increased leasing demand
• Low levels of new supply
Infrastructure • Global population growth
• Existing infrastructure in need of repair or refurbishment
• New infrastructure development in emerging markets from growing
wealth and urbanization
• Acceleration of privatization activity leading to an expanded
investible universe
• Declining availability of public capital to fund needed expenditures
Timberlands • Recovery of U.S. housing market
• Asia’s increasing wood demand
• Reduced supply from Canada and Russia
• Supply constraints due to conservation, development and damage
caused by the Mountain Pine Beetle
• Demand for wood fi ber as an alternative energy source
Agrilands
• Global population growth and increasing consumption levels
• Growing demand for biofuels
• Slowing yield growth rates
Aggrilands • Global population growth and increasing consumption levels
• Growing demand for biofuels
• Slowing yield growth rates
COMPELLING ABSOLUTE AND RELATIVE RETURNS
As evidenced in Exhibit 13, Real Assets have produced impressive
absolute and relative returns over the last 10 years, outperforming
both the global equity and global bond markets.
Exhibit 13: Attractive Return Profi le
Source: MSCI, Barclays, Bloomberg, NCREIF, S&P Dow Jones Indexes; data as of
June 30, 2013
LOW VOLATILITY AND COMPARATIVELY HIGHER
RISK-ADJUSTED RETURNS
This relative outperformance becomes even more impressive when
viewed on a risk-adjusted basis, as the volatility of Real Asset returns
has historically been lower than that of equities, while returns have
been greater than that of bonds. Importantly, while Real Assets tend
to retain value during economic downturns and participate in value
creation during economic upturns, performance generally lacks sharp
movements in either direction. When combined with the stability
of Real Asset cash fl ows, the resulting risk-adjusted returns have
meaningfully surpassed those achieved by either equities or bonds.
Exhibit 14: Comparison of Sharpe Ratios across Real Assets and
Investment Alternatives
Source: MSCI, Barclays, Bloomberg, NCREIF, S&P Dow Jones Indexes; data as of
June 30, 2013; Sharpe Ratio based upon 10-year average annualized total returns
and standard deviations of performance; assumes a risk-free rate of 3.0%.
Source: MSCI, Barclays, Bloomberg, NCREIF, S&P Dow Jones Indexes; data as of
June 30, 2013
Source: MSCI, Barclays, Bloomberg, NCREIF, S&P Dow Jones Indexes; data as of
June 30, 2013; Sharpe Ratio based upon 10-year average annualized total returns
and standard deviations of performance; assumes a risk-free rate of 3.0%.
l l b d d
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HEDGE AGAINST INFLATION
With infl ationary concerns on the rise, we believe Real Assets represent
an attractive investment in long-lived, physical resources that tend to
increase in value as land and input costs rise. Additionally, Real Asset
revenue streams often respond favorably to higher infl ation, as shorter
term contractual revenues (i.e., one-year apartment leases) benefi t
from frequent resets while longer term lease structures (i.e., 30-year
airport concessions) often include regularly scheduled rent escalations
linked to infl ation. Importantly, end-user demand tends to be relatively
inelastic and often insulated from infl ation, due to the essential nature
of the goods and services provided by Real Assets. Indeed, demand
often increases during infl ationary periods, particularly when rising
prices are spurred by economic growth and improving levels of
employment and consumption. As a result of these various drivers,
Real Asset returns tend to exhibit greater correlations with infl ation
than traditional investment alternatives.
Exhibit 15: Correlation of Asset Class Returns with Infl ation
Source: MSCI, Barclays, Bloomberg, NCREIF, S&P Dow Jones Indexes, U.S.
Bureau of Labor Statistics; data as of June 30, 2013; represents the correlation
of annualized returns for Property, Timberlands, Agrilands, Bonds and Stocks
with historical Consumer Price Index over the duration of data available for
each index; represents correlation of quarterly returns for Infrastructure with
historical Consumer Price Index given the limited time series of data.
The Sharpe Ratio Defi ned
The Sharpe Ratio is a measure of return per unit of risk. The fi gure is
calculated by subtracting a risk-free rate, such as the yield of the 10-year
U.S. Treasury bond, from the rate of return achieved from an investment.
This net return is then divided by the standard deviation of performance
results. The resulting ratio indicates whether investment returns have
suffi ciently rewarded investors for the level of risk assumed. The higher
the Sharpe ratio, the greater the level of risk-adjusted performance.
Source: MSCI, Barclays, Bloomberg, NCREIF, S&P Dow Jones Indexes, U.S.
Bureau of Labor Statistics; data as of June 30, 2013; represents the correlation
of annualized returns for Property, Timberlands, Agrilands, Bonds and Stocks
with historical Consumer Price Index over the duration of data available for
each index; represents correlation of quarterly returns for Infrastructure with
historical Consumer Price Index given the limited time series of data.
Real Assets in a Rising Interest Rate Environment
Recent developments in global capital markets have led to the potential
for rising long-term interest rates, which has brought to the forefront the
question of Real Asset performance in a rising rate environment. While
we claim no unique insight on monetary policy, our views on the matter
have been shaped by our deep experience as an owner and operator of
these assets and as an active participant within global capital markets.
We fi rmly believe that Real Assets are uniquely positioned to generate
attractive performance across various market cycles, due to their
generally stable, long-term, contractual revenue streams combined with
considerable leverage to economic growth. During periods of higher
nominal interest rates (whether from higher real rates in a more positive
growth environment or from higher infl ation in a low growth environment),
we believe the increased revenues from these assets will more than off set
any potential valuation decline from rising discount rates.
In gaining an appreciation for the performance of Real Assets across
varying cycles, it is essential to understand the impact of interest rates
and infl ation on each of the main value components of an investment.
First, Real Asset revenue streams are positively impacted by interest rates and
infl ation in several ways. Infrastructure and power assets tend to operate
under regulated and contractual revenue agreements that span several
decades. These agreements often contain either direct, explicit infl ation-
linked revenue increases or revenue growth formulas that are derived
from interest rates and/or infl ation. The revenue streams derived from
in-place commercial property leases also tend to perform favorably in
an infl ationary environment, as lease rolls lead to higher revenues while
rising replacement costs lead to higher asset valuations.
Secondly, interest rates remain very low and fi xed interest rate loans
enhance equity returns as revenues increase. The economic eff ect of debt
revaluations accrues to owners and can create meaningful embedded
value. Long-term, fi xed rate debt with a low coupon is benefi cial in a
rising interest rate and infl ationary environment, due to the stable nature
of the debt service payments relative to higher revenues.
Thirdly, Real Asset expenses tend to grow more slowly than revenues. While
the revenue implications of rising interest rates and infl ation tend to be
positive, the impact of expense growth is often more subdued or passed
on to end users. Additionally, Real Assets tend to require low sustaining
capital expenditures, which helps to minimize overall expense growth.
Lastly, in anticipation of interest rate increases, capitalization rates for Real
Assets did not decrease as much as fi xed income yields in recent years. Asset
valuations are generally based upon cash-fl ow projections discounted at
an appropriate, risk-adjusted rate of return. This discount rate is, in turn,
infl uenced by both the level of benchmark interest rates and the level of
demand in the investment marketplace for the asset class. We expect that
as bond yields rise, Real Asset capitalization rates will lag this movement,
as they have maintained wider spreads to absorb interest rate increases.
In summary, we expect Real Assets to produce positive and consistent
performance and stable cash fl ows over the long term, irrespective of
interest rates movements or capital market cycles. While short-term
volatility will ebb and fl ow, Real Assets will remain the New Essential.
Real Assets in a Rising Interest Rate Environment
Recent developments in global capital markets have led to the potential
for rising long-term interest rates, which has brought to the forefront the
question of Real Asset performance in a rising rate environment. While
we claim no unique insight on monetary policy, our views on the matter
have been shaped by our deep experience as an owner and operator of
these assets and as an active participant within global capital markets.
We fi rmly believe that Real Assets are uniquely positioned to generate
attractive performance across various market cycles, due to their
generally stable, long-term, contractual revenue streams combined with
considerable leverage to economic growth. During periods of higher
nominal interest rates (whether from higher real rates in a more positive
grgrowowththeenvnvirirononmementntoorr frfromomhhigigheherr ininflfl atatioionnininaallowowggrorowtwthhenenviviroronmnmenent)t),
we believe the increased revenues from these assets will more than off set
any potential valuation decline from rising discount rates.
In gaining an appreciation for the performance of Real Assets across
varying cycles, it is essential to understand the impact of interest rates
and infl ation on each of the main value components of an investment.
First, Real Asset revenue streams are positively impacted by interest rates and
infl ation in several ways. Infrastructure and power assets tend to operate
under regulated and contractual revenue agreements that span several
decades. These agreements often contain either direct, explicit infl ation-
linked revenue increases or revenue growth formulas that are derived
from interest rates and/or infl ation. The revenue streams derived from
in-place commercial property leases also tend to perform favorably in
an infl ationary y environment, as lease rolls lead to highg er revenues while
rising replacement costs lead to higher asset valuations.
Secondly, interest rates remain very low and fi xed interest rate loans
enhance equity returns as revenues increase. The economic eff ect of debt
revaluations accrues to owners and can create meaningful embedded
value. Long-term, fi xed rate debt with a low coupon is benefi cial in a
rising interest rate and infl ationary environment, due to the stable nature
of the debt service payments relative to higher revenues.
Thirdly, Real Asset expenses tend to grow more slowly than revenues. While
the revenue implications of rising interest rates and infl ation tend to be
positive, the impact of expense growth is often more subdued or passed
on to end users. Additionally, Real Assets tend to require low sustaining
capital expenditures, which helps to minimize overall expense growth.
Lastly, in anticipation of interest rate increases, capitalization rates for Real
Assets did not decrease as much as fi xed income yields in recent years. Asset
valuations are generally based upon cash-fl ow projections discounted at
an appropriate, risk-adjusted rate of return. This discount rate is, in turn,
infl uenced by both the level of benchmark interest rates and the level of
demand in the investment marketplace for the asset class. We expect that
as bond yields rise, Real Asset capitalization rates will lag this movement,
as they have maintained wider spreads to absorb interest rate increases.
In summary, we expect Real Assets to produce positive and consistent
performance and stable cash fl ows over the long term, irrespective of
interest rates movements or capital market cycles. While short-term
volatility will ebb and fl ow, Real Assets will remain the New Essential.
Real Assets — The New Essential 9
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GEOGRAPHIC DIVERSIFICATION
Real Assets provide access to a global opportunity set across multiple
asset classes. When combined with a variety of investment vehicle
options – detailed in the following section – we believe diversifi cation
of investment across geography, currency and asset class can be
readily achieved. This diversity can provide enhanced insulation
against regional economic trends and cycles.
PORTFOLIO DIVERSIFICATION
Real Asset returns have historically exhibited low correlations to
traditional equity and fi xed income investments. The addition of Real
Assets to a mixed-asset portfolio may therefore provide important
diversifi cation benefi ts, lowering overall volatility and enhancing risk-
adjusted returns.
Exhibit 16: Correlation of Real Asset Returns with Equities and Bonds
Source: MSCI, Barclays, Bloomberg, NCREIF, S&P Dow Jones Indexes; data as
of June 30, 2013; represents correlation of quarterly returns for each respective
index with the MSCI World Index (stocks) and the Barclays Global Aggregate
Bond Index (bonds) since the fi rst quarter of 2003.
In regards to infrastructure, it is important to note that the proxy for
infrastructure asset performance utilized throughout this paper is a
listed index. As private market investment in infrastructure is relatively
new, having evolved in earnest over the last 20 years, an index of
private market asset performance with a meaningful track record does
not currently exist. Accordingly, the Dow Jones Brookfi eld Global
Infrastructure Composite Index was chosen as the most appropriate
proxy for the asset class.
This listed index is currently comprised of more than 125 asset-
rich infrastructure companies, with a total market capitalization
of over $1.0 trillion1 and historical data dating back to December
31, 2002. While we believe this index provides an eff ective
representation of the infrastructure asset class, it does refl ect the
performance of publicly traded equity securities. The listed nature
of the index provides many benefi ts to investors, including liquidity,
ease of investment and diversity across geography and asset type.
However, the index has also exhibited infl ated correlation levels in
recent years, as it has been aff ected by many of the same capital
market trends that have infl uenced the equity and bond markets.
Source: MSCI, Barclays, Bloomberg, NCREIF, S&P Dow Jones Indexes; data as
of June 30, 2013; represents correlation of quarterly returns for each respective
index with the MSCI World Index (stocks) and the Barclays Global Aggregate
Bond Index (bonds) since the fi rst quarter of 2003.
In an attempt to discern the correlation of infrastructure asset
performance excluding the impact of capital market fl uctuations,
an analysis was conducted utilizing a recently established private
infrastructure market data series. The Preqin Infrastructure Quarterly
Index is calculated based upon cash fl ow transactions and Net Asset
Values as reported by over 130 individual unlisted infrastructure
partnerships. While this index dates back only to the fi rst quarter of
2008, the fi ve-year life span of this data series has been one of the
most volatile periods on record. As such, the results of a correlation
analysis utilizing this data should provide a meaningful context.
Exhibit 17: Correlation of Private Market Infrastructure Data with
Equities and Bonds
Source: MSCI, Barclays, Bloomberg, Preqin; data as of December 31, 2012;
represents correlation of quarterly returns of the Preqin Infrastructure Quarterly
Index with the MSCI World Index (stocks) and the Barclays Global Aggregate
Bond Index (bonds) since the fi rst quarter of 2008, which is the earliest date for
which data is available across all indexes.
We believe the low correlations produced by this analysis are indicative
of the relationship between infrastructure asset performance and
that of the listed markets. Accordingly, we believe this comparison
provides further support for our belief that Real Assets can provide
powerful diversifi cation benefi ts for a mixed-asset portfolio.
HOW TO ACCESS THE OPPORTUNITY
Depending on an investor’s needs surrounding liquidity, time horizon
and capacity to invest, there are a number of options for participating
in the global Real Asset investment opportunity. While the specifi c
characteristics of these options vary meaningfully, we believe they
share a common ability to provide attractive current income streams
and capital growth potential.
Exhibit 18: Typical Characteristics of Real Asset Investment Options
SouSourcerce: M: MSCISCI B, Barcarclaylayss, BloBloombombergerg P, Preqreqin;in; dadatata asas ofof DecDecembemberer 3131, 202012;12;
represents correlation of quarterly returns of the Preqin Infrastructure Quarterly
Index with the MSCI World Index (stocks) and the Barclays Global Aggregate
Bond Index (bonds) since the fi rst quarter of 2008, which is the earliest date for
which data is available across all indexes.
1 As of June 30, 2013
Private, Unlisted
FundsManagedAccount
Direct AssetInvestment
Ease of Invesment
Investment Diversification
PortfolioDiversification
STRONG LIMITED
Liquidity
GovernanceRights
Unlisted Fund of Funds
ListedMutualFunds
Exchange- TradedFunds
Publicly Traded Equity
Securities
Private Fund
Invested inDebt
Investments
Stocks Bonds
Property 0.23 -0.08
Timberlands -0.05 0.15
Agrilands 0.11 -0.03
Stocks Bonds
Private Market Infrastructure -0.11 -0.05
Real Assets — The New Essential10
Brookfi eld.com | For Clients Only. Not for Redistribution.
These investment options are available across the universe of Real
Asset opportunities, with more established asset classes off ering a
wider variety of investment options.
Exhibit 19: Availability of Real Asset Investment Options
* Limited pure-play investment opportunities
Interestingly, when deciding among this opportunity set, it is important
to note that correlations among Real Assets are quite low, as indicated
in Exhibit 20. This suggests that the optimal asset allocation should
include more than one component asset class, which can serve to
enhance overall portfolio returns while diversifying total portfolio risk.
Exhibit 20: Correlations Among Real Asset Constituents
Source: NCREIF, S&P Dow Jones Indexes; data as of June 30, 2013; represents
correlation of quarterly returns since the fi rst quarter of 2003, which is the
earliest date for which data is available across all indexes.
Source: NCREIF, S&P Dow Jones Indexes; data as of June 30, 2013; represents
correlation of quarterly returns since the fi rst quarter of 2003, which is the
earliest date for which data is available across all indexes.
Capitalizing on the Real Asset Investment Opportunity
While the potential benefi ts of Real Assets are readily observable and
the options for investment are numerous, the ability to capitalize on the
opportunity is more complex.
• As these assets tend to be large-scale, capital-intensive investments,
signifi cant access to capital is typically required in order to fund
initial acquisitions as well as ongoing capital expenditures.
• As not all Real Assets are created equally, investment sourcing and
underwriting play a vital role in understanding the key drivers of
asset performance and determining asset value. Factors such as
asset quality, location, lease or concession structure, ownership
basis and growth potential must all be considered when evaluating
a potential investment.
• As Real Asset operations tend to be industry-specifi c and often
driven by complicated regulations, operational experience is
necessary in order to maximize effi ciency and productivity.
• As Real Assets are generally long-lived assets often subject to long-
lasting contractual agreements, a long-term, patient investment
philosophy may be needed to fully realize the value of an investment.
Given the complexities of Real Asset investment and operations,
specialized expertise can assist investors seeking to access the asset
class and benefi t from its attractive characteristics. Along every step of
the investment process – sourcing, underwriting, acquiring, fi nancing,
operating and monetizing – a specialized asset manager with focused
Real Asset experience can help to ensure an investment’s full value
creation potential is achieved.
EVOLVING REAL ASSET ALLOCATIONS
Institutional investors globally are recognizing the potential benefi ts of investment in Real Assets and are evaluating the options for accessing the
opportunity. Many institutions are leading the way forward, having increased their allocations to Real Assets meaningfully in recent years. As
indicated in Exhibit 21, these allocations can move swiftly, leading to signifi cant capital fl ows seeking investment in Real Asset opportunities1.
Exhibit 21: Illustrative Examples of Increasing Real Asset Allocations
Example A
Canadian National Pension Plan | C$183.5 billion | As of June 30, 2013
Asset Allocation in 2000 Asset Allocation in 2013
Example A
Canadian National Pension Plan | C$183.5 billion | As of June 30, 2013
Asset Allocation in 2000000 Asset Allocation in 200133
1 The examples included herein are based on Brookfi eld’s internal research of certain company annual reports and have been chosen and presented to illustrate the change
in asset allocations of certain investors. The examples presented herein are not intended in any way to be exhaustive of the investors investing or not investing in real
assets. An investment in real assets involves signifi cant risk, including loss of the full amount of the investment.
Capitalizing on the Real Asset Investment Opportunity
While the potential benefi ts of Real Assets are readily observable and
the options for investment are numerous, the ability to capitalize on the
opportunity is more complex.
• As these assets tend to be large-scale, capital-intensive investments,
signifi cant access to capital is typically required in order to fund
initial acquisitions as well as ongoing capital expenditures.
• As not all Real Assets are created equally, investment sourcing and
underwriting play a vital role in understanding the key drivers of
asset performance and determining asset value. Factors such as
asset quality, location, lease or concession structure, ownership
basis and growth potential must all be considered when evaluating
a potential investment.
•• AsAs RReaeall AsAssesett opopereratatioionsns ttenendd toto bbee ininduduststryry s-spepecicififi cc anandd ofoftetenn
driven by complicated regulations, operational experience is
necessary in order to maximize effi ciency and productivity.
• As Real Assets are generally long-lived assets often subject to long-
lasting contractual agreements, a long-term, patient investment
philosophy may be needed to fully realize the value of an investment.
Given the complexities of Real Asset investment and operations,
specialized expertise can assist investors seeking to access the asset
class and benefi t from its attractive characteristics. Along every step of
the investment process – sourcing, underwriting, acquiring, fi nancing,
operating and monetizing – a specialized asset manager with focused
Real Asset experience can help to ensure an investment’s full value
creation potential is achieved.
* Limited pure-play investment opportunities
Private,UnlistedFunds
ManagedAccount
Direct Asset Investment
Property
Infrastructure
Timberlands
Agrilands
Unlisted Fund ofFunds
Listed MutualFunds
Exchange- TradedFunds
PubliclyTradedEquity
Securities
Private FundInvested in
DebtInvestments
Property Infrastructure Timberlands Agrilands
Property 1.00 0.27 0.33 0.22
Infrastructure 0.27 1.00 -0.10 0.03
Timberlands 0.33 -0.10 1.00 0.74
Agrilands 0.22 0.03 0.74 1.00
Real Assets — The New Essential 11
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Example B
U.S. University Endowment | $32.7 billion | As of June 30, 2013
Asset Allocation in 1995 Asset Allocation in 2013
Example C
U.S. State Defi ned Benefi t Pension Plan | $117.5 billion | As of April 17, 2013
Asset Allocation in 2000 Asset Allocation in 2012
Example D
Australian Superannuation Fund | A$89.0 billion | As of June 30, 2013
Asset Allocation in 2008 Asset Allocation in 2013
Example B
U.S. University Endowment | $32.7 billion | As of June 30, 2013
Asset Allocation in 1995 Asset Allocation in 2013
Example C
U.S. State Defi ned Benefi t Pension Plan | $117.5 billion | As of April 17, 2013
Asset Allocation in 2000 Asset Allocation in 2012
Example D
Australian Superannuation Fund | A$89.0 billion | As of June 30, 2013
Asset Allocation in 2008 Asset Allocation in 2013
Source: Company annual reports
Real Assets — The New Essential12
Brookfi eld.com | For Clients Only. Not for Redistribution.
We expect this trend to accelerate over the next decade, as investors
come to view Real Assets as an attractive alternative to traditional
equity and fi xed income investments. The early movers profi led in
Exhibit 21 have set the foundation for this important shift in asset mix
and have demonstrated the potential for Real Asset allocations to
increase meaningfully over a relatively short period of time.
CONCLUSION – PART I
The current economic environment is presenting numerous challenges
for investors to navigate. At a time when liability requirements are
increasing, the opportunity to invest for yield has been diminished
and the outlook for growth has been subdued. With rising interest
rates and the potential for higher infl ation on the horizon, investors are
looking beyond the traditional array of investment options in search of
a more attractive alternative.
Amid the constraints of the current environment, we believe Real
Assets can provide the path forward. With an attractive combination
of yield, stability, and growth, Real Assets off er the potential to protect
investment value on the downside while maintaining exposure to the
upside. Indeed, based upon our own 100-year history of owning and
operating these assets, we believe they combine the most appealing
attributes of traditional equity and fi xed income investments.
Accordingly, we believe Real Assets provide a unique opportunity to
generate compelling risk-adjusted returns across market cycles.
Investors across the globe are recognizing the attractive, long-term
benefi ts of investment in Real Assets. As this trend continues to
accelerate, we expect institutional allocations to the asset class to
grow materially over the next decade. We believe the foundation for
this shift has been established and the investible universe is poised to
expand to meet this rising demand. As the "New Normal" gives way to
the market cycles that lie ahead, we believe the stage has been set for
a new alternative to emerge and for Real Assets to become the New
Essential.
Brookfi eld's Real Asset Expertise
Brookfi eld Asset Management is a global alternative asset manager with over $175 billion in assets under management. We have over a 100-year history
of owning and operating Real Assets, including property, infrastructure, timberlands and agrilands.
On behalf of our clients and shareholders, we own and manage one of the world’s largest portfolios of Real Assets. We off er a range of public and private
investment strategies that leverage our expertise and experience in markets across the globe. Given our deep history in the ownership and operation
of Real Assets and our belief in their future growth potential, we actively invest a very substantial amount of our own capital alongside our clients and
partners, ensuring a signifi cant alignment of interests. We are proud of our track record for success in achieving strong risk-adjusted returns across
market cycles.
Our focus is on high quality, long-lived, cash fl ow generating Real Assets that are well-positioned to appreciate in value over time.
Asset Class AUM1 Profi le
PROPERTY
Offi ce, Retail, Residential,
Multifamily, Industrial
and Hotel
$110 billion • 192 offi ce properties comprising 101 million sq. ft.
• 174 regional malls comprising 154 million sq. ft.
• 29 million sq. ft. of offi ce and retail development globally
• 20,000 owned and over 52,500 managed apartments
• 117,000 residential lot equivalents and 54 million sq. ft. of condo density
• 7,600 hotel rooms and 146 industrial properties comprising 35 million sq. ft.
INFRASTRUCTURE
Transportation,
Renewable Power, Energy
and Utilities
$41 billion • 28 ports, 3,200 km of toll roads and 5,100 km of rail operations in Europe, South
America and Australia
• 193 hydro power plants on 70 river systems in North America and Brazil
• Nearly 950 MW of wind capacity in key North American markets
• 1,800 MW of early stage hydro and wind developments
• Electricity and gas distribution and connections in the U.S., New Zealand, the UK and
Colombia
• 9,900 km of transmission lines in Canada, the U.S. and Chile
TIMBERLANDS $4 billion • 2.6 million2,3 acres of timberlands in North and South America
AGRILANDS $1 billion • 580,000 acres of agricultural land in Brazil, which includes sugarcane for ethanol,
soya and corn, pineapple and rubber and a premium cattle operation
1 As of June 30, 2013. Excludes Private Equity assets under management of $22 billion and Asset Management and Services, Cash and Financial Assets and Other Assets
of $5 billion.2 On July 23, 2013, Brookfi eld sold 100% of Longview Timber for $2.65 billion. Longview Timber consists of approximately 645,000 acres of high quality timberlands in the
U.S. Pacifi c Northwest. Brookfi eld continues to invest in timberlands and believes this is an attractive asset class for institutional investors.3 Total acres does not include management services provided on 1.3 million acres of Crown licensed timberlands in New Brunswick.
Real Assets — The New Essential 13
Brookfi eld.comFor Clients Only. Not for Redistribution. |
MULTI-FAMILY RESIDENTIAL PROPERTY SECTOR
The multi-family residential sector is comprised of multi-unit rental
apartments. The main performance drivers of these assets include
employment levels, the available supply of rental housing and
competition from for-sale housing. As the typical duration of a rental
apartment lease is only one year, this property sector tends to exhibit
greater volatility and sensitivity to macroeconomic variables. However,
this enhanced operational leverage provides numerous benefi ts during
an up-cycle, allowing apartment owners to capture rising cash fl ow
levels more quickly than owners of other property types. As a result,
multi-family residential assets tend to provide meaningful protection
against rising infl ation as well as attractive growth potential during
periods of economic expansion.
INDUSTRIAL PROPERTY SECTOR
The industrial property sector is comprised of assets such as bulk
warehouse space, distribution centers, light manufacturing facilities
and modular offi ce space. Industrial assets are often located within
warehouse parks, where individual buildings range in size from
25,000 to over 1 million square feet.
Demand for industrial and warehouse assets is derived primarily
from inventory storage or the fl ow of goods through tenant supply
chains. Growth in demand is therefore dependent upon trends in
consumer spending, manufacturing and import/export activity.
Additionally, as industrial assets play a key role in the distribution
of commercial goods, these assets tend to be located near major
centers of transportation, including ports, airports and roadway
systems. The industrial sector is generally viewed as relatively stable
and defensive, due to the long-term nature of its lease structures.
PROPERTY GROWTH OUTLOOK
The nascent global economic recovery is leading to increased demand
for property across the globe, driving income and occupancy growth
and leading to enhanced levels of profi tability. Additionally, property
development activity slowed considerably following the global
fi nancial crisis due to lower demand as well as a limited availability
of construction fi nancing. Importantly, new development remains
signifi cantly below historical averages, as credit provision has only
recently begun to improve.
PART II
AN INTRODUCTION TO REAL ASSETSAs previously discussed, our defi nition of Real Assets is focused
upon long-lived, hard assets that generate stable and growing cash
fl ow streams. In particular, this investible universe includes Property,
Infrastructure, Timberlands and Agrilands.
PROPERTYAn essential component of the global economy, property is an
established asset class encompassing commercial and residential
real estate assets around the world. These hard assets off er investors
relatively steady income streams, a potential hedge against
infl ation, as well as leverage to economic growth. Additionally,
property markets are the largest consumer of capital in the world,
providing a signifi cant opportunity for private investment. As
such, demand for the asset class has remained strong for many
decades, as investors appreciate the fundamental value of property
ownership over the long term.
The total size of the global property investible universe is currently
estimated at over $25 trillion1 across developed and emerging market
economies. Within this universe, assets can be classifi ed among key
property sectors, the most signifi cant of which include Offi ce, Retail,
Multi-family Residential and Industrial.
OFFICE PROPERTY SECTOR
The offi ce property sector is comprised of assets ranging from Class
A trophy buildings in major gateway cities to single-story buildings
in suburban offi ce parks. The key driver of demand for offi ce space
across the globe is job growth, particularly within professional service
industries. While this creates a degree of sensitivity to macroeconomic
factors, any such volatility is partially mitigated by the long-term
nature of offi ce leases, which range anywhere from fi ve to thirty years.
A typical offi ce building with an average lease term of eight years
would have only 12% to 15% of leases expiring in each year. As a result,
85% or more of revenue would generally be identifi ed at least one year
in advance. This predictability, when combined with modest levels of
annual re-leasing, leads to relatively stable cash fl ow streams coupled
with upside growth potential.
RETAIL PROPERTY SECTOR
The retail property sector encompasses three main asset types: local
community shopping centers, regional malls and outlet centers. The
performance of retail property assets is driven by retailer demand
for space in the short term and by trends in consumer spending over
the long term. However, property performance tends to be relatively
stable due to multi-year lease structures that often incorporate regular
increases in contractual rent obligations, usually tied to infl ation. As
a result, retail assets produce relatively stable, long-term cash fl ow
streams that can often weather short-term macroeconomic noise.
A Note on Single-Family Housing
Although single-family homes are long-lived hard assets, they do not tend
to possess the key characteristics we utilize in defi ning the Real Asset
investible universe. Accordingly, we view the development of single
family housing as a private equity investment opportunity rather than a
Real Asset suitable for long-term institutional ownership. However, this
business does require a signifi cant amount of private investment capital,
owing to strong consumer demand for home ownership in many parts
of the world. Brookfi eld participates in this opportunity as a provider of
capital through our private equity operations.
1 EPRA, Monthly Statistical Bulletin, June 2013
Real Assets — The New Essential14
Brookfi eld.com | For Clients Only. Not for Redistribution.
Exhibit 22: Historical Aggregate U.S. Commercial Property
Construction Starts
Source: Citigroup; data as of June 30, 2013.
As demand begins to recover with the broader economy, this supply
imbalance is likely to further drive revenue and occupancy growth for
existing property owners. Accordingly, we believe that global property
assets, particularly top tier, well-located properties that enjoy some
form of barrier to entry, are positioned for meaningful growth in
coming years.
Furthermore, the global property investible universe is poised
for attractive growth as well. While property is an established,
stable asset class in many mature markets, economic growth and
expanding populations are expected to fuel ongoing development
activity. Additionally, aging property assets are likely to be replaced
or refurbished, leading to enhanced opportunities for investment.
Meanwhile, in emerging market economies, accelerating population
growth and urbanization are expected to drive signifi cant growth in
new property development activity.
In an attempt to quantify this growth potential, an analysis of the
relationship between property markets and GDP can serve as a guide.
By calculating the current ratio between these two fi gures for each
major economy around the world and applying this ratio to estimates
of 2030 GDP, a projection of growth in the global property market can
be developed. While this approach may yield conservative results, as
it assumes national property markets will not grow faster than GDP,
it serves to balance the mature growth of developed economies with
the potentially more robust growth of emerging markets. Importantly,
this approach indicates that global property markets may expand by
over $15 trillion through 20301, creating a signifi cant opportunity for
investment.
INFRASTRUCTUREInfrastructure assets are generally long-lived, capital-intensive assets
that provide essential products or services. As such, infrastructure
assets are vital to economic development and benefi t from relatively
inelastic demand. These assets are often characterized by sustainable
long-term cash fl ows, infl ation-linked revenues, high barriers to
entry and high operating margins with minimal maintenance capital
requirements. Within this defi ned investible universe, we classify
assets into four main categories: Transportation, Renewable Power,
Energy and Utilities.
TRANSPORTATION
The Transportation subsector is comprised of essential infrastructure
networks that move freight, bulk commodities and passengers,
including railroads, toll roads, seaports, bridges, tunnels and airports.
Transportation assets are generally privatized through concession
agreements, which are granted by a government body and which set
parameters for the operation of the asset, such as:
• concession length, which is generally in the range of 10 to 99 years,
and in some cases indefi nite;
• price increase mechanisms, which are often tied to infl ation; and
• future capital expenditures required to maintain good operating
performance.
Given the essential nature of transportation assets, the high barriers to
entry, and the structure of concession agreements, volumes generally
grow in-line with GDP while pricing increases in-line with infl ation. The
long-term growth potential of volumes and pricing, combined with the
low operating costs for most transportation assets, results in attractive
investment opportunities.
RENEWABLE POWER
A growing subset of the Infrastructure asset class, Renewable Power
represents one of the most commercially and environmentally-
friendly forms of power generation. As nations across the world
seek to reduce carbon emissions in a cost-eff ective manner,
renewable power has become a meaningful provider of global
electricity supply. These assets provide energy generation fueled
by renewable resources, including water, wind, solar, geothermal
and biomass (organic materials). Among these resources, water
and wind have provided the most economically feasible sources
of renewable energy and have experienced the most signifi cant
growth in both supply and demand in recent years.
Source: Citigroup; data as of June 30, 2013.
While the relatively stable, long-term nature of these cash fl ow streams
can provide resiliency through economic downturns, regional mall
performance also benefi ts during periods of economic recovery and
growth. As consumer demand increases, regional mall occupancy levels
and rental revenues tend to rise as well. In the current environment, these
growth drivers are complemented by the expected lack of new supply of
mall space over the next fi ve years and resilient demand from domestic
and international retailers. We believe this combination of potential
growth underpinned by sustainable revenues and cash fl ows provides
a solid foundation upon which regional mall assets in particular, and
property assets in general, can produce attractive performance results
across market cycles.
While the relatively stable, long-term nature of these cash fl ow streams
can provide resiliency through economic downturns, regional mall
peperfrforormamancncee alalsoso bbenenefiefittss duduriringng ppererioiodsds ooff ececononomomicic rrececovovereryy anandd
growth. As consumer demand increases, regional mall occupancy levels
and rental revenues tend to rise as well. In the current environment, these
growth drivers are complemented by the expected lack of new supply of
mall space over the next fi ve years and resilient demand from domestic
and international retailers. We believe this combination of potential
growth underpinned by sustainable revenues and cash fl ows provides
a solid foundation upon which regional mall assets in particular, and
property assets in general, can produce attractive performance results
across market cycles.
The Benefi ts of Investing in Property Assets
Property assets, particularly well-located, high quality assets, typically
generate relatively long-term cash fl ow streams that off er downside
protection as well as exposure to economic growth. For example, the
regional mall property sector is characterized by lease maturities that
usually range from fi ve to seven years, providing a measure of protection
against market cyclicality and economic challenges. In addition, regional
mall leases often contain operating cost pass-through arrangements that
provide added certainty during an unsure operating environment.
The Benefi ts of Investing in Property Assets
PrPropoperertyty aassssetetss, pparartiticuculalarlrlyy wewellll-llococatateded, hihighgh qquaualilityty aassssetetss, ttypypicicalallyly
generate relatively long-term cash fl ow streams that off er downside
protection as well as exposure to economic growth. For example, the
re igion lal m lalll propertty secttor iis chhara tcteriiz ded bby llease mattu iritities tthhatt
usually range from fi ve to seven years, providing a measure of protection
against market cyclicality and economic challenges. In addition, regional
mall leases often contain operating cost pass-through arrangements that
provide added certainty during an unsure operating environment.
1 EPRA, World Bank, PricewaterhouseCoopers, Brookfi eld Asset Management
Real Assets — The New Essential 15
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Hydroelectric power generation facilities are long-lived assets that
generate stable, sustainable cash fl ows and require minimal ongoing
capital expenditures. Furthermore, these assets benefi t from scarcity
value and high barriers to entry. As the requirements for permitting,
building and operating hydroelectric power plants have grown more
complex, these barriers have only increased.
Hydro power cash fl ow streams are generally derived from long-term,
infl ation-linked power purchase agreements with durations of 15 years
or longer. Additionally, power generating capacity tends to be highly
predictable over time, with historical water fl ow data for many river
systems typically ranging from 50 to 60 years. Importantly, these
assets can also provide meaningful upside potential through the
storage of excess water fl ow in reservoirs. This fl exibility allows for
incremental power generation during periods of peak demand and
premium pricing.
The technology and systems underlying hydro power assets have been
utilized for over a century and are both well-proven and economically
viable. Indeed, hydroelectricity is a cost-competitive source of
production, as there are no associated fuel costs or input commodity
risks, while the source of energy is readily available and sustainable.
As the need to replace aging electricity systems or develop new
sources of power continues to increase, particularly in a manner that
is both environmentally-friendly and cost-eff ective, renewable power
is poised for meaningful growth.
Renewable power currently represents 26% of global electricity
generating capacity and over 21% of actual generation. With a current
installed base of 1,300 gigawatts worldwide, the renewable power
industry is adding in the range of 100 gigawatts of new supply each
year, which corresponds to approximately $200 billion of annual
investment. As a result, industry projections indicate that renewable
energy, particularly hydro and wind power, will be the fastest growing
source of electricity generation over the next 30 years1.
Exhibit 23: Growth in Electricity Generation by Energy Source
2010-2040
Forecasted Generation as a Percent of Actual 2010 Levels
Source: U.S. Energy Information Administration International Energy Outlook
2013
The signifi cant growth forecasted for the renewable power asset
class is expected to be driven by eff orts to ensure the sustainability
of the global economy and environment. More specifi cally,
several key trends are expected to lead to accelerating demand for
renewable energy.
• Declining competition from coal and nuclear generation – coal
plants are increasingly facing legislative pressures to undertake
signifi cant environmental compliance expenditures, leading to
an accelerating trend towards the retirement of coal generation
facilities. Additionally, following the recent Fukushima nuclear
disaster in Japan, public concern over the safety of nuclear power
generation has delayed or halted new development activities in the
U.S. and has caused other nations to legislate the early retirement of
existing nuclear capacity.
• Increasing global acceptance of climate change – in recent years,
increasing concern over global warming has become a signifi cant
catalyst for environmental policy action around the world, including
new legislation mandating renewable power procurement targets
and implementation of feed-in-tariff s that off er cost-based
compensation to renewable energy producers.
• Improving cost competitiveness of new technologies – technological
developments over the last decade continue to reduce the costs
of newer renewable power generation technologies such as wind,
solar and geothermal, enhancing the competitiveness of renewable
resources and providing an attractive means to meet increasingly
stringent environmental standards.
• Government policies – at least 64 countries, including all 27 European
Union member nations, have national targets for renewable energy
supply. Additionally, 37 U.S. states and nine Canadian provinces
have established Renewable Portfolio Standards requiring electricity
distributors to obtain a minimum percentage of their power from
renewable energy resources by specifi ed target dates and/or have
initiated policy goals that require utilities to off er long-term power
purchase contracts for new renewable supply.
ENERGY
The Energy subsector encompasses oil and gas pipelines,
processing plants, storage facilities and district energy systems.
Energy infrastructure assets are generally owned on a free-hold
basis, resulting in indefi nite cash fl ow streams. Many assets have
long-term (30 years or longer) contracts with energy exploration
and development companies, which source oil and natural gas,
and utility companies, which consume these resources. Similarly,
district energy systems provide heating and cooling to central
business districts under long-term contract arrangements. These
contractual commitments provide attractive cash fl ow stability.
Commodity price fl uctuations generally do not impact the cash
fl ow profi le of energy infrastructure assets, as income streams are
based largely upon the transport and storage of commodities. These
fees are generally not signifi cantly impacted by changes in the cost
of the commodity itself. Energy infrastructure assets also benefi t
from impressive growth potential as additional infrastructure is
required to transport energy from new sources, such as natural gas
extracted from newly tapped shale reserves.1 U.S. Energy Information Administration
Real Assets — The New Essential16
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UTILITIES
Utilities are typically regulated assets that transmit and distribute
essential products and services to communities, such as electricity,
natural gas and water. These assets include electricity transmission
and distribution systems, water distribution systems, wastewater
collection and processing systems, and communications towers.
Due to their natural monopoly status, these assets enjoy relatively
inelastic demand. However, these assets are also highly regulated
by governmental authorities, which determine the rate that can
be charged to the end user. These established rates are typically
determined so as to provide a “fair” return on invested capital to
the asset owner, including a recovery of operating costs, capital
costs and capital expenditures. Additionally, the regulatory body
often includes estimates of infl ation when determining future rate
growth. As a result, regulated assets tend to generate relatively
stable and predictable cash fl ow streams tied to infl ation. Further
value creation opportunities are possible through operational
effi ciencies, growing market share and system expansions.
INFRASTRUCTURE GROWTH OUTLOOK
Several signifi cant, large-scale trends are fueling infrastructure
spending worldwide and are expected to drive infrastructure
returns for decades to come. These trends include:
• Global population growth, which is creating demand for new
infrastructure;
• Aging existing infrastructure in the developed world, much of it
built over 50 years ago, is in need of refurbishment or replacement;
• Growth in emerging markets, where new infrastructure
development is required as increasing wealth, urbanization and
motorization rates lead to enhanced electricity and transportation
needs; and
• A shortage of capital due to strained government budgets, the
traditional source of funding.
A recent analysis conducted by the Organization for Economic
Cooperation and Development (OECD) projects the level of
investment needed to meet these growing demands will equal
3.5% of world GDP through the year 2030, or more than $55
trillion. This required investment is expected to encompass
all infrastructure asset types, with a particular need for the
development or modernization of roads, power networks, water
systems and telecommunication networks.
Exhibit 24: Expected Global Infrastructure Investment through 2030
Source: OECD, McKinsey Global Institute – Infrastructure Productivity: How to
Save $1 Trillion a Year (2013)
Importantly, the need for infrastructure spending is global in nature,
spanning developed and emerging markets alike. While the risk
and return profi le for investment will vary by market, the demand
for capital to fund infrastructure development is a common theme
heard around the world.
• In the U.S., the American Society of Civil Engineers has recently
estimated the total level of investment needed by 2020 across all
infrastructure categories to be $3.6 trillion in order to complete
overdue maintenance on existing infrastructure and modernize
aging systems1.
• Within Europe, the European Commission has projected
overall investment needs for transportation, energy and
telecommunication networks at EUR 1 trillion through 20202.
• Across Asia, the United Nations has forecasted that urban
populations will increase by 650 million people by 2030, led mainly
by China, India and Indonesia. In order to meet the requirements
of an increasingly urbanized society, recent estimates indicate
$11.5 trillion will need to be invested in infrastructure development
over the same time period3.
As economic distress has depleted government resources to fund
these needed infrastructure expenditures, private capital investment
in the asset class has accelerated and is expected to continue to grow
over the next decade and beyond.
The Benefi ts of Investing in Infrastructure Assets
Infrastructure assets tend to generate stable and growing cash
fl ows while benefi ting from high barriers to entry and generally low
maintenance capital requirements. These attributes are embodied in
electricity transmission systems located in local and regional markets
throughout the world. These systems typically serve as the backbone
to essential power supplies, fueling economic growth and development.
As an asset investment, electricity transmission systems benefi t from
high replacement costs and limited competition. Additionally, the revenue
derived from operation of these assets tends to be highly regulated, often
with pricing provisions that ensure a real return on investment. In some
cases, this return is based upon the replacement cost of the transmission
system, rather than the depreciated value of the asset base, providing for
stable, predictable and growing cash fl ows.
In addition to stable cash fl ow streams, electricity transmission systems
benefi t from GDP and population growth, which tend to drive increasing
power requirements. We believe the combination of this critical provision
of electricity, the regulated nature of the underlying revenue stream and
the growth potential of power demand should provide for attractive cash
fl ows over the long term, demonstrating the benefi ts of investment in
this asset class.
Source: OECD, McKinsey Global Institute – Infrastructure Productivity: How to
Save $1 Trillion a Year (2013)
1 American Society of Civil Engineers: “2013 Report Card for America’s
Infrastructure”2 European Commission: “A Growth Package for Integrated European
Infrastructures”, October 20113 HSBC Global Research: “Bridging the Gap”, May 2013
Real Assets — The New Essential 17
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TIMBERLANDSTimberlands provide essential products for the global economy on
a sustainable basis. Across the globe, timberlands produce the raw
materials utilized in a variety of industries, including lumber and
plywood for use in construction, furniture and fl ooring and pulpwood
for use in the manufacture of paper, packaging and wood panels –
such as oriented strand board and particleboard – and in bioenergy
generation. Importantly, while demand for these products tends
to be correlated to the economic growth cycle, timberlands also
experience biological growth irrespective of market cycles. This
biological growth can lead to capital appreciation during periods
of slowing economic fundamentals, which may then be harvested
when the economy once again improves.
The global investible universe of private timberlands is estimated
at approximately $160 billion, with a majority of this opportunity
located in the U.S. Of this amount, institutional investors currently
own approximately $40 billion, with the remainder held by private
owners and/or publicly traded timber REITs ($32 billion) and
corporations having integrated manufacturing and timberlands
operations.
Exhibit 25: Estimated Value of Investible Global Private Timberlands
Source: Bloomberg, Brookfi eld estimates; data as of June 30, 2011.
TIMBERLANDS GROWTH OUTLOOK
The global timber supply and demand outlook is projected to be
very positive in the next decade onward due to several signifi cant
macroeconomic, geopolitical and industry-specifi c trends.
• Recovery of the U.S. housing market
• Asia’s increasing demand for wood and China’s signifi cant wood
defi cit
• Reduced economic wood supply from Canada due to a reduction
in public land Annual Allowable Cut
• Challenges facing the Russian forest industry, including a lack of
adequate infrastructure to access forested areas, a degradation
in forest quality due to selective harvesting, labor shortages and,
most importantly, signifi cant cost increases
• Reduced supply of timber due to the Mountain Pine Beetle
epidemic in Western Canada and U.S. inland, which is aff ecting
select pine species
• Increased demand for wood fi ber as an alternative energy source
• Conservation eff orts
Source: Bloomberg, Brookfi eld estimates; data as of June 30, 2011.
The Benefi ts of Investing in Timberlands
With an attractive combination of biological growth during periods of
economic strain and harvesting potential during periods of economic
prosperity, we believe timberlands represent a compelling investment
opportunity. Recent experience during the 2009-2010 market downturn
provides a valuable illustration of these characteristics.
Over the course of several years, the combination of the global fi nancial
crisis and the collapse of the U.S. housing market led to a signifi cant
reduction in demand for lumber and wood products. Accordingly,
timberland harvesting and production volumes were substantially
reduced. However, this diminished production did not harm the underlying
value of the asset; rather, this period of time allowed timberlands to
continue to grow and become more valuable. As the global economy
began to recover and the U.S. housing market rebounded, demand for
the products and materials produced by timberlands returned, leading
to a re-acceleration of harvesting and production levels. Importantly, the
biological growth that occurred during the economic downturn was able
to be realized once the economy improved.
We believe this ability to generate value over time, smoothing out the
eff ects of market cycles, is both meaningful and attractive. When
combined with a declining supply of available timberlands, we believe
the asset class epitomizes the benefi ts of Real Asset investment.
AGRILANDSAgricultural lands source the world’s food supply, producing
commodities that experience generally inelastic demand. The
global farmland universe consists of close to 1 billion harvested
hectares, of which approximately two-thirds are concentrated
in the top 15 countries. However, the investible portion of
this universe is more limited, due to restrictions on corporate
or institutional ownership in developed economies as well
as insuffi cient infrastructure or scale limitations in emerging
markets.
Exhibit 26: Top Net Exporters of Agricultural Products
Soy Corn Cotton Beef Sugar Wheat RiceBrazil U.S. U.S. India Brazil U.S. India
U.S. Argentina India Australia Thailand Australia Vietnam
Argentina Ukraine Brazil Brazil Australia Russia Thailand
Paraguay Brazil Australia U.S. India Canada Pakistan
Source: USDA; data as of 2012.
Real Assets — The New Essential18
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AGRILANDS GROWTH OUTLOOK
Tightening supply and growing demand for many agriculture
products are indicating the potential for long-term growth in
the agricultural sector. Strong macroeconomic fundamentals,
including global population growth, improving consumption in the
developing world and growing demand for biofuels, are leading to
increasing demand for agricultural commodities. As a result, it is
estimated that world food production will need to increase between
60% and 90% by 2050 in order to meet expected food demand.
However, while demand is on the rise, yield growth rates have been
slowing over the last decade due to a fundamental shift in supply
expansion from productivity enhancement to acreage expansion.
As increasing acreage is a more costly and time consuming method
of expanding production, supply growth has had diffi culty keeping
pace with demand. While these signifi cant supply and demand
trends continue to evolve, we expect institutional investment
opportunities in global agriland assets to increase meaningfully.
Exhibit 27: Inventory and Price of Major Food Crops
Source: IMF and USDA; data as of 2011
An Illustrative Example of the Agrilands Investment Opportunity
The evolution of Brazilian agriculture over the last 30 years has provided
an impressive example of realized and potential future growth. In the last
three decades, Brazil has been transformed from a food importer into
one of the world's great breadbaskets by increasing its productive land
area by 37%1 and raising agricultural production by 249%1. Today, Brazil
supplies approximately 40% of the world's soybean trade2 using just 9%
of the country's potential arable land3.
It overtook Australia as the world's largest beef exporter and grew to
develop the world's second largest cattle herd. It also became the world's
largest exporter of poultry and sugar2. Importantly, it has achieved this
with virtually no government subsidies.
Practically all of the recent agriland development in Brazil has occurred in
the cerrado biome, an area of savanna about the size of Mexico, located
south of the Amazon. This area contains approximately 80 million
hectares of agriculturally apt land, 60% of which is currently productive.
The region benefi ts from a high annual sunlight average and 1,500 mm
of rain, as well as good topography. Yet, until recently, the cerrado´s
highly acidic and infertile soil limited its performance, while the lack of
adequate infrastructure to the region, particularly cargo transport, made
it uncompetitive3.
An Illustrative Example of the Agrilands Investment Opportunity
The evolution of Brazilian agriculture over the last 30 years has provided
an impressive example of realized and potential future growth. In the last
three decades, Brazil has been transformed from a food importer into
one of the world's great breadbaskets by increasing its productive land
area by 37%1 and raising agricultural production by 249%1. Today, Brazil
supplies approximately 40% of the world's soybean trade2 using just 9%
of the country's potential arable land3.
It overtook Australia as the world's largest beef exporter and grew to
develop the world's second largest cattle herd. It also became the world's
llargestt expo trter off po lulttry andd sugar22. IImpo trtantltly, iitt hhas achihiev ded tthihis
with virtually no government subsidies.
Practically all of the recent agriland development in Brazil has occurred in
the cerrado biome, an area of savanna about the size of Mexico, located
south of the Amazon. This area contains approximately 80 million
hectares of agriculturally apt land, 60% of which is currently productive.
The region benefi ts from a high annual sunlight average and 1,500 mm
of rain, as well as good topography. Yet, until recently, the cerrado´s
highly acidic and infertile soil limited its performance, while the lack of
adequate infrastructure to the region, particularly cargo transport, made
it uncompetitive3.
Much of the growth witnessed in recent years is attributable to a
combination of operational performance and technological advances.
Pioneering government-sponsored agricultural research and innovation
tackled several of the key defi ciencies in sub-tropical agriculture,
including the development of new seed varieties, advancement of
region-specifi c soil research, and new operational farm techniques that
have considerably raised farm yields. Brazilian producers have used this
information and innovation to transform tropical agricultural production,
cultivating two and occasionally three crops each year on the same area.
As a result, Brazil´s per acre agricultural productivity is today at least
equivalent to, and in some cases better than, that of the U.S. The key
diff erences between the two markets lie in land value, which is about one-
third lower in Brazil4 than in the U.S. and logistics, which still represents
a major bottleneck in Brazil. Importantly, when properly addressed,
improvements in infrastructure and logistics are expected to considerably
further improve Brazilian agricultural competitiveness.
As Brazilian agriculture advances further and local infrastructure
improves, we expect the market to continue to off er attractive investment
opportunities.
1 Companhia Nacional de Abastecimento (CONAB)2 U.S. Department of Agriculture3 Empresa Brasileira de Pesquisa Agropecuária (EMBRAPA)4 AGRA FNP
Much of the growth witnessed in recent years is attributable to a
combination of operational performance and technological advances.
Pioneering government-sponsored agricultural research and innovation
tackled several of the key defi ciencies in sub-tropical agriculture,
including the development of new seed varieties, advancement of
reregigionon-sspepecicififi cc sosoilil rreseseaearcrch,h, aandnd nnewew oopeperaratitiononalal ffararmm tetechchniniququeses tthahatt
have considerably raised farm yields. Brazilian producers have used this
information and innovation to transform tropical agricultural production,
cultivating two and occasionally three crops each year on the same area.
As a result, Brazil´s per acre agricultural productivity is today at least
equivalent to, and in some cases better than, that of the U.S. The key
didiffff ererenencecess bebetwtweeeenn ththee twtwoo mamarkrketetss liliee inin llanandd vavaluluee, wwhihichch iiss ababououtt onone-e
third lower in Brazil4 than in the U.S. and logistics, which still represents
a major bottleneck in Brazil. Importantly, when properly addressed,
improvements in infrastructure and logistics are expected to considerably
further improve Brazilian agricultural competitiveness.
As Brazilian agriculture advances further and local infrastructure
improves, we expect the market to continue to off er attractive investment
opportunities.
1 Companhia Nacional de Abastecimento (CONAB)2 U.S. Department of Agriculture3 Empresa Brasileira de Pesquisa Agropecuária (EMBRAPA)4 AGRA FNP
SUMMARYAs indicated by this introduction and overview, Real Assets represent
a diversifi ed set of investment opportunities, with exposure to a
wide variety of geographies and underlying assets. However, these
opportunities are united by common characteristics of investment
and a shared ability to generate relatively attractive yield, stability and
growth. Accordingly, we believe these assets are collectively poised to
benefi t as Real Assets gain recognition as the New Essential portfolio
investment.
Real Assets — The New Essential 19
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DEFINITIONS
The NCREIF Property Index is a quarterly time series composite total
rate of return measure of investment performance of a very large pool of
individual commercial real estate properties acquired in the private market
for investment purposes only. All properties in the NPI have been acquired,
at least in part, on behalf of tax-exempt institutional investors - the great
majority being pension funds. As such, all properties are held in a fi duciary
environment.
The Dow Jones Brookfi eld Global Infrastructure Composite Index is
calculated and maintained by S&P Dow Jones Indexes and comprises
infrastructure companies with at least 70% of its annual cash fl ows derived
from owning and operating infrastructure assets, including master limited
partnerships. Any comparisons, assertions and conclusions regarding the
performance of the Dow Jones Brookfi eld Global Infrastructure Composite
Index during the time period prior to its initial calculation on July 14, 2008
is based on back-testing (i.e., calculations of how the index might have
performed during that time period if the index had existed). Back-tested
performance information is hypothetical and based on index methodology
applied and calculated by S&P Dow Jones Indexes and is provided solely for
information purposes.
The NCREIF Timberland Index is a quarterly time series composite return
measure of investment performance of a large pool of individual timber
properties acquired in the private market for investment purposes only.
All properties in the Timberland Index have been acquired, at least in part,
on behalf of tax-exempt institutional investors - the great majority being
pension funds. As such, all properties are held in a fi duciary environment.
The NCREIF Farmland Index is a quarterly time series composite return
measure of investment performance of a large pool of individual agricultural
properties acquired in the private market for investment purposes only.
All properties in the Farmland Index have been acquired, at least in part,
on behalf of tax-exempt institutional investors - the great majority being
pension funds. As such, all properties are held in a fi duciary environment.
The MSCI World Index is a free fl oat-adjusted market capitalization
weighted index that is designed to measure the equity market performance
of developed markets.
The Barclays Global Aggregate Bond Index is a market capitalization-
weighted index, comprising globally traded investment grade bonds. The
index includes government securities, mortgage-backed securities, asset-
backed securities and corporate securities to simulate the universe of bonds
in the market. The maturities of the bonds in the index are more than one
year.
The S&P 500 Total Return Index is the total return version of the S&P 500
Index. Dividends are reinvested on a daily basis and the base date for the
index is January 1, 1988. All regular cash dividends are assumed reinvested
in the S&P 500 Index on the ex-date. Special cash dividends trigger a price
adjustment in the price return index.
The Barclays U.S. Aggregate Bond Index is a market capitalization-weighted
index, comprising investment grade bonds traded on U.S. exchanges. The
index includes government securities, mortgage-backed securities, asset-
backed securities and corporate securities to simulate the universe of bonds
in the market. The maturities of the bonds in the index are more than one
year.
The Preqin Infrastructure Quarterly Index is calculated on a quarterly basis
using data from Preqin's Infrastructure Online product. The models use
quarterly cash fl ow transactions and NAVs reported for over 130 individual
unlisted infrastructure partnerships.
Standard Deviation measures the degree to which an investment’s return
varies from its mean return.
Real Assets — The New Essential20
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DISCLOSURE
This document is confi dential and is intended solely for the information of
the persons to whom it has been delivered. It may not be reproduced or
transmitted, in whole or in part, to third parties except as agreed in writing by
Brookfi eld Asset Management Inc. (“BAM” and together with its affi liates,
“Brookfi eld”). The views and opinions expressed in this presentation are
the views of Brookfi eld generally and do not necessarily refl ect the views
of every individual or entity within Brookfi eld. These views and opinions
should not be construed as research, investment advice and/or trade
recommendations. These views and opinions should not form the basis
for any investment decisions. This document is not intended to, and does
not, relate specifi cally to any investment strategy or product that Brookfi eld
off ers. It is being provided only for informational purposes to provide a
framework to assist in the implementation of an investor’s own analysis and
an investor’s own views on the topics discussed herein.
The views expressed refl ect the current views of Brookfi eld as of the date
indicated and Brookfi eld does not undertake to advise you of any changes
in the views expressed herein. In addition, the views expressed do not
necessarily refl ect the opinions of any specifi c investment professional at
Brookfi eld, and may not be refl ected in the strategies and products that
Brookfi eld off ers.
The information contained herein is only as current as of the date indicated,
and may be superseded by subsequent market events or for other reasons.
Charts and graphs provided herein are for illustrative and informational
purposes only. Certain of the information contained herein is based on or
derived from information produced by independent third party sources.
While Brookfi eld believes that such information is accurate as of the date it
was produced and that the sources from which such information has been
obtained are reliable, Brookfi eld does not guarantee the accuracy, adequacy
or completeness of such information, and such information, and the
assumptions on which they are based, has not been independently verifi ed.
There can be no assurance that an investment in Real Assets will be
successful. Historic market trends are not reliable indicators of actual future
market behavior or future performance of any particular investment which
may diff er materially, and should not be relied upon as such. This publication
is not, and should not be viewed as, a current or past recommendation or a
solicitation of an off er to buy or sell any securities or to adopt any investment
strategy. Investments in alternative assets, including real assets, involve
signifi cant risks, including loss of the entire investment. Nothing contained
herein constitutes investment, legal, tax or other advice nor is it to be relied
on in making an investment or other decision.
The information in this publication may contain projections, estimates or
other forward-looking statements regarding future events, targets, forecasts
or expectations regarding the asset classes described herein, and is only
current as of the date indicated. There is no assurance that such events
or targets will be achieved. The information in this document, including
statements concerning fi nancial market trends, is based on current market
conditions and assumptions, which will fl uctuate and may be superseded
by subsequent market events or for other reasons. Performance of all cited
indexes is calculated on a total return basis with dividends reinvested. The
indexes do not include any expenses, fees or charges and are unmanaged
and should not be considered investments.
Investment concepts mentioned in this publication may be unsuitable for
investors depending on their specifi c investment objectives and fi nancial
position. Where a referenced investment is denominated in a currency
other than the investor’s currency, changes in rates of exchange may
have an adverse eff ect on the value, price of or income derived from the
investment. Please note that changes in the rate of exchange of a currency
may aff ect the value, price or income of an investment adversely.
Brookfi eld does not assume any duty to, nor undertakes to update
forward-looking statements or any other information contained herein.
No representation or warranty, express or implied, is made or given
by or on behalf of Brookfi eld or any other person as to the accuracy and
completeness or fairness of the information contained in this publication
and no responsibility or liability is accepted for any such information. By
accepting this document, the recipient acknowledges its understanding and
acceptance of the foregoing statement.
This document has not been approved by the United States Securities and
Exchange Commission or by any regulatory or supervisory authority of any
state or other jurisdiction, including Canada and the United Kingdom, nor
has any such authority or commission passed on the accuracy or adequacy
of this document. The information contained herein is subject to correction,
completion, verifi cation and amendment. Any representation to the contrary
is unlawful.
© 2013. Brookfi eld Asset Management Inc.
OFFICE LOCATIONS
For further information please visit Brookfi eld.com
UNITED STATESBrookfi eld Place
250 Vesey Street, 15th Floor
New York, NY 10281-1023
CANADABrookfi eld Place, Suite 300
Bay Wellington Tower
181 Bay Street, Box 762
Toronto, ON M5J 2T3
BRAZILRua Lauro Müller 116, 21° andar
Botafogo–Rio de Janerio–Brasil
CEP: 22.290–160
UNITED KINGDOM23 Hanover Square
London W1S 1JB
United Kingdom
UNITED ARAB EMIRATESLevel 1, Al Manara Building
Sheikh Zayed Road
PO Box 212975
Dubai, UAE
AUSTRALIALevel 22
135 King Street
Sydney, NSW 2001
HONG KONGLippo Centre, Tower One
13/F, 1306
89 Queensway
Hong Kong