Diversifying a Real Estate Portfolio Through Infrastructure Investment : An Interview Study of Opportunities and Challenges in the Nordics

Abstract: Since the financial crisis infrastructure has become an increasingly attractive asset class for investors, especially among financial institutions, who recognize the value of diversification opportunities within infrastructure. In parallel with the emergence of infrastructure as an investable asset class, the global financial turbulence has generated even greater incentives for investors to diversify their portfolios with infrastructure, as the asset class exhibits characteristics to navigate in a more challenging economic environment. A growing trend are real estate companies entering the infrastructure market for the first time, strategically seeking to balance their real estate portfolio with other real assets and capitalize on global trends such as the energy transition and digital progress. This approach allows real estate companies to achieve portfolio diversification while potentially generating greater financial returns, depending on the investment strategy and type of infrastructure asset. The global privatization of infrastructure has also been reflected in the Nordic market, with the public sector showing more reliance on private capital inflows for initiatives such as infrastructure renovation and transition toward sustainable energy. As the market has grown, the concept of infrastructure has also transitioned from a traditional notion of including railways, roads and bridges, subsidized by the public sector, to incorporate several different sectors backed by private financiers. Consequently, the study seeks to establish an appropriate definition of infrastructure from a Nordic perspective, serving as a foundation to identify opportunities and barriers for Nordic real estate actors seeking to diversify their portfolios into the infrastructure sector. As part of the study, the strategies of Nordic institutional infrastructure investors are analyzed, as well as prevailing trends and prospects for the Nordic infrastructure market. In order to obtain the results, a qualitative semi-structured interview study was conducted, involving eight actors with different backgrounds, active in the Nordic infrastructure market. The results showed that Nordic actors have divided opinions of what should be included in the definition of infrastructure. The conclusion is that the definition of infrastructure is dynamic, with capital-intensive infrastructure investors characterizing different asset classes depending on where the capital is allocated. In addition, there is currently an incentive for a real estate actor to involve infrastructure in the portfolio to strengthen the company's sustainability profile through green renewable energy and to benefit from real estate expertise in grey areas consisting of infrastructure assets with property-like attributes. Through the act of diversifying a portfolio, real estate actors have the potential to benefit from tomorrow's infrastructure market, which will consist of more private actors, and provide enhanced risk diversification as new technology is constantly being integrated in the Nordic region. One avenue for future research would involve examining quantitative transaction data to gain a comprehensive understanding into the dynamics and patterns associate with different investment approaches and risk appetites.