By Marc Zahr, Co-President and Global Head of Real Assets, Blue Owl
Key Takeaways
- Real assets can offer characteristics that are attractive to fixed income investors: steady income, creditworthy counterparties, and downside protection.
- Real assets pay income in different ways: interest from lending against a property, rent from owning it on a net lease, or revenue from infrastructure that may be contracted, regulated or usage-based. Fixed income investors must identify what they own to assess how these assets generate revenue and how that compares to rising bond yields.
- Even when income holds steady, values can still move with interest rates and financing conditions. True diversification and portfolio resilience can be built by holding real assets that, like a set of bonds maturing at different rates and spread across different sectors, respond differently to the same market forces.
Introduction
Behind every supermarket shelf in Australia is a building most shoppers never think about: the distribution centre. At Blue Owl, our real assets platform owns and lends against buildings that support these and other essential services around the world.
Ask a bond investor what they want and you’ll hear the same three things: regular income, a reliable payer and a clear claim if things go wrong. Real assets can offer all three, but assessing them requires understanding where the income comes from, who is obligated to pay and what rights and protections you have if those payments stop. With the RBA lifting the cash rate to 4.85% last week, the comparison between bonds and real assets demands closer scrutiny. Higher rates give income investors more choice, but they also put pressure on real asset financing and valuations. So the real test is whether a real asset pays you enough for the risks you’re taking.
Good real asset decisions come back to a question bond investors instinctively ask: what am I actually relying on to get paid? We think there are five ways to address that question.
1. Where does the income come from?
Lend against that warehouse and your income is interest. You have a contractual claim secured against the property, and your goal is simple: principal repayment plus interest. Own it through a triple net lease structure, and you often collect contractual rental income, sometimes over 15 to 20 years, while the tenant covers substantially all property-level operating expenses, including real estate taxes, insurance and maintenance. I find this compelling because net lease offers fixed income attributes but with the potential for equity-like returns. We underwrite the lease much like a bond: who’s paying, for how long and on what terms. Beyond the rental income, there may be an opportunity to participate in any property value appreciation, so our total return combines contractual income with the potential upside of ownership. If we acquire a property, often mission-critical to the occupier’s business, at an attractive price, and finance it prudently, we think that risk-return profile is not easily replicable for investors elsewhere.
Infrastructure has a different mix of revenue sources. Revenue can be contracted, like a solar farm selling power under a long-term agreement. It can be regulated, like an electricity network whose revenue is set through the Australian Energy Regulator. Or it can be usage-based, like an airport earning from passengers, parking and retail. Owners can share in growth over time. Core strategies put stable income first, while value-add strategies lean toward growth and accept more operating risk.
Each is a different claim with different risks, and the first job is knowing which one you hold
2. How strong is the credit behind it?
Any bond investor knows a long maturity means little without a strong issuer. A 20-year lease is no different: it’s only as strong as the party behind it. What matters is who pays, and what could stop them. For a lender, it’s the familiar secured-credit test. Can the borrower keep up the repayments? And if not, what is the property worth when it’s sold to recover the loan?
For a net lease owner, the tenant is effectively the issuer and the lease is the term sheet. Credit quality and lease structure matter, but the first question I ask is what happens to the building if it loses a tenant. A well-located, general-purpose warehouse is usually far easier to re-let than one built around a single company’s operations. The time and cost of finding a replacement belong in the underwriting from the start.
Infrastructure can add contractual protections, regulation and demand to the mix. Australians saw how much that matters in 2020. Airport passenger numbers collapsed almost overnight, while regulated electricity networks largely kept earning. Both are called essential infrastructure, but their income responded very differently when travel stopped.
Dependable income doesn’t guarantee a dependable price, though.
3. Why can values move when income holds steady?
When yields rise, bond prices fall, even if every coupon is paid on time. Real assets follow similar logic. Interest rates, financing conditions and the returns investors demand can shift what a building is worth, in either direction, regardless of how it’s performing.
How much of that an investor feels depends on structure. Owners can cushion the impact. Long-term fixed-rate debt keeps borrowing costs steady until it needs refinancing, rent increases built into the lease keep income growing, and high-quality, well-located property tends to hold its value better. Repricing can also work in a buyer’s favour. Lenders on floating-rate loans can earn more as rates rise, and the owner’s equity absorbs any fall in value first. The key risks are the borrower’s ability to keep paying and refinancing conditions when the loan comes due.
Infrastructure valuations also move with financing costs and required returns, but inflation-linked revenue and steady demand for essential services can help offset that pressure over time.
Rates are only half the story for long-dated income, though. The other half is inflation
4. Fixed or floating, nominal or inflation-linked?
Real assets are often described as an inflation hedge, but the protection depends on whether revenue can rise with costs. Bond investors already have the framework to test it: ask how its income actually adjusts, how quickly and with what limits.
With a net lease, a fixed annual rent increase works like a nominal bond with a built-in step-up. A CPI-linked increase behaves more like an inflation-linked bond, although caps, floors and the timing of rent reviews can limit how much of a spike it captures. Under a triple-net lease, the tenant pays property taxes, insurance and maintenance. That can help protect the owner from rising costs, but adds to the tenant’s burden, bringing us back to credit quality.
For lenders, a fixed-rate loan is like a nominal bond: inflation erodes the purchasing power of its income. A floating-rate loan works like a floating-rate note: income rises with interest rates, which tend to climb when inflation runs hot, although the link to prices is indirect. Those higher repayments also have to remain affordable for the borrower.
Infrastructure pricing can be set by contract, by a regulator or by the market, and often allows revenue to rise with inflation. Some Australian toll road concessions, for example, lift tolls by CPI or a fixed minimum. Even then, higher prices only help if traffic holds up and costs stay under control.
5. Are you diversifying your income, or doubling up?
A portfolio holding property, infrastructure and real estate debt is, on paper, spread across three asset classes. But all three can be hit by the same forces: higher interest rates, tighter financing and a slowing economy. When those arrive together, holdings that looked different can come under pressure at the same time. Fixed income investors must weigh the risks holdings share, not just how many asset classes they span.
First, look at who’s paying. If a grocer leasing a warehouse is also the anchor tenant at a shopping centre in your property fund, and the business behind a loan in your credit portfolio, you have three investments that all depend partly on the same business.
Then look at when the debt comes due. If the owners of your buildings and the borrowers behind your loans all need to refinance in the same year, you’re relying on the same financing conditions at the same moment. It’s the real asset version of a bond portfolio with all its maturities bunched together.
Finally, check how sensitive each holding is to rates. A collection of long-dated, fixed-rate income streams across property and infrastructure can behave like a long-duration bond portfolio, even if it doesn’t hold a single bond.
The differences covered earlier are the tools for doing this well: lending versus owning, fixed versus CPI-linked rent, regulated versus usage-based revenue. Each can respond differently to the same shock, and combining them thoughtfully is what builds genuine diversification.
Bringing bond discipline to real assets
With bonds offering meaningful yields again, investors should look past the yield to the payer, the contract and the asset behind it. It’s the same discipline we bring to underwriting at Blue Owl.
Ask the questions you’d ask of a bond, and you’ll have a clearer view of how real assets can be structured and invested in to deliver many of the characteristics fixed-income investors value.
