Expert: Andrew Gill, Fund Manager, TIME Investments Moderator: Rupert Phelps, Independent Consultant
Headlines:
- Real estate and infrastructure provide diversification but have faced challenges recently due to being interest rate sensitive. However, fundamentals remain strong in areas like logistics and renewable energy
- Inflation should be positive long-term for real assets with index-linked leases, though many have rental growth caps around 3-5%
- Rents broadly lag inflation but will likely rise
- The outlook is attractive for experienced managers with capital to deploy, as asset values have fallen but income stability has improved
- Mispricing opportunities may emerge
- ‘Essential' sectors like renewables, digital infrastructure, healthcare, education, and logistics are favoured currently for their defensive demand and cash flow. Offices and retail face uncertainty on space needs
- Total returns have been volatile recently but these asset classes offer lower volatility over full cycles. They provide bond-like income with inflation protection
Context:
While real estate and infrastructure have faced challenges amid rising interest rates, certain sectors like logistics and renewables have displayed resilience.
The discussion emphasised the importance of evaluating exposure, considering sector preferences, and strategically capitalising on potential market shifts and mispricing opportunities in these asset classes. Additionally, the potential long-term benefits of real assets in relation to inflation were highlighted.
Macro backdrop and recent performance:
Despite their traditionally defensive nature, real estate and infrastructure faced challenges due to sensitivity to rising interest rates. However, certain sectors, like logistics and renewable energy, maintained strong fundamentals.
Inflation outlook and impact:
While recent inflationary spikes have been observed, the expectation is for a decline from these highs but a stabilisation above target levels.
Real assets with index-linked leases stand to benefit long-term from inflation, but rental growth caps around 3-5% may limit immediate impacts.
Sector preferences:
Sectors labelled as 'essential' - such as renewables, digital infrastructure, healthcare, education, and logistics - are currently favoured due to their defensive demand and consistent cash flows. Conversely, offices and retail face uncertainty regarding space needs.
Key takeaways:
- Review exposure to real estate and infrastructure in context of portfolio objectives, time horizon, and risk tolerance
- Consider increasing allocation to 'essential' property and infrastructure sectors with defensive characteristics
- For opportunity funds, evaluate dry powder levels and transaction plans to take advantage of possible mispricing
- Analyse inflation outlook and impact on real asset leases, rent reviews, and distributions
- Assess opportunities in listed real asset securities trading at discounts to net asset value
