By Jayson Forrest - Managing Editor - IMAP Perspectives
Speaking at the 2022 IMAP Portfolio Management Conference, Jan de Vos (Resolution Capital) and Dan Cave (Zenith Investment Partners) consider the role of real estate and property in portfolios in an inflationary environment.
Property and real estate are two asset classes that Jan de Vos - Real Assets Portfolio Manager at Resolution Capital - remains bullish on under the current high inflation and interest rate environment.
According to Jan, these asset classes have three areas that Resolution Capital believe have particularly strong secular growth prospects, offering investment opportunities to investors. They are: alternative property (childcare, healthcare, lifestyle communities, pubs, and self storage); mobility and decarbonisation (airports, toll roads, renewables, and electricity transmission); and digitisation (logistics, data centres, and telco towers).
“If you have quality real asset companies, with good balance sheets that are benefitting from these three secular tailwinds, we believe investors should be able to achieve satisfactory returns,” says Jan. “It’s a great time to be a real assets investor.”
He adds: “One benefit that the REIT market can demonstrate is that REIT income, derived from rent, has a history of outpacing inflation. As replacement costs of physical assets rise, rents rise in parallel and this ripples through the existing assets.”
However, Jan points out that not all sectors in the real asset class have done equally well. As Chart 1 shows, obvious exogenous factors like COVID have compounded long-term trends, such as the growth of online ecommerce to hammer local retail and benefit warehouses, while similarly, a long-term trend – the increase in the cost of housing - has benefitted cheaper forms of accommodation.
Chart 1
Jan de Vos - Resolution Capital
Dan Cave - Zenith Investment Partners.
If you have quality real asset companies, with good balance sheets that are benefitting from these three secular tailwinds, we believe investors should be able to achieve satisfactory returns. It’s a great time to be a real assets investor.”
But in a stagflation environment, it’s a bit different. There aren’t that many winners. You really need to focus on utilities with inflation-links
The risk of stagflation
Considering the current macro environment, with high inflation and persistent geopolitical issues, what are the chances of slipping into a stagflation environment? Given this potential scenario, are there certain sectors investors should be looking at?
While Jan doesn’t think we’ll be going into stagflation, when it comes to a high growth and high inflation environment, from a real asset perspective, he believes North American freight rail and self storage companies should do well in this type of environment.
“But in a stagflation environment, it’s a bit different,” he says. “There aren’t that many winners. You really need to focus on utilities with inflation-links.”
And what about the effects of the Russia/Ukraine conflict? How is that impacting infrastructure, like airports?
“Airports are natural monopoly assets, and as travel resumes, as it will, both their principal revenue streams of aircraft movement and land rental, along with their associated streams of retail and parking, will resume their inflation resistant growth,” he says.
Jan notes that, while there is a continuing challenge posed by delisting of the type of assets Resolution Capital invests in, long-term growth in the economy and the structural need to raise capital for ecommerce, electrification and infrastructure development, or renewal throughout the world, means a steady supply of the type of listed assets in which Resolution Capital invests.
Another favourable aspect of the current universe of listed investments has been the discipline which company management has exercised in the use of debt. “Despite low interest rates, there are plenty of opportunities to invest in REITs, with balance sheets that are well within permitted debt ranges.”
Dan Cave - Senior Investment Analyst at Zenith Investment Partners - who moderated this discussion, added that a substantial portion of listed infrastructure is energy related, and in the United States, this is typically gas infrastructure. In this example, he believes it’s important to note that with these types of energy companies, they are on ‘take or pay’ contracts, where they are renting pipe capacity long-term on a regulated price basis.
“So, in terms of the impact of current energy prices, there’s very little negative impact on earnings for these companies,” Dan says. “That’s a good example of how infrastructure can offer investors a hedge against inflation.”
About
Jan de Vos is Real Assets Portfolio Manager at Resolution Capital.
This session of the IMAP Portfolio Management Conference 2022 entitled ‘Do real assets offer protection from inflation’ - was moderated by Dan Cave, Senior Investment Analyst at Zenith Investment Partners.