Modern condo buildings with huge windows in Montreal, Canada.
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With inflation running higher for longer and the threat of a recession rising as monetary policy tightens, investors can look to real assets for opportunities.

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While some sub-sectors within infrastructure and real estate are more vulnerable in a downturn, others can offer shelter as growth slows, said Larry Antonatos, managing director and portfolio manager with Brookfield Asset Management.

“Relative to many traditional investment sectors, infrastructure and real estate offer more predictable revenues and predictable cash flows,” Antonatos said in an interview earlier this month. For example, in real estate, predictable revenues are a result of long-term leases; in infrastructure, revenues are driven by regulated pricing and limited competition.

Consequently, in a shallow recession, Antonatos said both real estate and infrastructure should outperform traditional cyclical sectors.

However, the performance of real assets will reflect different sensitivities to growth, given their different business models. Broadly speaking, infrastructure is typically more defensive than real estate, Antonatos said.

“Real estate is generally a free-market business driven by the traditional interplay of supply, demand and pricing,” he said. “In contrast, infrastructure is generally a regulated business where [government] regulation can significantly impact supply and pricing.”

For example, the real estate rental rate can be volatile as it’s determined by negotiations and therefore impacted by supply and demand at the time of negotiation. Conversely, infrastructure provides essential services, so demand is generally steady.

Sub-sectors in both real estate and infrastructure range in their sensitivities to economic growth, creating “more granular investment opportunities,” Antonatos said. 

Within real estate, growth sensitivity is higher for property types with shorter lease durations, such as hotels, storage and residential, and lower for property types with longer lease durations, such as industrial, office and retail.

Within infrastructure, growth sensitivity is higher in the transport sectors — namely airports, seaports and toll roads — because of their sensitivity to volume. Conversely, utilities and communications tend to have steady demand and are therefore more attractive investments in a recessionary environment. 

Looking forward, Antonatos said the consideration of sector fundamentals is also important when forecasting performance in a recession.

For example, within real estate, logistics will benefit from a shift to just-in-case inventory management, which will reduce supply chain disruptions; housing is in short supply and affordability is low, but multi-family real estate will benefit from strong fundamentals and pricing power; and high-quality office space will also be attractive.

Within infrastructure, data infrastructure will benefit from a growth in demand, and transportation will benefit from onshoring to reduce supply chain disruptions.

Regarding recession, Antonatos outlined three potential scenarios. 

First, there’s a high probability of slowing growth with no recession, he said. In this environment, infrastructure and real estate should both outperform traditional cyclical sectors. 

Next, there’s a moderate probability of a short and shallow recession. Again, infrastructure and real estate should perform well relative to traditional cyclical sectors.

Lastly, he said there’s a low probability of a deep and prolonged recession. In this scenario, infrastructure should outperform both real estate and traditional cyclical sectors.

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