Real assets saw strong returns in 2021 as economic growth accelerated and central banks maintained low policy interest rates.
However, Larry Antonatos, managing director and portfolio manager at Brookfield Asset Management, said infrastructure and real estate can continue to perform amid slower growth, rising rates and high inflation.
Infrastructure tends to be more defensive and less sensitive to the broader economy, Antonatos said. Demand is steady as infrastructure provides essential services, often with regulated pricing and little competition.
Real estate is more opportunistic and also more sensitive to growth, supply, demand and pricing dynamics.
But slowing growth doesn’t necessarily translate to slower growth for all real estate and infrastructure. Certain sectors were negatively impacted by the Covid-19 pandemic: infrastructure assets such as airports and toll roads, and real estate sectors including hotels, offices and retail. As economies reopen and mobility increases, Antonatos said, these sectors may see both earnings growth and sentiment improvement, “leading to strong investment performance.”
With regard to interest rates, he said longer duration cash flows are more sensitive to rates than shorter duration cash flows.
Utilities tend to be longer duration on the infrastructure side, he said, while duration within real estate ranges from one-night hotels to monthly self-storage to commercial properties with leases of five to 10 years.
When it comes to inflation, Antonatos said infrastructure and real estate “have the potential to really shine” compared to other asset classes.
Approximately 70% of infrastructure cash flows are regulated or tied to contracts that allow for price increases tied to inflation, making infrastructure “a terrific asset for times of high inflation,” he said. In real estate, some leases allow rent increases and expense pass-throughs tied to inflation.
With these macroeconomic factors in mind, Antonatos said he favours electricity, gas utilities, rail and toll roads within infrastructure. On the real estate side, he sees opportunity in life sciences, hotels and multi-family residences.
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