Against a backdrop of economic uncertainty, investors have been looking to alternative asset classes to meet their financial goals.
What is a ‘real asset’?
The best way to think of real assets is that they are physical or tangible investments that have an intrinsic value to society. Examples include infrastructure, such as schools, roads and hospitals, student accommodation, warehousing, wind and solar farms, and commodities such as oil and gas.
However, it’s important to note that different types of real assets behave in distinctive ways, and they won’t all share the same characteristics. Accordingly, investors looking to diversify risk as part of a balanced portfolio may wish to focus on those that are more defensive in nature. In particular, assets that generate stable, predictable cash flows that can increase with inflation and help to manage risk over the longer term.
These assets tend to be those that form part of the foundations of an economy. By their very nature they can benefit from, or cater for, economic or demographic changes rather than fall victim to them. Examples include offshore wind farms and water desalination companies.
Where are the opportunities?
Population growth: businesses across the world are investing in real assets that fulfil the needs and requirements of larger populations and more concentrated population densities. The implications of a growing and ageing population are deep and wide ranging. According to the UN, the global population will rise by more than 2 billion people over the next 30 years, with most of this growth coming from emerging markets.
The UN also forecasts that, by 2050, one in six people in the world will be over the age of 65, up from one in 11 in 2019. There are already conspicuous consequences of these population and demographic changes. Issues such as housing shortages, public healthcare spending and public infrastructure give rise to social and economic challenges, some of which investment in real assets can address.
Climate change: there’s no question that climate change is rising quickly up the political and economic agenda, and this will result in significant investment opportunities. Take the rate of progress in renewable energy as an example. Thanks to government subsidies, the UK leads the way in offshore wind farms, which is hugely exciting given that wind and solar power are set to collectively generate close to 50% of the world’s electricity supply by 2050. New technologies such as “whole wind farm optimisation” and “digital twins” are improving output and extending the lives of the assets themselves – all good news for investors.
Large global organisations also want to reduce their carbon footprint and their long-term energy costs. Many businesses are investing in new technologies to tap into the need for energy efficiency, for example in storage solutions. There’s a growing appetite to provide large offices and buildings with “off-grid” energy, meaning their power is generated and distributed on-site. The future of decentralised energy can reduce generation, transmission and distribution losses from circa 65% to around 15%. It also provides a cleaner, lower-carbon, lower-cost power supply with more security thanks to its independence from the grid. Investing in companies that are at the forefront of such technology could ultimately pay huge dividends.
Technology: the pace of technological advancement is being dubbed the fourth industrial revolution. The convergence of virtual reality, augmented reality, the so-called internet of things (where billions of devices are connected and controlled from our smartphones) and 5G will mean that our homes, workplaces, schools, transport and healthcare could transform in ways that are currently impossible to imagine.
We’re already seeing the impact of this on the real asset sector. The burgeoning demand for online shopping and fast home delivery has meant that large warehouse and distribution centres are essential in today’s retail strategy. Good facilities near major road networks and within striking distance of large populations offer investors the security of longer leases and the potential for positive rental growth.
At the same time, the need for digital storage is growing so quickly that data centres are being built all around the world. These make good investments, as it’s not easy to move large data centres, which are best located close to major internet nodes. Centres that are built specifically for a tenant’s needs can command leases in excess of 10 years, providing investors with longer-term, reliable returns.
Real assets serve as a diversifier and can provide investors with stable, long-term and inflation-linked cash flows. There are huge opportunities emerging in this sector, and we foresee them playing an increasingly valuable part of investment portfolios for years to come.
Christopher Greenland is a fund manager at Sanlam.