The events of 2020 have had a profound impact on all types of investment, and created new opportunities in the real assets universe that allocators are eager to explore, according to new research.
The shock of COVID-19, creating volatility in equity markets and leading to a new wave of monetary easing that has suppressed bond yields, has only heightened the appeal of assets with secure, long-term income streams.
A survey of more than 1,000 insurers and pension funds from 34 countries found that real estate and infrastructure debt were of particular interest to institutional investors since the COVID-19 crisis began, while equities and fixed income were less popular.
In last year's study, politics figured prominently in the list of investors' concerns as US-China trade tensions escalated and Brexit loomed.
This year, financial stability is the biggest worry, followed by increasing unemployment, supply chain disruption and evolving consumer patterns. The latter predominantly concerns the rise of e-commerce at the expense of what was once real estate's most reliable asset class: retail.
The pandemic has had profound impact on this and other areas of real assets, in particular office property given the sudden and significant shift to remote working. The impact of COVID-19 on the more vulnerable parts of the real estate debt world is expected to be severe.
April's Cass Business School UK Commercial Real Estate Lending Report anticipated loan write-offs and debt losses for the retail sector of between £8bn and £10bn. Cass said an additional £22bn of development loans were affected by construction delays.
"Investors are very focused on risk," says Mark Meiklejon, Aviva Investors' head of real assets investment specialists. "The general sense is that appetite has not changed dramatically. The longer-term trajectory of pretty much every investor group, be that by channel, by geography and investor type hasn't changed - we are still seeing strong demand."
Jonathan Gorrie, associate principal in portfolio management at the £52bn BT Pension Scheme, adds: "We are already quite conservative in the way we approach our portfolio, and are pleased it has been relatively resilient during this crisis.
"In fact, our portfolio has performed very robustly. Rather than scrambling to put out fires, we have been able to ride out the storm and are now thinking hard about 'how do we position ourselves to take advantage of the opportunities coming out of this and what de we do next?'"
Aviva Investors' study found that real estate long income, infrastructure equity, real estate equity and infrastructure debt are the likely sources of increased investment over the next 12 months.
Barry Fowler, Aviva Investors' managing director for alternative income, says that, while there is less liquidity in the real assets space in general, more deal opportunities are starting to arise with terms more attractive than pre-crisis, much as we experienced after the Global Financial Crisis.
While many areas of real estate are undoubtedly challenged, the industrial sector experienced an increase in deal volume in the second quarter of 2020 compared with the same period last year, according to Real Capital Analytics.
Likewise, appetite for assets with strong environmental, social and governance credentials has increased during 2020. More than half (58%) of global insurers in Aviva Investors' study said energy efficient real estate was a particularly important asset to include in a portfolio, while 48% of global pension funds said the same.
Elsewhere, digital infrastructure is booming. Microsoft reported a 775% increase in the use of cloud services in regions that have been social distancing. EE's network saw a 45% increase in traffic for communication apps such as WhatsApp, while Openreach reported in April that average UK data traffic increased by 24% during the peak lockdown period. Any asset that capitalises on these trends - like data centres - will perform well.
It is hardly surprising then that many investors, including those who took part in this year's study, see infrastructure or real estate assets that can deliver relatively secure and stable income streams as offering better prospects than many other asset classes.
Aviva Investors' full real assets study is accessible here.
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144029 - 31/10/2021