Posted by MIRA Funds
July 1, 2020
Whether due to their underlying defensiveness (infrastructure), their lower leverage relative to the last downturn (property), or the fact that some central banks have announced plans to support the non-investment grade debt market, real assets are likely to emerge from the downturn in relatively good shape in terms of both their performance and the stability of key industry players.
If formal travel restrictions are slow to unwind and/or people remain reluctant to fly due to lingering health concerns, the recovery in air travel could lag the economic upswing. Recent data out of China is consistent with this view, with flight numbers there still well below pre-crisis levels1. In the long-term, the rate of growth in air travel could also be slower than it was pre-crisis, due to weaker growth in business travel as more meetings are conducted virtually.
This is a trend that has been in play for some time and the COVID-19 pandemic could serve to reinforce it. An increase in online shopping means logistics, warehousing and distribution properties should continue to see strong demand and robust pricing. Cold storage logistics facilities are also likely to benefit as more consumers become accustomed to purchasing groceries and other essentials via online platforms. Meanwhile bricks and mortar retail ex-grocery anchored assets could come under even more pressure post-crisis given the overall pressure on discretionary spending. The resulting vacancies in excellent locations, increased cap-ex requirements and downward pressure on pricing may create opportunities, particularly for multi-family residential development but also for other uses including offices and hotels.
With government securities no longer offering adequate returns for insurers and pension funds to meet their long-dated liabilities, this capital could move up the risk spectrum, with private credit a possible beneficiary. At the same time, central bank purchases of non-investment grade debt could mean defaults and losses in this section of the market are relatively low during this downturn, something that could improve private credit’s perceived risk-reward proposition. Finally, with the financial sector likely to be adversely affected by the downturn, traditional financial institutions’ ability to service this market may be limited, particularly in the first few years of the recovery. This combination of improving demand, supply disruption, and better (perceived) fundamentals could open up increased scope for growth for privately managed credit funds.
The use of broadband and data should continue to grow rapidly as working from home becomes a more permanent feature of our working lives. This growing dependency leads to more people viewing it as essential infrastructure. At the same time governments may become increasingly interested in tightening control over these networks, given their importance from a national security perspective. They could also devote greater energy to ensuring the entire population (and not just segments of it) has access to high-capacity broadband.
Daniel McCormack, Macquarie Infrastructure and Real Assets Economist
In the short-term road trips may act as a substitute for air travel, something that should benefit toll road operators. Public transport may continue to be shunned due to the perceived health risks, meaning more people could take private car trips for short journeys as well. Car sharing companies may benefit, something that would support electric vehicle (EV) demand and help offset some of the negative consequences for EVs from lower oil prices.
The denominator effect could constrain the amount of money flowing into real assets in the near-term. But medium to longer-term these asset classes may attract more investor interest. Real assets’ potentially good performance through this downturn (see point 1 above), their attractive risk-return profile, and the inability of insurers and pension funds to meet their long-term liabilities by simply investing in government bonds could all play a role in this.
Large cities have seen very strong growth in demand for property (of all kinds) in recent decades. More working from home could slow this growth, not just for office (where any slowing in demand growth may be mitigated by increasing office space per worker), but also retail and residential as more people live and shop further away from the office and dense urban centres. Any potential reduction in migration post COVID-19 could soften demand further, as new migrants usually locate themselves in one of the major urban centres of their new host country on arrival.
With international tensions increasing, governments may become more wary about foreign ownership of nationally or strategically important assets. Over time this could apply to a larger number and broader sweep of infrastructure assets. In some cases, it may also apply to agricultural land, medical facilities, and manufacturing.
More people working from home sees data usage continue to rise rapidly. Home entertainment use may also be higher post crisis, given more people have invested in home entertainment systems and set up the necessary accounts. Any potential reduction in migration flows may also lead to pressure on governments in the developed world to focus more on productivity and investment to support GDP growth, something that could help to bring the use of new (data heavy) technologies forward.