Vantage Investment Philosophy – Part 2: Investing in Listed Property and Infrastructure Sectors
At Vantage, we have long advocated for building well-diversified portfolios to ensure stable long-term performance for our clients. While many investors understand the benefits of allocating to Australian Equities, Global Equities and Fixed Income, the potential of Listed Property and Infrastructure sectors often remains under appreciated. This paper aims to detail the strengths and weaknesses of investing in Listed Property and Infrastructure, two asset classes that can play a crucial role in enhancing portfolio diversification and resilience.
Defining the Sectors
Listed Property, also know as Real Estate Investment Trusts (REITs), represents publicly traded companies that own, operate and finance income-producing real estate across various property types. The main listed property sub-sectors include residential (single-family homes, multi-family apartments, student housing), commercial (office, retail, hotels, hospitality), industrial (warehouses, manufacturing facilities, logistics, data centres, self-storage) and healthcare (hospitals, medical offices, senior housing).
Listed Infrastructure comprises of publicly traded companies that own, operate or develop physical infrastructure assets critical to economies and societal functioning. The main listed infrastructure sub-sectors include transportation (toll roads, airports, ports, freight and passenger railways), utilities (electric, gas, water, renewable energy), energy (oil & gas storage and transportation, pipe- lines, midstream energy) and communications (wireless communication towers, data centres).
Benefits of Investing in Real Assets like Property and Infrastructure
- Stable and Predictable Cash Flows: Listed property and infrastructure companies generate consistent income streams due to the essential nature of their assets. Long-term leases in real estate and regulated revenue models in infrastructure provide reliable cash flows. This stability often results in attractive dividend yields.
- Inflation Protection: Real assets include built-in inflation protection mechanisms, allowing companies to adjust pricing as inflation rises. Many real estate leases have rent increases linked to inflation, while infrastructure assets often have contracts permitting inflation-linked price adjustments. This feature helps preserve income streams real value over time.
- Portfolio Diversification: Incorporating real assets enhances diversification due to their distinct characteristics compared to traditional stocks and bonds. They typically have low correlations with other asset classes, reducing overall portfolio volatility. Additionally, different sectors within real assets respond uniquely to economic factors, providing further diversification.
- Defensive Characteristics: Listed infrastructure and property exhibit defensive traits, often performing well during economic downturns. The essential nature of these assets—housing, energy, and transportation—ensures demand regardless of economic conditions. Long-term contracts provide insulation from short-term fluctuations, with the intention of adding stability to portfolios during market turbulence.
Risks of Investing in Real Assets like Property and Infrastructure
- Market Volatility: Listed property and infrastructure companies are subject to stock market ups and downs. While share prices can be influenced by broader market sentiment and economic conditions, historically during market downturns volatility in listed property and infrastructure is less than in traditional stocks due to the essential nature of their assets and the stability of their long- term contracts and cash flows. Additionally, over the longer term listed property and infrastructure has provided investors with attractive risk-adjusted returns that outpace inflation.
- Interest Rate Sensitivity: Real assets are often capital-intensive and rely on debt financing. As interest rates rise, borrowing costs increase, potentially impacting profitability and asset valuations. Higher interest rates can also enhance the appeal of floating-rate fixed-income investments from a yield perspective, which may potentially reduce demand for real asset investments. This sensitivity to interest rates can lead to short-term underperformance during periods of monetary tightening and higher interest rates.
- Regulatory and Political Risk: Property and infrastructure assets are heavily influenced by government policies and regulations. Changes in zoning laws, environmental regulations or infra- structure spending priorities can potentially impact asset values and operational costs. Political instability or shifts in government stance towards private ownership of essential assets can also pose risks to investors in these Due to the nuances of these regulatory and political risks, it is important to co-invest with experienced managers who have strong expertise in the sector, as they can better navigate these complex landscapes and mitigate potential risks.
Advantages of Investing Globally Versus Locally
The main benefit of investing globally in listed infrastructure and listed property is the vastly expanded range of investment opportunities compared to the local Australian market.
Global Listed Infrastructure
The Australian listed infrastructure market has significantly consolidated since 2005, leaving only four infrastructure companies on the ASX (APA Group, Atlas Arteria, Auckland International Airport and Transurban Group). This limited domestic market necessitates that Australian investors look globally for meaningful exposure to diversified infrastructure assets. In contrast, global listed infrastructure offers access to over 130 companies across multiple infrastructure sub-sectors. This broader universe provides greater diversification opportunities and the potential to capitalise on global infrastructure trends.
Global Listed Property
The Australian REITs (A-REITs) market is highly concentrated with only 38 REITs in the S&P/ASX 300 Index, one company in Goodman Group representing over one third of the A-REIT index and the top five companies accounting for about 64% of the A-REIT index. A-REITs are primarily limited to retail, office, and industrial properties, resulting in sub-sector concentration. In contrast, the global listed real estate universe includes over 300 Global REITs across a wider range of sub-sectors. By investing globally, investors can access a more diverse range of property sub-sectors, geographical markets and economic drivers.
The Benefits of Active Management
Active management in listed property and infrastructure offers several advantages over passive index investing.
1. Expertise and Opportunity Identification
Experienced managers can leverage their expertise to identify undervalued companies and capitalise on emerging opportunities.
2. Flexibility and Risk Mitigation
Active management provides flexibility to adjust portfolios rapidly in response to changing or challenging market conditions, helping to mitigate risks associated with specific companies, regions or sub-sectors in passive indexes.
3. Navigating Benchmark Complexity
Due to the varying definitions of what is considered essential real assets, there is no universally used benchmark for listed global infrastructure and listed global real estate. This results in many different ‘passive’ ways to invest in listed property and infrastructure.
Conclusion
The past 24 months have presented significant challenges for global listed property and infra-structure investing, which are typically considered ‘longer duration’ assets due to their stable and predictable cash flows extending in some instances beyond 30 years. This characteristic has historically resulted in a negative correlation between short-term performance and longer-term bond yields. Recent underperformance has largely been driven by elevated long-term bond yields, a con- sequence of accelerated inflation in the wake of the COVID-19 pandemic and subsequent monetary tightening by global central banks.
As we enter a new phase where central banks are beginning to cut rates, we anticipate a shift in market dynamics. Company fundamentals are expected to play a more prominent role in driving share price performance for global listed property and infrastructure companies. This evolving environment offers a favourable outlook for global listed property and infrastructure, presenting attractive opportunities for long-term investors due to their unique characteristics and potential for stable returns.
* This article contains purely factual information and/or general advice and does not constitute personal financial product advice. The content of this article does not take into account your personal objectives, financial situation or needs and you must determine whether it is appropriate to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision.
About the Author:
Anthony Nguyen – Head of Investments – Vantage Wealth Management
Anthony commenced his career in the financial services industry in 2018, bringing a strong educational background to his role. As the Head of Investment at Vantage Wealth Management, Anthony is responsible for overseeing investment due diligence, investment governance and portfolio management of the Vantage Managed Accounts. Read more about Anthony here.
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