Real Estate

Why Hamitage Mining Global for real assets?

At Hamitage Mining Global, our dedicated Real Assets team of industry and sector specialists deliver global reach, with deep local expertise. They have decades of relevant experience, are deeply embedded in their operating industries by sector and geography and have developed strong partnership networks over time. Real assets statistics Source: Hamitage Mining Global , as of October 31, 2019.

Cycling slowly

The recent slowdown in the global economy had only a moderate impact on Real Assets market activity. In real estate, occupier demand remains strong where vacancy rates have fallen over the past 12 months and are significantly below their long-term average in most global markets.

Moderate global economic growth for the foreseeable future has set in and appears to be the new normal. At the same time, usual late-cycle limits, most notably an overheating in factors such as wage and price inflation that would prompt central banks to tighten even as recession risks rise, are not visible. On the contrary, interest rates fell during the year. As a result, we believe we are in a slow-moving cycle or to say it differently: even lower for even longer.

In this environment of moderate growth and low rates, Real Assets fundamentals remain sound (as discussed in the previous section). New construction remains in check in a vast majority of global real estate and infrastructure markets, with a combination of disciplined lending markets and structural barriers such as higher construction costs and policy uncertainties. As a result of this relative demand-supply balance, and in line with the last few years, income growth has driven healthy and stable Real Assets returns.

While from a high level, the market may appear similar to 2019, there are divergences across both sectors and markets (more on that in the next theme). Even though we have experienced an unusually long and stable cycle, cycles are not dead; rather, they are stretched and bumpier. In such a market it is important to remain cognizant of any emerging imbalances. Patience, risk control and flexibility remain critical.

We are also seeing cracks emerging in the publicly-listed and debt markets. Within listed strategies, there is an increasing polarization. Strong management teams with higher quality assets and better-capitalized businesses are outperforming while weaker management teams and businesses are struggling. Within the debt space, yields have tightened for deals, there are some signs of stretching on underwriting assumptions. However, in Europe, only the largest sponsors are able to secure covenant-light structures.

Relatively attractive

Risk-adjusted returns from Real Assets remain attractive relative to other asset classes amidst the stable ‘lower for longer’ interest rate environment and a backdrop of negative policy rates in several of the world’s major economies.

Forward return expectations across asset classes are moderating, as detailed in our capital market assumptions. This has compelled investors to reconsider their asset class allocation in favor of income producing Real Assets.

Investors are increasingly shifting allocations to the Real Assets sector and entry yields offer favorable relative spreads to risk-free rates.

Although we had expected yield compression (or multiple expansion) to come to an end last year, the movement lower in interest rates and increased Central Bank accommodation across the globe has us more convinced that moderate valuation gains are still possible in some markets. However, while we remain positive on valuations given the market backdrop, we must recognize that asymmetric risk is rising. With prices tight, the likelihood of a shock to the downside outweighs the likelihood of significant moves higher. The tighter market relationship to binary outcomes such as future Central Bank rate decisions, geopolitical trade issues and policy developments mean investors need to be more aware of their risk exposure.

Even in the bounds of a single Real Assets sector we see dispersion. The global renewable power market for example offers investors a variety of potential financial outcomes, with divergence in contracted revenues, size of opportunity and supply of capital all influencing returns. Demand is very tight for long contracted revenues, particularly in OECD countries. This is leading some participants to reach into more opportunistic assets as well as into emerging asset classes. We see the same characteristics with natural gas and oil infrastructure investments, showing the strong appetite for core stabilized assets.

In real estate we see dispersion across sectors and cities. From a sector perspective, industrial properties are outperforming across regions while returns on retail properties remain muted. Meanwhile, across cities we are seeing outperformance in global secondary cities benefiting from tech and professional business service employment gains. In the box below, we discuss how this creates relative value opportunities.

Changing the future

Real Assets serve as the building blocks of a changing world. Impacted by change as technological advances accelerate, urbanization continues, environmental, social and governance (ESG) concerns intensify and global population grows and ages, albeit the rate of growth is slowing (projected to reach almost 10 billion by 2050 from 8 billion today1). These transformative trends are driving society’s increasing demand for Real Assets but also changing the nature of this demand, in turn influencing the relative attractiveness of sectors within the asset class. Furthermore, these drivers are supporting the increasing investment demand for the asset class as demographic trends are increasing pension savings, and retirement rates drive demand for income producing assets.

Within infrastructure, we see investable themes around the global energy and power transition, the public financing gap, the rise of digital infrastructure and the investment implications of smarter and more densified cites. Currently, the global power and energy transition is driving deal flow. The public financing gap remains but associated attempts to invigorate public private partnership models remains challenged. At the same time opportunities are opening in digital infrastructure in the context of smart cities.

Within real estate, emerging sectors are increasingly in favor, as exemplified in the living and healthcare spectrum backed by resilient demographic and urbanization trends. Capital invested into these sectors is at record levels. These sectors tend to be more operationally intensive, changing the risk profile for investors. Traditional sectors, meanwhile, are evolving amid developments such as the rise of flexible office providers and continued e-commerce pressures.