Maintaining a balance of infrastructure and pure property real estate investment trusts (REITs) in a portfolio will help even out volatility and boost returns, according to Todd Canter, global portfolio strategist and head of sub-advised relationships at NAB Asset Management.
Speaking in Melbourne during a recent visit, Canter said he created the Smarter Global Real Estate Securities concept (which recommends adding real assets, such as roads, utilities, and pipelines to a portfolio) to help lower the volatility.
Infrastructure assets are known to generate stable income streams, similar to the monthly rent collected by office and retail landlords, Canter said.
Canter’s research of the real estate sector from 2000 to 2016 showed that real estate and infrastructure share numerous similarities. “Both represent hard assets. Both tend to act as a strong inflation hedge. Both offer attractive dividend yields. Both have had similar average annual returns over the past 16 years, as well as low to moderate correlations to other asset classes,” he said.
He added that the rise in risks comes from the changing nature and maturing of the REIT sector. During the late 90s, the REIT market was dominated by office, retail, industrial, and residential property. Since then, many more product types have been added or expanded, including healthcare, lodging, timber, self-storage, and communication towers.
“Real estate and infrastructure tend to act as a strong inflation hedge. Both offer attractive dividend yields. Both have had similar average annual returns over the past 16 years as well as low to moderate correlations to other asset classes,” Canter said.
By combining global real estate securities with listed infrastructure, investors can examine the investment characteristics of real assets portfolios and assess how the two sectors interact.
“At lower levels of risk and return, say at a 9 per cent standard deviation, listed infrastructure dominates the portfolio with an 83 per cent weight,” Canter said. “At the midpoint of risk and return we find the allocation of the portfolio evenly divided between global real estate securities and listed infrastructure. At higher levels of risk and return, global real estate dominates the real asset portfolio.”
In Australia, with REITs in one index and infrastructure in another category, it’s much harder to mix the two well. However, Lendlease has more focus on infrastructure and construction than on “pure” office or retail REIT.
The sectors’ performance will be examined in August during the full year reporting season.
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