As global vaccination progresses and the spring shoots of recovery break through, it remains unclear how long the scars inflicted by Covid-19 will take to heal. 
But whatever the economic or social outlook in the post-pandemic world, investors will still need to provide for the long-term saving objectives of clients at all stages of their investment journey. Add to this the prospect of higher inflation and we have all the ingredients of a cocktail that requires patient and well-constructed investment strategies.
To help meet some of these very significant investment challenges, investors have increasingly embraced real assets, given their ability to deliver income-enhanced portfolio diversification.
Within real assets, real estate and infrastructure are two of the largest asset classes. These two assets are often treated separate from one another but, on a closer look, they share more in common than you might think. In fact, appreciating the relationship between real estate and infrastructure could enable investors to take a more holistic approach to how they choose to invest.
The relationship between real estate and infrastructure
At its core, infrastructure is comprised of structures and networks, which are essential for an economy to operate efficiently, and this makes it the backbone of real estate demand. In a sense, real estate could not independently exist without infrastructure, and infrastructure would be of little use without the supporting real estate.
In terms of building a portfolio, both asset classes offer diversification benefits, as well as providing stable and often growing income yield, while acting as natural hedges against inflation due to the nature of long-term contractual leases that can be tied to inflation and protect income yields. As real assets, they also act as a source of capital preservation and appreciation – an important goal for most investors.
We believe there are three criteria that some sectors of real estate can meet, which enhance their similarities to infrastructure and make attractive investment opportunities. They must be essential for the economy to function, provide an important societal need and be irreplaceable for the function they provide.
Exposure to assets exhibiting these characteristics can indirectly increase the diversification of investors’ real assets portfolios. As such, there are some forms of commercial real estate that have similar characteristics to infrastructure, whether through lease design, indexation or liability. This increasingly blurs the lines between real assets, making the distinction between real estate and infrastructure less evident.
Warehouses and logistics
The industrial sector of real estate is perhaps the most apparent overlap given its clear similarities with and dependency on infrastructure. As we quickly learned during the pandemic, the delivery of goods and groceries is critical for individuals who are secluded to their homes.
While traditional public infrastructure, such as roads and bridges, made this possible, the underlying supply chain distribution of these goods was through large warehouses and smaller last mile locations. Therefore, the entire supply chain is a combination of ‘pure’ play infrastructure assets such as road, port and train networks, and real estate assets such as industrial warehouses. In fact, it may be quite possible that we see retail parks converted into logistics hubs in the future and see this go full circle.
Data centres
The increased dependency on data in the modern era has also given rise to data centres, which are becoming the backbone of the digital economy. The storage and dissemination of data has made this niche sector paramount in the continuity of business operations and efficiencies.
The pandemic disrupted normal office operations for many white-collar employees, yet high-speed internet connections paired with data centres allowed many jobs to seamlessly shift to remote work. Although not true for all occupations, the absence of a shift to remote work would have resulted in a far more damaging global recession, or even depression, than was experienced in 2020. Therefore, data centres, and the data they support, have become an essential piece of infrastructure for the global economy.
Affordable housing
Housing is in the headlines due to the ongoing housing shortage across much of Europe and the globe. Additionally, social investment is an increasingly important consideration for investors looking to support under-housed communities. This trend has also been stimulated by the growing emphasis on ESG issues increasingly interwoven into the investment landscape.
As we think of its relevance to infrastructure, it is hard to envision a reality where housing is not vital for individuals to contribute meaningfully to the economy. For many, it has also recently become their workplace. Although this is an abnormal period in the timeline of human behaviour, there will undoubtedly be some persistent trends. Housing is dually vital to the shelter and productivity of an economy’s largest contributor – its workforce.
Medical offices and care homes
The effects of the pandemic have highlighted the need for continued medical research and development, as well as focused attention to the key role of long-term care homes. Healthcare needs are rising in developed markets and are increasingly a vital element of social infrastructure.
Particularly, as new conditions and diseases emerge, the research conducted in these specialised structures is vital to the prevention and treatment of illnesses. In fact, this research is as important as the care and administration of drugs carried out in hospitals. Without the proper space and equipment, current vaccines for the COVID-19 virus could not have been developed.
Understanding the roles real estate and infrastructure play together and the lasting impact they produce on society helps support our efforts to maximise investment opportunities and find the best relative value. That is why our strategy centres on the notion that real estate often directly benefits from exposure to infrastructures and, if anything, the pandemic has made this even clearer today than ever before.
Indraneel Karlekar is global head of research & strategy at Principal Real Estate Investors. The views expressed above are his own and should not be taken as investment advice.