REITs and Alts into a down-cycle

The claim: While real estate tends to perform well during inflationary cycles (see: ‘Sector performance’ note), many REIT sub-sectors perform best while economic prospects are improving. Self-storage, residential, and certain types of infrastructure assets offer the best relative prospects within the space to capture inflationary reversion as economic conditions wane. Farmland returns are, unsurprisingly, closely associated with the commodity cycle. The asset class performed well during the recessions in the 1970s, 1990s and 2000’s but did not diversify as well during the early 1980’s or in 2008.

Infrastructure assets benefit from a relatively high degree of cashflow certainty: pricing often contractually embeds inflationary increases. The current pricing structure for Canadian pipeline and power company Embridge, for instance, allows for tariff increases equal to 75% of Canadian nominal GDP growth. Concessions for Australian toll-road operator Transurban often increase at the higher of CPI or a fixed percent (on right). Similarly, rates charged by European utility companies are often based on a prescribed ‘real return’ levels (e.g. 3.5-3.7% in the UK).

Within real estate, hospitality, logistics, and office properties tend to have more economic and market “beta”. Storage and residential REITs tend to outperform the former group during growth slowdowns. 

Weighted average performance of 22 infrastructure companies* against the S&P 500

Source: TIAA Center on Farmland Research. Recession years highlighted on X-axis.

Infra companies included are: Transurban (AU), Japan Railway East, Japan Railway West, MTR (HK), Vinci (FR), Grid (UK), CK Infra (HK), TC Energy (CA), Enbridge (CA), Auckland Airport (NZ), Iberdrola (ESP), Enel (IT), EDP (PT), HK Gas, Sempra (US), Canadian National, Canadian Pacific, SSE (UK), CLP Holdings (HK), Zhejiang Expressway (HK), Jiangsu Expressway (HK), and Shenzhen Expressway (HK).