Real Assets may hedge against the unavoidable rising cost of living, due to their ‘everyday-life’ nature.
Own the Real Assets
Real assets such as gas and electricity grids, utilities, toll-roads or office, distribution and retail properties, are the ‘Real’ tangible building blocks of our daily lives.
From the moment we wake and switch on the lights (e.g. AGL Energy), turn on the gas (AusNet Services and Spark Infrastructure networks), drop the kids at childcare (Arena REIT as landlord), drive to work (Transurban’s toll roads), pick up the groceries (at Vicinity Centres or Scentre Group shopping centres), or, (when travel restrictions are lifted) take that holiday flight (from Sydney Airport) - real assets are there helping to make things happen.
ASX listed real assets have a long history, so we have seen high quality Real Asset listings over a prolonged period. It’s not widely known that Australia had one of the earliest REIT markets globally, infrastructure and utility listings then followed. For example, GPT Group, the owner of some of Australia’s premier office, industrial and shopping centre assets first listed in 1971. Transurban, the dominant owner of over 70% of Australia’s toll-road network, listed back in 1996. This means some of the best quality assets, with the highest barriers to entry, form the ASX-listed real asset universe. Because of this, listed assets typically enjoy strong pricing power and may grow their dividends above inflation.
Why Not Outpace Inflation Yourself?
As a whole, what we like to describe as the household ‘pain spend’ on life’s essentials has consistently grown higher than both wages and the CPI1. One way to get ahead of that crimp on spending power is a real asset investment that is leveraged to the daily ‘pain spend’.
Pain spend, wages and CPI (year on year growth %)
Easing this cost of living pressure through investing in real assets appears even more compelling as alternative sources of income, like term deposits, continue to fall. With the Reserve Bank of Australia (RBA) cutting the official cash rate to historical lows, savers and investors face increased challenges in deriving enough investment income to meet their needs.
As Population Grows, so Grow Real Assets
Population growth is a long-term structural driver of real assets. It may surprise you to learn that Australia has had one of fastest growing populations in both the developed and developing world.
Expected population growth: 2015 to 2050 (%)2
And while we expect Immigration will slow significantly in 2020/21, we see this as a necessary Government policy lever in times of economic weakness. Once GDP returns to pre COVID-19 levels in early 2022 (based on an ANZ Bank forecast), we would also expect immigration to also normalise.
We also note that 50-60% of Australian population growth comes from the natural birth rate - so every four years, at least 500,000 new Australians are added to our net population, all of whom will need to use real assets and build houses.
This strong population growth drives Australia’s urban development, best evidenced in the following satellite images of the city of Hume, some 27km north on the outskirts of Melbourne3.
These Google Earth images, taken 20 years, apart illustrate the effects of Australia’s world beating growth. In this location, Stockland have established the Highlands Estate, where today this growing population has supported the building of two childcare centres, six schools, four community centres, two shopping centres, a medical centre, 20+ parks and countless new utility connections4 - all of which drive the revenues of real asset companies to differing degrees.
Between 2016 and 2014, the population for Hume City is forecast to increase 164,797 or 2.36% p.a.5
The Real Advantage - Defensive ‘Everyday Life’ Assets
An additional benefit of the ‘everyday life’ nature, and strong market position of real assets is that their key drivers are often quite independent of the business cycle. For example, while the COVID-19 pandemic is negatively impacting many parts of the economy, we expect household consumption of basic needs to remain robust.
More specifically, we believe that Utilities businesses and dividends will be one of the more defensive sectors of the equities market, as well as one of the most defensive asset classes within the real asset space. Because while Utility volumes sold to Industrial and Business customers have been materially impacted, our conversations with industry management indicate that the higher margin household consumption has increased significantly during the lockdown.
Similarly, while we expect housing growth will slow in the short-term, we also forecast that demand driven by population growth will support a resumption of new building activity by 2022.
Active Real Asset Management in the Era of COVID-19
With Governments imposing severe restrictions on the entire economy, the impact on real asset sectors has been mixed, with some areas experiencing rapid and severe contractions and others maintaining business as usual. For example, shopping malls have reported a sharp decline in foot traffic, toll roads a sharp fall in passenger vehicles and airports a sharp decline in passengers. Conversely, gas and electricity utilities, coal freight companies and gas pipelines and to some degree regulated electricity utilities, continue to see reasonable levels of activity.
These dislocations mean that active management is real asset portfolios is more critical than ever. Investment managers who possess a deep understanding of real asset businesses models, their cash-flow drivers, and long-term prospects, will play a critical role in selecting market opportunities and crafting diversified portfolios.
While real assets were among the most immediate companies to be impacted by COVID-19, as we see state and federal governments begin to re-open economies, real assets have been among the first companies to benefit. Already the Northern Territory, Western Australia, South Australia and Queensland are starting to ease restrictions.
As we emerge from the COVID-19 lockdowns, an intelligent approach to navigating the market environment will be critical but in the longer term, real assets servicing everyday needs from a growing population remains the prevailing driver of the Real Asset Australian Dream.
1 Source: Martin Currie Australia, ABS, FactSet; as at 31 March 2019. Includes cost of rent & other dwelling services, interest on dwellings, insurance & other financial services, household electricity & gas & fuel, household healthcare, operation vehicles.
2 Source: Martin Currie Australia, UN; as at 30 June 20 8; United Nations, Department of Economic and Social Affairs, Population Division (2014). World Urbanization Prospects: The 2014 Revision
3 Source: Google Earth; as at 31 May 2019.
4 Source: Martin Currie Australia, company reports; as at 31 May 2019.
5 Source: Martin Currie Australia, company reports; as at 31 May 2019.
Past performance is no indication of future performance.
Legg Mason Asset Management Australia Ltd (ABN 76 004 835 849 AFSL 240827) is part of the Global Legg Mason Inc. group. Any reference to ‘Legg Mason Australia’ is a reference to Legg Mason Asset Management Australia Limited. The information in this article is of a general nature only and is not intended to be, and is not, a complete or definitive statement of the matters described in it. The information in this article does not constitute specific investment advice and does not include recommendations on any particular securities. These opinions are subject to change without notice and do not constitute investment advice or recommendations.