- Fixed-rate debt and long income the best risk-adjusted strategies
- The UK economy's broad reopening makes it better positioned than Europe
- This is likely to greater room for higher capital value growth
Research unveiled by Aviva Investors, the global asset management business of Aviva, has found that real estate assets in the UK offer much better growth perspectives in comparison to continental Europe.
Specifically, the research identifies fixed-rate debt and long income as the strategies most likely to provide the best risk-adjusted returns.
The Real Assets House View by Aviva Investors provides a range of analysis and views from the company’s real estate, infrastructure and private debt investment teams.
This is designed to help investors make relative-value investment decisions in regards to multi-asset allocations.
The report noted real estate assets in the UK offer better growth potential thanks to the broad reopening of the UK economy, stronger GDP forecasts and monetary policy lending that is supportive and likely to facilitate greater room for capital value growth.
CIO of Real Assets at Aviva Investors, Daniel McHugh, noted that pricing in European markets is at an all-time high.
“As a result, we expect UK real estate to outperform on a five-year risk-adjusted basis, where better pricing means there is more room for yield compression as income streams strengthen,” he said.
“With UK monetary policy having been able to adapt quicker to the changing macro climate, we think the UK market to be more favourable to investors.”
“That said, our central assumption for inflation is that there will be significant increases over the short term, making the cost of using traditional liquid markets to hedge inflation punitively high.
“The result has seen Real Assets increasingly appreciated as a more viable solution for inflation-hedging purposes.”
The challenging macro environment is expected to continue as a backdrop for markets.
Fixed-rate debt as an asset class has offered a 30-50 basis point premium over liquid bonds of similar creditworthiness. Aviva Investors believes this makes such an investment a much more attractive for isntituiaonl investors seeking to match long-term liabilities.
“Long income and private debt are two examples of Real Assets strategies which have the ability to deliver robust income streams, underpinned by consistent returns and lower volatility relative to other asset classes, despite the exceptional challenges presented by the pandemic over the last two years,” said Mr McHugh.
“They have done so whilst continuing to offer an illiquidity premium relative to other asset classes. This is a further demonstration of the all-round qualities real assets can provide to a portfolio, including as part of credible return-seeking strategies.”