Inflation hedges in infrastructure and real estate sectors

The infrastructure and real estate sectors have been recognised for their hedging capabilities against potential inflation risks by Sarah Shaw, Chief Investment Officer at 4D Infrastructure, and Chris Bedingfield, Portfolio Manager at Quay Global Investors.

Shaw told a briefing hosted by Bennelong that inflation poses a key risk to the ongoing global economic recovery in the wake of the COVID-19 pandemic, after global stimulus measures initiated during the pandemic combined with accommodative central bank monetary policy led to strong global GDP growth.

“The current debate revolves around whether inflation is transitory or not. We are more in the transitory camp, although some of the recent supply chain disruptions have been significant,” she said.

“It does raise some concerns around how long is transitory. We do still see central banks largely keeping interest rates where they are for the foreseeable future. Although, there have already been some moves towards the easing of accommodative monetary policy.”

“But say… the inflation is transitory or it’s more of a problem than we currently anticipate, we still believe infrastructure is the place to be.”

Shaw said several infrastructure stocks – particularly user-pays assets like airports, toll roads and rail – have built-in inflation protection through their tariffs or regulatory models that have a direct positive correlation with GDP and growth through their volume.

“As inflation and interest rates increase over time, these protection mechanisms begin to kick in and positively impact earnings,” she said.

“In a transitory inflationary scenario, user-pays assets themselves should enjoy a really perfect storm in the short to medium term, mainly low interest rates to support future growth, economic activity flowing through to volume, explicit inflation hedge through their tariff mechanisms to combat any inflationary pop we may experience.”

Bedingfield also highlighted the impacts of supply chain bottlenecks in the real estate sector triggered by inflation concerns, as demand continues to increase off the back of stimulus packages handed to consumers in the last 12 to 18 months.

“It’s been a positive momentum on the demand side. The supply side has been really held up… More recently, supply has been constrained just in terms of supply chains not being able to deliver product,” he said.

“A good example is housing in the United States. Projects that were expected to be delivered in September, October this year have been pushed forward to March, April the following year. The shortage of supply and this big surge in demand coming through results in this mismatch.”

Bedingfield also said that despite these inflationary headwinds, rental growth in areas experiencing renewed demand like single-family housing, self-storage and industrial is driving profit growth across the entire sector.

“Around 35% of core CPI in the United States, for example, is basically housing… this is the whole argument about transitory versus permanent inflation. From a real estate point of view, there is supply coming. It has been delayed, but it’s coming. When it does come, we’ll see some softening at least on that rental and housing growth side.”