Real Assets – Long-term economic themes and megatrends

by | Nov 25, 2022

Share this article

Written by Mike Pinggera, co-manager of Sanlam’s Multi-Strategy and Real Assets funds

Globally, life expectancy has increased significantly over the last few generations and today the world has more people than ever. At the same time, the age structure of populations has been shifting to an increased number of old-age dependents relative to the working-age population, bringing with it new economic and social ramifications.

A growing and ageing population has many global implications, and the challenges we face ahead will need to be addressed by governments and industries. The economic consequences stretch far and wide, effecting the provision of: education; shelter; energy; food & water; healthcare; transport; and communications. These are the mission-critical assets that form the pillars of a functioning economy.

Whilst these long-term trends present challenges, businesses across the globe are investing in real assets to fulfil the needs and requirements of bigger populations and more concentrated population densities. Many of these developments lead us to have more confidence in the long-term structural economic trends than the near-term economic and geopolitical uncertainties.

Higher education

A university degree has now become a pre-requisite for many jobs across multiple industries. Despite the high cost of getting a higher education, developed economies are seeing more and more university applicants and enrolments over time. The rise has been, in part, fuelled by increased participation rates in the university-age populations. Looking forwards however, 18-year-old populations across geographies is set to further underpin higher education student numbers. Growth in student numbers coupled with a structural undersupply of suitable housing has created opportunities in purpose-built student accommodation (PBSA) across many regions.

Housing

Persistently lower levels of building construction activity have been observed across many developed economies over the last decade. Over time this has led to a greater imbalance between increasing demand and limited supply. Coupled with increasing unaffordability, home ownership has been declining in many countries, leading to a meaningful rise in renting – a trend expected to persist.

The situations in the UK and Europe have given rise to large corporate landlords and a professionalised offering in the private renting sector, providing high-quality homes through build-to-rent programmes.

The increased propensity to rent isn’t only observed in younger generations. For some countries like the US and Australia, retirement accommodation has become a popular choice for pensioners, offering affordable housing with long-term stability of tenure to those without care needs.

Connectivity

Interaction between people is vital to the success of an economy. The evolution in modes of transport over the last century has revolutionised economic activity and vastly expanded the movement of goods and people. Road, rail, air and marine infrastructure has formed the foundations for a more connected economy, and today the digital age is enhancing this trend through new forms of communication.

Many aspects of life have been transformed through advances in technology, from the way we work and communicate, to the way we shop and seek entertainment via music and video streaming or online gaming. These behavioural shifts have driven exponential growth in data creation and consumption, which has in turn created a burgeoning demand for digital infrastructure. This structural trend has created opportunities across the digital infrastructure domain, including data centres, fibre networks, subsea cables, and wireless communication towers. Looking forwards, a larger tech-savvy population with new data-heavy technologies such as artificial intelligence, the metaverse and the Internet of Things (IoT) are expected to drive additional growth in demand.

Healthcare

Today people live longer thanks to the significant advancements in healthcare, and whilst healthcare has been a primary driver of ageing populations, it is also being heavily shaped by them. Older populations are creating greater burdens on healthcare systems and this trend is necessitating adaption and expansion of services to meet demand. These challenges are being tackled with investment into areas such as specialised supported housing that provide better outcomes for some at a more affordable cost to the public purse. Elsewhere, the role that primary care facilities play is becoming increasingly important. Remits are increasing to include non-urgent and periphery procedures to help alleviate pressures building in secondary care, which in turn is creating demand for modern, high-quality, purpose-built primary care centres.

Energy

A larger global population has had the effect of driving higher energy consumption, but also heightened levels of pollution from energy sources such as coal, oil and natural gas. Initiatives have been established in response to this, with widespread involvement from governments and corporates. Consequently, the energy landscape is undergoing an enormous multi-decade transition to one where renewables and cleaner sources of energy are playing more significant roles in electricity generation.

Advances in technology have brought the costs of wind turbines and solar panels down to a point where they offer the cheapest form of power to most of the world, so, clean benefits aside, renewables now make more economic sense than fossil fuels. We see similar cost trends playing out in other technologies such as batteries which, in combination with renewables, will provide more stability to power grids. Renewable energy sources provide pathways to decarbonisation, energy security and energy affordability.

Conclusion

The long-term structural tailwinds behind these themes provide a pool of attractive investment opportunities. History has shown that these opportunities have endured and advanced through numerous economically challenging periods in the past and remain durable. Ultimately, it is this durability that makes real assets a compelling investment proposition.

Share this article

Related articles

Most Popular this week