Investors should consider looking beyond traditional real estate when hedging against inflation with more tech-focused disruptive pockets of the market better suited, according to Gregg Guerin, senior product developer at First Trust.
Speaking at ETF Stream’s Big Call: Thematic ETFs 2022 event on 31 March, Guerin (pictured) outlined real estate’s value as an inflation hedge – having increased dividends at double the rate of inflation over the past 25 years – and also noted its ability to perform in a Fed rate hike environment, performing positively in six of the last eight hiking cycles.
Furthermore, REITs have been one of the best performing assets over the past two decades, returning almost 9% of annualised performance versus 7.2% for global high yield bonds, 6.4% for emerging markets and 5.8% for commodities alternatives.
However, it has also faced several turbulent performance periods, notably, the 2008 Global Financial Crash – brought on by the housing market crash – and 2020 as the onset of the COVID-19 pandemic ripped through markets.
“In both these instances a specific part of the real estate market was affected,” Guerin said. “In 2007 and 2008, it was residential mortgages and in 2020, it was the disruption to the way we work. There were certainly pockets of the market that would have been incubated to some degree.”
He added it was important to understand the massive disruption currently happening in the real estate sector driven by the huge shift to digital infrastructure.
For example, consumer demand was traditionally catered for in shopping centres, high street and retail parks. However, retail footfall has declined by 27.7% over the past two years, according to data from Statista.
“We all know where that has gone,” Guerin said. “Since Amazon’s AWS service was founded in 2006, the allocation to data centres in the MSCI World REIT index and the FTSE EPRA NAREIT index has grown from nothing to 5% and 9%, respectively.
“Data centres and cell towers have grown and will continue to grow rapidly, but you also have satellites circling the globe to provide 5G and 6G to anywhere in the world. Fibre optic cables, physics tells us the fastest thing than can move is the speed of light, these cables move data at the speed of light,” he said.
Highlighting the investment opportunity, figures from DataBrigde show there is a $400bn annual investment gap needed to meet digital infrastructure demand.
“Warehouse and fulfilment centres are also vitally important from an emission perspective and a customer demand perspective. Where is the most important location to satisfy consumer demand? it used to be high streets … but now it’s all very remote,” Guerin added.