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Hunting for yield: Have you considered commercial property and infrastructure?


Assets that exhibit defensive and stable yield profiles, along with strong growth potential, are obvious candidates for a long-term investment strategy.

 

In a low interest rate world, term deposits are likely to continue to provide poor returns for some time. Coupled with ongoing market volatility, investors are searching for assets that provide stable and consistent income. In this article, we discuss we explore two asset classes, commercial property and infrastructure, and explain why they are attractive to investors in their ongoing search for yield.

Commercial property: what to consider?

Commercial property has proven to be a popular choice among investors due to its defensive nature, diversification benefits and income potential. Below, we highlight some of the key attributes which make commercial property a compelling investment option during periods of economic uncertainty.

Infrastructure: what to consider?

A noticeable rise in allocations to infrastructure over the past five years has been driven by investor search for yield, inflation hedging and low correlation with other asset classes. Below, we outline some of the key characteristics of infrastructure which make it attractive in times of market volatility.

What are the risks for investors?

The overall scale of risk when investing in both commercial property and infrastructure sits between bonds and shares; the income is more secure but has less capital growth potential than shares.

Although the search for yield is a positive trend, where commercial property is concerned it is pushing prices ahead of rental growth. This could lead to low rental growth assets when interest rates rise.

Similarly, changes in interest rates can increase the risks of infrastructure investment – changes in availability and funding price may impact asset performance. The different infrastructure classifications are also subject to varying risk profiles. For example, social infrastructure (i.e. assets including hospitals, schools and education) generate stable long-term cash flows, as they are provided on an availability basis. Demand-based infrastructure (e.g. communications/telecoms towers) however, is exposed to competition and dates rapidly compared to other infrastructure assets, due to the pace at which technology develops and changes, so there is a greater investment risk.

Final thoughts

Typically, long term investors like commercial property for the stability it provides in an investment portfolio, the long investment cycle periods and high potential to generate yield.

Infrastructure is still a relatively new asset class and affords investors with exposure to the type of investments that have previously only been accessible by institutional investors.

In a low interest rate environment where investors are chasing yield, asset classes that exhibit defensive and stable yield profiles, along with strong growth potential, are obvious candidates for a long-term investment strategy.

About the author
Tim Humphreys is the head of AMP Capital’s Global Listed Infrastructure team, based in the Sydney office. He also leads the research effort of infrastructure companies in the Americas. Tim has over 15 years’ experience in the financial industry in the UK and Australia and is a skilled infrastructure analyst.
Michael Kingcott is the Head of Property Investment Strategy and Research at AMP Capital leading commercial property research and investment strategy.
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