What comes NEXT NOW?

Investment managers have long accepted that we live in a world of heightened uncertainty compounded by the ever-increasing frequency of global and regional crises. But so far, 2022 has pushed this learning to the extreme: traditional bond/equity portfolios were not spared this time; the celebrated negative correlation between these two asset classes has not held so far, with year-to-date returns profoundly negative.

Today’s disruptors are as severe and potentially damaging as they are varied. Economic, geopolitical, pandemic- and climate-related risks are top concerns in business surveys. On the economic front, inflation has spiked to record highs, leading to higher borrowing costs and slumping economic growth.

Geopolitical tensions are also at their highest since the end of the Cold War, with humanitarian and economic repercussions extending well beyond Europe. While the pandemic appears to have receded (or at least become endemic – though still deadly), zero-COVID policies in China impact global supply chains and global output.

Finally, the Intergovernmental Panel on Climate Change (IPCC) reports that the world will be exposed to multiple unavoidable climate hazards over the next two decades. The increasing frequency of extreme natural disasters and weather conditions make it clear to everyone that transitioning to a sustainable economy will demand extraordinary efforts from both the public and private sectors.

When we examined the four megatrends, it was clear that massive infrastructure investments from governments and entities would be required, which provides opportunities for astute investors. The global demand for infrastructure has never been so high, and debt-laden governments alone cannot meet the needs. Global investors are increasingly stepping into the gap and upping their portfolio exposure to this sector, appreciating its solid long-term investment potential amid the turmoil of a rapidly changing world.

PATRIZIA now has a unique offering of infrastructure and real estate. Besides access to the latest insights and research, and our extensive network of local experts, PATRIZIA benefits from decades of experience in infrastructure, which we have incorporated into our business. Our colleagues in PATRIZIA Infrastructure look back on 24 years of experience, investing some EUR 7 billion in equity and debt in over 110 infrastructure investments worldwide.

Our investments in real assets always aim to make an impact, ensuring that modern infrastructure addresses future transport, communications, energy and water supply requirements, while fulfilling the need for social and affordable housing, efficient logistics and attractive community spaces in the real estate space.

Two themes characterise our infrastructure investments. First, they are physical assets that provide a public service. Second, there is an intense environment, social and governance (ESG) focus.

A recent example of how we can address the four major themes through Infrastructure – in this case, decarbonisation – is Biomet. This Italian company turns urban and agricultural waste into biomethane and then into bio-LNG (liquified natural gas) for use by trucks. PATRIZIA Infrastructure recently purchased an 80% majority stake on behalf of clients.

Compared to diesel, bio-LNG can cut fuel costs by up to 30% and CO2 by at least 20% while delivering a 90% reduction in NOx (nitrogen oxides, a family of poisonous gases) and particulate matter emissions. Bio-LNG ensures that trucks have a clean, low-carbon substitute to fossil fuel.

Biomet is only one of the energy solutions PATRIZIA offers. We are also invested in geothermal district heating in Norway, while our Etzel energy storage facility in Germany is actively testing the conversion and long-term storage of hydrogen on a commercial scale using existing infrastructure.

Such real assets also offer an attractive inflation hedge to investors, with longterm inflation-linked income streams. And we expect some real asset sectors, such as renewable energy, data centres and social care, to offer income growth beating inflation in the mid-term. Our approach allows investors to participate in and benefit from the global energy transition against a background of interesting times.

As an illustration, think about why the office occupier market in Berlin is so dynamic while the national economy is faltering. Berlin is the most viable location for the German economy to execute its digital transformation. It is the only place in the country with access to a good supply of much-needed talent, yet still offering attractive staff costs. This is why many larger Mittelstand firms (SMEs) continue to open new (and often substantial) offices in Berlin despite the current ‘blessings’ inflicted upon the economy.

At PATRIZIA, we believe many good things can come from smart city concepts, such as better resource management, traffic efficiency, healthcare and environmental applications. Accordingly, we spend a significant amount of time pinpointing the trends that can be stabilisers and those that could disrupt the success or failure of our investment strategies.

The current market environment is far from the normal we’ve known for so long. The current crisis will accelerate many transformations – be it the energy transition to renewables, further digitalisation in order to build smarter cities and buildings, or social care to meet the demands of our ageing society. Investors need a cool head to look beyond the noise and design investment portfolios that benefit from the strongest medium- and long-term fundamentals. Real assets should be an addition they consider as part of a future-proofed, multi-asset class portfolio.