What comes NEXT NOW?

20 / 10 / 22 - 7 minute read

“May you live in interesting times” is said to be an old Chinese curse delivered in the disguise of a blessing. The expression probably owes more to the English sense of irony than Confucian logic, but whatever its origins, it is particularly apt today. Unfortunately, we are living in times that are all too interesting.

At the beginning of 2022, people looked forward towards economic recovery after two tough years of lockdowns during the COVID-19 pandemic. Then Russia invaded Ukraine on February 24, and another entry was made to the long list


Juan Gotsis

Mahdi Mokrane

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.

Politically, it will be a hot winter

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.

Finding value in challenging times

In this very challenging environment, an increasing proportion of investors are considering alternative asset classes, including real estate. But real estate is not the easy slam dunk some may think. Real estate is, at its heart, an illiquid asset class. The benefits are well understood: unlisted property isn’t subjected to the implacable volatility that listed markets often experience.

Yet, over time, property returns will be influenced by the same market forces and megatrends as more liquid asset classes. For example, the COVID pandemic triggered an unprecedented recession in 2020 but also accelerated several megatrends still shaping the landscape of real estate investing today, such as e-commerce adoption, hybrid working and the rise of alternative sectors such as life science, data centres, student housing – to name a few.

The result was strong outperformance in the industrial, residential, and alternative asset sectors over office and retail, which traditionally account for the bulk of European institutional portfolios. This picture
was seen across Europe, showing that sectors, not countries, drove performance in 2020-21, as has been the case for the past decade.

Similarly, today’s environment favours stock pickers (alpha returns) over market replicators (beta returns). It seems clear that the complex mix of headwinds and tailwinds will result in more polarisation between geographies, sectors and individual assets.

This implies there will be plenty of opportunities to generate alpha, even when risks to the overall market seem skewed to the downside. As such, investment managers must avoid the herd mentality and design strategies tailored to their convictions about market trends and fundamentals.

"Real estate is not the easy slam dunk some may think. Real estate is, at its heart, an illiquid asset class."

First Megatrend: Digitalisation trends, such as the rise of e-commerce and hybrid/remote work, will increase the demand for last mile logistics, improved digital backbone infrastructure, data centres and tech-enabled buildings.

Second Megatrend: Decarbonisation is the first significant challenge society faces over the coming decades. The world is already 1.1°C degrees warmer than in pre-industrial times. Natural disasters and extreme weather conditions will increase in frequency and intensity in the coming decades, threatening to disrupt societies on scales not seen before.

The decade of infrastructure

At PATRIZIA, we believe there are four fundamental secular trends which support allocations to real estate in the medium and long term: demographics, urbanisation, digitalisation and decarbonisation. Demographic trends, such as evolving age pyramids and human capital agglomeration, affect how people ‘consume’ real estate, driving demand for emerging alternative subsectors such as student housing and
senior living.

In parallel, urbanisation trends will underpin where the demand will rise and fall within urban areas. Tech and digitalisation trends, such as the rise of e-commerce and hybrid/remote work, bring about the need for lastmile logistics, data centres and tech-enabled buildings.

Finally, decarbonisation is closely linked to ESG trends and impact investment, which are more important than ever. With the looming threat of climate change, we have a firm conviction that these principles
will underpin value and liquidity in the future. 

The way forward for investment managers is to become the portfolio designer of choice. We have backed this conviction by making a strategic move into Infrastructure in addition to remaining grounded
in our heritage of the real estate sector.

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.

Third Megatrend: Demographics is the study of the composition of human society. Trends such as declining fertility rates, ageing societies and the health dividend mean demographics will play a critical role in shaping communities in the future. This includes affecting how people ‘consume’ real estate.

Synergies between residential and infrastructure

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.

Value in waste

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.


This investment approach is tied to the philosophy of PATRIZIA, which is to build communities and sustainable futures. Creating livable communities is only one of the many challenges confronting our cities. Our cities face immense issues linked to overcrowding, traffic congestion, resource scarcity and environmental threats.

Infrastructure is the backbone of every economy and will be crucial for us to continue to make a positive social impact. To take our communities to the next phase, to ensure they remain vibrant, viable and resilient to the dramatic changes that are coming, we need to consider what will be coming next and address it now.

Without basic infrastructure, like schools, hospitals, trains, electricity and water, how can we build sustainable communities? And smart city infrastructure has the power to improve people’s lives. What does this mean for the investment environment that is rapidly unfolding in front of our eyes?

Urbanisation, demographic pressure, digitalisation, and decarbonisation are megatrends that are here to stay -- and investors can count on them. Real estate and the infrastructure that supports communities will remain at the heart of our economies.

Fourth Megatrend: The final megatrend is urbanisation. Where people move to and settle will define the fluctuations in demand for real assets within urban areas.

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.

Creating smart cities

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.