UK real assets are expected to offer investors better growth prospects relative to continental Europe, according to the latest edition of the Real Assets House View by Aviva Investors.
The research also identifies long income and fixed-rate debt as strategies most likely to provide best risk-adjusted returns, particularly for those investors seeking investments with strong cashflow-generating characteristics.
Said Daniel McHugh, CIO, real assets at Aviva Investors: 'Pricing in European markets is at all-time highs. As a result, we expect UK real estate to outperform on a five-year risk-adjusted basis, where better pricing means there is more room for yield compression as income streams strengthen.
'With UK monetary policy having been able to adapt quicker to the changing macro climate, we think the UK market to be more favourable to investors.
'That said, our central assumption for inflation is that there will be significant increases over the short term, making the cost of using traditional liquid markets to hedge inflation punitively high.
'The result has seen real assets increasingly appreciated as a more viable solution for inflation-hedging purposes.'
The report, which brings together views and analysis from across the real estate, infrastructure and private debt investment teams, suggests that factors including the broad reopening of the UK economy, stronger GDP prospects and supportive monetary policy lend themselves to greater room for capital value growth.
Furthermore, the challenging macro environment that is set to continue means that cashflow-generating strategies such as long income and fixed-rate private debt are likely to prove attractive with investors looking for best risk-adjusted returns.
As an asset class, fixed-rate debt has offered a 30-50 basis point premium over liquid bonds of similar creditworthiness, which Aviva Investors believes makes it a much more attractive option for institutional investors looking to match long-term liabilities.
McHugh added: 'Long income and private debt are two examples of Real Assets strategies which have the ability to deliver robust income streams, underpinned by consistent returns and lower volatility relative to other asset classes, despite the exceptional challenges presented by the pandemic over the last two years.
'They have done so whilst continuing to offer an illiquidity premium relative to other asset classes. This is a further demonstration of the all-round qualities real assets can provide to a portfolio, including as part of credible return-seeking strategies.'
Aviva Investors also pointed out the impact that an intensifying race to net zero is having on real assets, with renewables and forestry as sectors experiencing strong investor demand as a result.
