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Aviva: investors consider real assets as a safe haven in an uncertain world

Both insurance (44 per cent) and pension funds (38 per cent) consider ‘trade wars between nations’ as both likely and a concern to their real assets investments in the next 12 months.

Insurance (66 per cent) and pension funds (50 per cent) in the Nordics are much more fearful of ‘trade wars’ than their regional counterparts. Lack of clarity over future trading relations between Britain and the European Union is also a concern for one in three of those polled, with respondents in southern Europe – where economic performance is weaker and where collateral damage could therefore be greater – the most concerned.

An international slowdown would have an impact on real estate occupational demand, although there is also an argument that infrastructure spending could increase as one of the few ways to stimulate economies, with few other tools left in governments’/states’ armouries.

According to the OECD, advanced economies will spend just 1.77 per cent of their combined gross domestic product on debt interest in 2019 – the lowest since 1975 and down from a peak of 3.9 per cent in the mid-1990s. This comes despite the large debt accumulated by many countries since the financial crisis, which has risen from 45 per cent in 2001 to 76 per cent this year, according to the IMF. There is still leeway for spending on infrastructure, digital connectivity and environmental improvement.

The prospect of ‘increasing populism/political extremism’ in Europe continues to cast a shadow over real asset investment (insurance: 39 per cent; pension funds: 43 per cent).

While respondents are primarily concerned about volatility and unpredictability, there is also a fear that political risk could lead to nationalisation or disruption in a world which bases its appeal on reliable income streams. ‘Financial instability’, however, is perceived to be the most likely and concerning possibility (insurance: 49 per cent; pension funds: 45 per cent).

Four in 10 insurers (43 per cent) and pension funds (40 per cent) fear ‘regulatory interference’, which again could be seen as a rise of interventionism by populist governments. However, global change can also mean opportunity, particularly in an era of knowledge capitalism, according to Aviva Investors’ Director of Research, Real Assets, Chris Urwin.

In a study, ‘Talent, clusters and scale’ published in June 2019, Urwin highlights how cities are evolving, with new characteristics defining success on top of the traditional benefits of geographical location and access to suppliers and consumers. In an era of ‘knowledge capitalism’, where a city’s success is defined by its ability to facilitate knowledge-exchange and information-sharing to nurture the creation of ideas, cities need:

Talent – with deep pools of highly-skilled labour, allowing them to thrive. Nothing boosts a location more than access to highly-skilled people.

Clusters – success breeds success in the era of knowledge capitalism, allowing organisations to feed and grow from each other, adding productivity overall.

Scale – co-location facilitates the exchange of goods and ideas, catapulting growth at an exponential rate the bigger a location gets.

As global challenges grow, investors are increasingly likely to combat them by focusing on infrastructure and real estate in fast-growing locations which can support the growth of knowledge capitalism. The two European cities considered by our research team to have the best ‘Future City’ prospects are Paris and London.

james.wallace@realassetmedia.com