Zero or negative interest rates are going to push investors into real assets.

“We desperately need income, but we are in a yieldless world,” writes analyst Jussi Askola in “The New Gold Rush” in Seeking Alpha. He argues for investments in real assets.

Why Institutions are gravitating towards real assets

Real assets are tangible assets that are at the core of a country’s economic infrastructure. These include commercial real estate, railroads, airports, farmland, pipelines, and others.

They are “the only remaining asset class of scale that can provide high and sustainable income to investors in today’s yieldless world,” says Askola.

Large institutional investors are on the hook for benefits but are confronted by unviable yields on income investments. On the other hand, they are deterred by the enormous volatility in stocks as well as their rich valuation.

“The average P/E of the S&P500 (SPY) is 30% above average even as we enter a sharp recession, and the dividend yield is a mere 1.7%, hardly providing a good reward for the risk undertaken,” Askola observes.

These factors are inducing investors, particularly institutions, to invest in real assets. That is bullish for this class, not least because allocations to it are still comparatively meager.

Real assets – advantages

• Good income – real assets still offer 6-8% cap rates.
• Resilient to recessions because of long-term agreements
• Protect against inflation

“Most real assets change hands at ~6-7% cap rates which is a massive spread relative to the 0.6% yielding 10-year treasury,” comments Askola.

Askola also cites a projection by Brookfield (NYSE: BAM) that $45 trillion could flow into real assets over the coming years to 2030.

In a recent example, Warren Buffett’s Berkshire Hathaway (NYSE: BRK.A) acquired Dominion Energy’s gas pipeline network in a $9.7 billion deal.

How to invest

Askola recommends real asset investing through liquid alternatives such as REITs:

“After the COVID crash, REITs are currently priced at the highest yield spreads ever relative to the 10 year-treasury.”

He cites the example of Store Capital Corp (NYSE: STOR), a net-lease REIT with nearly 100% upside potential.

The REIT is currently available at a 6.3% dividend yield and priced nearly 50% below its pre-COVID level.

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