Redefining real assets: Megatrends and their impact on investment strategies

A time of unprecedented change

Demand for real assets is underpinned by megatrends which persist throughout market cycles, allowing investors to develop forward-looking investment strategies with confidence. These long-term, structural changes increasingly drive the demand and supply of real assets – natural capital, real estate and infrastructure.  

Megatrends play out slowly and are inherently difficult to disrupt. But over the last few years we have seen a period of unprecedented change with the global pandemic and geopolitical events, such as the war in Ukraine.  

Given the turbulence, we are re-examining the megatrends that shape our investment landscape to uncover any new opportunities – and new risks – that we should consider when investing in real assets. 

The long-term, structural nature of these trends means they all remain relevant. However, our analysis shows that they are evolving; some will maintain momentum, others will accelerate or be disrupted. And as investors, we need to respond and refine our approach.  

Disruption and acceleration

Digitalization The combined effects of the lockdowns and the leap forward in artificial intelligence (AI), such as large language models, has accelerated the digitalization trend. Huge demand for data infrastructure and energy is anticipated in the years ahead. AI will have a transformative effect on multiple industries, changing the nature of their real estate and energy needs.

Low carbon transition European investors and governments were already focused on decarbonization. However, the conflict in Ukraine, which threatens energy security, reinforces the transition to a low carbon economy, making investment in renewable energy a significant and immediate priority.

In the U.S., the conflict has been less impactful on energy policy, given the abundant domestic supplies of gas, but the introduction of the Inflation Reduction Act is driving green economy investment. While policy is pushing the decarbonization trend forward, technological advancements critical to the low carbon transition and the sheer volume of energy required to meet the growing data needs of the years ahead may prove to be a source of disruption. 

Urbanization Cities continue to see stronger population growth than towns and rural areas. However, the economic success of some urban centres is challenged with the increased cost of living, rising inequality and hybrid working practices. Hybrid working appears set to remain in some form for the near future, changing the shape of cities with hybrid workers more inclined to live in suburban locations.

Globalization Increasing globalization and the growth of global trade dominated the last few decades. But this trend could be stalling or reversing with geopolitical events that have led to greater protectionism, the imposition of sanctions and disruption to supply chains. The potential to further exacerbate disruption includes the Chinese economy’s shift in fortunes, growing tensions between East and West, and the impact of climate change on supply chains. Import volumes into the U.S. and Europe have yet to show any evidence of slowing but a desire for ‘friend-shoring’ and ‘reshoring’ has implications for real estate and infrastructure investment. 

Interconnectedness and reinforcement

The megatrends are deeply interconnected, often reinforcing each other. Digitalization and the rise of AI, for example, boosts demand for electricity and enables activities such as hybrid working and online shopping, which impact urbanization and the nature of cities.

We can also expect technology and digitalization to respond to the needs of the aging population, transforming health care and life sciences, while real estate and infrastructure will have to adapt buildings and services to better meet the needs of the elderly. 

Physical climate change is materializing, prompting a need for infrastructure that can protect against negative impacts, concerns about the sustainability of food production and a reassessment of locations, while heightening the urgency for the green transition. As the unpredictability of the physical impacts become more significant, global supply chains could be affected, potentially acting against globalization and reinforce onshoring.

Diving into the megatrends and what it means for real asset portfolios

As these examples show, megatrends will increase demand for some real assets and change the nature of demand for others. Different sectors, asset types and locations will become more attractive as the trends play out. Investors need to understand the implications to build resilient long-term portfolios. The chart below summarizes some of our findings. 

In the coming months, we will release a series of papers looking at each of the key megatrends in depth. We examine how they have accelerated or been disrupted in recent years and what we expect to see in the future. We also address what this means for investment in real estate, infrastructure and natural capital. Look out for our Megatrends series over the coming months.