Jay Frank, President of Cantor Fitzgerald Asset Management and COO of Cantor Fitzgerald Investment Management, joined Keith Black, Managing Director of RIA Channel, to discuss private credit and private equity investments in the real assets sector.
Frank notes that, while interest rates have seen their peak, the restrictive effect of monetary policy will increasingly be felt in the coming months. The long end of the yield curve has already started to react and is likely to slow growth and the labor market in 2024. In 2022, tightening monetary policy led to a repricing of both equity and fixed income assets, and 2023 sees fixed income markets facing an unprecedented third year of declines.
The real assets sector is interest rate sensitive, as investors want to earn income above today’s higher risk-free rates. When evaluating real assets, it is important to evaluate each sector and strategy, including real estate, infrastructure, and energy, on its own fundamentals. Most of the headlines regarding real estate are regarding the decline of the office market, while most other sectors of real estate and infrastructure have healthy fundamentals. The multi-tenant office is in a secular transition similar to decline of shopping malls. In addition to the weak fundamentals of the office market, rising rates and a difficulty of refinancing office properties will continue to weigh on the sector.
Frank notes that the stars are aligning for private credit, with higher rates, a lower willingness of banks to lend, and strong demand from borrowers could lead to performance in excess of real asset equities over the next two to three years. However, income from private credit is taxed as ordinary income. While it may be tempting to overweight private credit in the short run, equity is likely to outperform in the long run, especially on an after-tax basis.
There are a wide variety of tax incentives in the real asset space that lead to lower tax rates than in the credit markets. In addition to opportunity zones and 1031 tax-deferred exchanges, real estate investors can deduct depreciation while the income from energy investments is taxable after deductions for depletion. As such, the long-term after-tax return of real asset equity is likely to be more attractive than private credit.
Resources:
Tax-Advantaged Real Estate Solutions
Tax Planning With Opportunity Zones