The addition of mezzanine debt investments to JP Morgan Global Core Real Assets (JARA ) along with a strengthening dollar helped offset declines in the multi-asset portfolio’s real estate assets in a tumultuous year for property markets.

Pulkit Sharma, manager of the £167m real assets portfolio launched in 2019, was buffeted by the impact the rising cost of borrowing has had on property markets given the fund is around 40% invested in real estate equity at the end of June.

Sharma still managed to deliver an 11.6% net asset value (NAV) total return in sterling terms in the 12 months to the end of February, while local currency performance was 3.9%.

However, the fortunes of the fund have since taken a downward turn. Its NAV slipped in the three months to the end of May, with total returns declining 2.7% to 98.39p per share, with a dividend of 1.05p making up part of the return.

A strong dollar has been beneficial to UK-based investors in the fund but Sharma also flagged his decision to invest £14.4m in core real estate mezzanine debt in the US, with the sector now making up 7% of the total portfolio as at the end of June.

‘This is an income-producing portfolio of loans backed by high-quality, moderately leveraged core real estate assets,’ he said.

‘These investments were new to the portfolio over the past year and serve as both an income diversifier and a dampener on volatility, as mezzanine real estate debt is less sensitive to macroeconomic fluctuations than real estate equity.’

He added that mezzanine debt is also higher up in the debtors’ capital structure than equity financing, meaning the investment is ‘less exposed to change in real estate values’.

The volatility of real estate equity made itself known over the year as companies suffered the ‘twin drags of higher borrowing costs and reduced liquidity’, which in turn reduced transaction activity and valuations.

Concerns about the outlook for real estate led Pulkit to sell retail and office space that ‘fell short of its long-term growth objectives’, including US offices facing a ‘structural decline in demand’ as flexible working becomes the norm.

However, he said not all real estate falls were equal and while US real estate exposure contributed 0.5% to returns, Asia-Pacific property was up 1.1%.

Pulkit said Asia-Pacific property was ‘consistently positive throughout the year’ as the sector did not see the same appreciation in 2021 and 2022 as the US did and so ‘escaped the same degree of subsequent decline’.

‘This relative stability was driven in part by the diversity of the region, where economies are in varying stages of their economic cycles and interest rate tightening journeys.’

There are also specific trends in the Asia-Pacific region that helped buoy its property market. In contrast to the US office market, which has remained challenged by flexible working, this phenomenon has not gained traction with Asian employees, underpinning offices, particularly in business hubs such as Singapore.

Along with real estate debt, Pulkit also topped up his exposure to energy logistics given the troubles caused by Russia’s invasion of Ukraine.

He said the start of war ‘caused a major shift in how countries, particularly in Europe, source their energy and think about their future energy security’.

‘These major ructions benefited assets involved in the transportation of oil and gas around the globe, which saw a surge in demand. In response, we increased exposure to energy logistics by 2%.’

The fund’s largest exposure to recent developments in the energy markets is through its investment in liquid natural gas carriers, where demand has surged as pipelines become less reliable. Liquid strategy made up 17.4% of the portfolio at the end of June.

Pulkit said the carriers the portfolio is exposed to are ‘particularly competitive and attractive, as they are new and highly fuel efficient’.

He also added to other transportation sub-sectors over the year, including electric vehicle charging points, which will benefit from the increasing popularity of electric vehicles, and railcar leasing, which is ‘an integral part of the North American supply chain, currently representing 26% of annual US freight ton miles’.

‘This share is likely to rise over time as moving freight by rail rather than road significantly reduces greenhouse gas emissions,’ said Pulkit.

‘Demand for existing railcar inventory is therefore likely to strengthen, and there is scope for the sector to grow substantially as efforts to achieve net-zero carbon emissions intensify.’