Real Assets in a Portfolio: The Case for Inflation Protection

For four decades, UK inflation was low and predictable. The Bank of England's 2% target was largely met. Bonds held their real value. Equities outperformed inflation over any rolling 10-year period. In this environment, the case for dedicating a specific portfolio allocation to "inflation-protecting" real assets was theoretical rather than urgent.

The inflation surge of 2021–2023 — UK CPI peaking above 11% in October 2022 — changed the conversation. For the first time in a generation, investors had a live test of whether real assets delivered on their promise. The results were instructive.

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What real assets are

Real assets are investments that have physical substance and whose value tends to keep pace with — or exceed — inflation over time. They are distinguished from financial assets (equities, bonds) whose value is expressed in nominal monetary terms.

The main categories:

Real estate: Land and buildings. Values and rents typically rise with inflation over the long run, though the relationship is imperfect and varies by property type and market.

Infrastructure: Physical economic infrastructure — toll roads, airports, water and electricity utilities, renewable energy assets, data centres, telecommunications networks, hospitals. Many infrastructure assets have revenues that are contractually linked to inflation (CPI-escalation clauses in concession agreements and power purchase agreements).

Commodities: Physical raw materials — energy (crude oil, natural gas, coal), metals (gold, silver, copper, aluminium, iron ore), and agricultural commodities (wheat, corn, soybeans, sugar, coffee). Commodity prices are, by definition, inputs to the inflation indexes — they are part of what is being measured.

Farmland: Agricultural land that produces food. Long-run returns are driven by food prices (inflationary), population growth (structural demand), and the supply of arable land (constrained). UK farmland has been one of the strongest-performing real assets over 20 years.

Timber: Forests managed for timber production. Timber prices tend to track construction activity and economic growth. Trees grow in real terms regardless of inflation, providing a biological real return.

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The inflation protection mechanism

Why do real assets protect against inflation? The mechanism varies by asset class:

Infrastructure: Concession agreements and regulatory frameworks for regulated utilities typically include explicit CPI or RPI escalation. A toll road concession might specify that tolls rise by CPI annually. A regulated water utility receives an inflation-adjusted return on its asset base. The cash flows — dividends, distributions — rise with inflation by contractual or regulatory design.

Commodities: Commodity prices are a direct input to inflation. When energy and food prices rise, CPI rises. Holding commodities is, in effect, holding the inflation driver itself. This is why commodities provided very strong inflation protection in 2022 — they were the cause of the inflation episode.

Real estate: Rents are typically reviewed regularly (annually or every five years) and adjusted to market or to inflation. Capital values reflect both rental income and replacement cost — which also rises with inflation (construction costs rise with wages and materials prices). However, the relationship is not immediate: long-term leases can lock in below-market rents for years before review.

Farmland: Food prices are a major component of CPI. Agricultural land producing food benefits directly from food price inflation. The supply of high-quality farmland is structurally constrained.

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The 2022 inflation test: what actually happened

The period 2021–2023 was the first sustained, high-inflation environment since the late 1970s–early 1980s. It provided the most meaningful real-world test of real asset inflation protection claims in modern portfolio management history.

Commodities — strong performance: Energy commodities led in 2022. Brent crude oil rose from approximately $75 to over $130 (briefly) before settling around $85–90. Natural gas prices surged dramatically, driven by the Ukraine war and European supply disruption. Agricultural commodity prices also rose sharply in H1 2022. The iShares Diversified Commodity Swap UCITS ETF returned approximately +20% in GBP terms in 2022 — providing strong protection for investors who had allocated to commodities.

Farmland — continued appreciation: UK farmland values continued to appreciate in 2022 and 2023, driven by rising food prices, strong demand from institutional investors, and constrained supply. Average UK arable land prices rose approximately 10–15% per year in 2022–2023 (RICS/CAAV surveys). However, farmland is illiquid — it cannot be sold quickly during a crisis.

Infrastructure — mixed: Listed infrastructure funds initially held up well in H1 2022 as investors valued their inflation-linked revenues. But in H2 2022, rising discount rates (as interest rates increased sharply) compressed valuations. UK listed infrastructure investment trusts (HICL Infrastructure, INPP, International Public Partnerships) fell 15–25% in 2022 despite their inflation-linked cash flows. The lesson: listed infrastructure valuations are sensitive to the discount rate as well as to cash flows. The inflation protection on cash flows was real, but the rise in interest rates created an offsetting valuation headwind.

Gold — disappointing in 2022: Gold failed to deliver the inflation protection many expected. UK gold prices were approximately flat in GBP terms in 2022 despite 11% inflation. The reason: gold competes with government bonds for the "safe haven" allocation. When real yields on bonds turn positive (as they did from 2022 as nominal rates rose faster than inflation), gold becomes less attractive relative to bonds. Real yields, not nominal inflation, are the key driver of gold prices. Gold performs best when real yields are negative or falling; it underperforms when real yields rise.

Real estate (UK property) — fell sharply in H2 2022: UK commercial property fell approximately 15–20% in 2022 as rising interest rates increased capitalisation rates and compressed valuations. Residential property followed in 2023 as mortgage rates rose. The long-run inflation linkage for property is real, but in the short term, rising interest rates dominate the return.

The conclusion from 2022: real assets provide inflation protection on average but the individual categories diverge significantly depending on whether inflation is driven by commodity supply shocks (favours commodities, farmland) or broad demand-driven inflation (favours real estate, infrastructure over time). Rising interest rates, which often accompany inflation, are a short-term headwind for all asset classes — even inflation-linked ones — because they raise discount rates.

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Practical allocation: how to access real assets

Direct real estate: The most accessible real asset for most HNW investors. Direct ownership of commercial or residential property provides genuine inflation-linked income (if leases are index-linked or frequently reviewed) and capital appreciation. Limitations: illiquid, management-intensive, geographically concentrated.

REITs (Real Estate Investment Trusts): Listed UK and global property companies that provide liquidity, diversification, and ISA/SIPP eligibility. Tritax Big Box, LondonMetric Property, SEGRO, British Land. Correlated with listed markets in the short run but provide genuine long-term real estate exposure.

Listed infrastructure investment trusts: HICL Infrastructure, International Public Partnerships (INPP), Greencoat UK Wind, JLEN Environmental Assets, Foresight Solar Fund. These are listed closed-ended funds investing in real infrastructure assets. They pay quarterly dividends often explicitly linked to RPI or CPI. The 2022 discount rate headwind has largely unwound as at 2026, and several trade at or near NAV.

Commodity ETFs: iShares Physical Gold (physical gold), iShares Diversified Commodity Swap UCITS ETF (broad commodity basket using futures, available in GBP), WisdomTree Broad Commodities. Physical gold ETFs are the most practical way to access commodity exposure within an ISA or SIPP.

Farmland funds: Gresham House Rural Land and Environment Fund, Foresight Sustainable Forestry (timber/forestry). Direct farmland investment requires minimum capital of £500,000+ and specialist advice.

Suggested real asset allocation for a balanced HNW portfolio:

• Infrastructure investment trusts: 5–8%
• Physical gold or broad commodity ETF: 3–5%
• Global REITs or direct property: 5–10%
• Total real asset allocation: 10–20%

This range provides meaningful inflation protection without over-concentrating in illiquid or sector-specific risks.

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The value of investments and the income from them can fall as well as rise. Real assets do not guarantee inflation protection in all environments, and the relationship between inflation and real asset returns varies by asset class and time horizon. Investments in infrastructure, REITs, and commodity funds are subject to market, liquidity, and sector-specific risks. Past performance is not a reliable indicator of future returns. This guide is for information only and does not constitute financial advice.

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How Global Investments can help

Global Investments has extensive experience building real asset allocations for internationally mobile high-net-worth clients. We assess each client's inflation exposure, liquidity requirements, and tax position to determine the appropriate mix of direct and listed real assets — and we access the full spectrum including listed infrastructure, physical commodities, REITs, and, for larger portfolios, direct real estate and farmland.

Contact us at globalinvestments.net to discuss your portfolio's inflation resilience.