Amidst the current climate of bond yields at historic lows and unpredictable share markets, there is a growing interest in the return profile and investment characteristics of infrastructure assets.
As a separate asset class, infrastructure can offer an attractive income stream with long-term capital appreciation from monopolistic assets.
Infrastructure assets provide essential services that serve communities around the world. These include assets such as airports, rail, roads, electricity transmission and gas pipelines. All of these assets are required for economies to function and prosper. Irrespective of whether markets are in a boom or a bust phase, the revenues of many of these assets remain relatively stable. People interact with these services every day, as their demand for water, gas and electricity remains relatively constant. Importantly for investors, infrastructure assets are mostly long-dated, monopolistic assets that have historically provided stable and inflation-protected returns.
Infrastructure assets are either regulated or user-pay, based on long-term concession agreements. All have the common characteristics of long duration assets – high capital costs, high barriers to entry and provide an essential service to society. As a relatively new asset class, indices for infrastructure are fairly rudimentary which has created an opportunity for specialist managers to add value through active management.
Types of infrastructure assets
Regulated infrastructure assets
Some infrastructure assets, namely water, gas, and electricity, are regulated, usually by an independent government body. The role of the regulator is to provide a balance between protecting the users of these assets (the public) and the return a company can earn. The regulator must allow the company enough return to maintain the assets and compensate investors for making capital available. For instance, if the costs of maintaining the asset increases, such as due to inflation or a rising cost of capital, the regulator will generally allow a company to pass on these costs to users. This mechanism can lead to stable cash flows for a business, which is reasonably predictable, well into the future. These assets, therefore, can offer investors consistent growing yields over time and protection against long-term inflation. Spark Infrastructure, an Australian company that owns regulated electricity networks, is a prime example of a company who owns and operates regulated electricity assets.
User-pay infrastructure assets
User-pay assets are where the revenues depend on how many people use the asset. Examples of user-pay assets are toll roads, seaports, rail and communication assets. The majority of user-pay assets have long-dated contractual arrangements, usually with local or national governments. As revenue from these assets often closely correlate to the economic activity of a particular region. As economies grow, so does the demand for additional infrastructure services. For instance, this demand directly affects the usage of road networks as trucks and cars increase their usage of toll roads and rail networks as additional freight is transported around the economy.
Expected growth of infrastructure assets
The opportunity for investors is that the global infrastructure market is estimated to grow by 124 per cent, to US$110 trillion by 2030 as per the graph.
In the developed markets, investment in existing and ageing infrastructure is required to meet the future needs of these communities. In emerging markets, the need is quite different as new infrastructure is required to meet the demand of major structural drivers culminating from strong growing economies. This structural shift may present significant opportunities for investors to capture additional value. The majority of global infrastructure assets, however, remains within public ownership and as such is not available to private investors. With pressure on government fiscal spending increasing, infrastructure assets are increasingly transferring into private ownership through unlisted or listed markets providing opportunities to expand the universe of investments available in this asset class.
Ask your OBT financial planner about investing in infrastructure assets on 5472 2277.
Source: RARE Infrastructure