The global social infrastructure funding gap coincides with rising demand for these assets, both in replacing obsolete buildings in Western countries and responding to the needs of rapidly rising middle classes in Asian markets.
In addition, demographic trends are further adding to demand. Taken together, these dynamics illustrate a compelling case for institutional investment in social infrastructure assets, which is increasingly being met by traditional real estate developers and investment houses.
Charu Lahiri, investment manager at Heartwood Investment Management, the asset management arm of Handelsbanken in the UK, explains:
“Infrastructure in developed markets requires significant levels of replacement and upgrading in order to remain fit for purpose, while emerging markets need fresh infrastructure to enable their continued development.
“Private sector involvement in infrastructure projects can help to fill the existing void, and investors in this area can gain exposure to long-dated, inflation-linked income streams, supported by binding contractual agreements. However, regulatory risk and changing political priorities can be problematic in some areas, particularly in publicly-financed projects; a discerning approach is therefore key.”
World investment in infrastructure by 2040 ($trn)
Heartwood makes the case for social infrastructure investment by contrasting the outlook with commercial property investment and real estate debt.
“We believe that the era of dramatically falling yields in the commercial property sector is likely behind us, and our recent focus has been on income-oriented opportunities, and assets with the potential for rental growth. We have been actively reducing our exposure to traditional retail property, perceiving that other sub-sectors can offer attractive share price valuations while benefiting from niche growth trends.
“Urban warehouses in the UK are a good example of this – as online sales rise as a percentage of total retail sales, the demand for industrial storage and distribution centres in urban areas is rising too, leading to falling vacancy rates and rising rents in key urban locations.
“Significant opportunities for private lenders emerged in the wake of the 2008 financial crisis, as a wave of regulatory changes and bank capital requirements saw traditional lenders step back from certain types of lending. As a result, investor options in real asset debt (via private lending vehicles) have grown rapidly.
“Private real asset debt has the potential to offer investors more attractive yields than public debt markets, and is often backed by solid, legally-contracted cash flows. A significant amount of investor capital has flowed into real assets in recent years, driving down yields, but attractive returns are still available to selective investors.”