Stable returns even in times of crisis and huge amounts of state investment make infrastructure a compelling proposition, reports Nicol Dynes.
The need to upgrade assets and make them sustainable is powering the infrastructure sector forward.
According to a PwC study, infrastructure assets under management will double to $2 trillion by 2025 in the worst-case scenario, increase to $2.1 trillion in the base case scenario and grow to $2.2 trillion in the best case scenario, the same level as real estate AUM (see graph below).
Infrastructure investment has proven it can deliver in times of crisis. The pandemic has had a negative impact on many sectors, but infrastructure is stable and has a low correlation to the general economic cycle. It also offers a huge range of sectors and segments to invest in, from energy to telecoms to healthcare.
“Infrastructure is the fastest-growing asset class and real estate comes second,” says Thomas Veith, partner, real estate, at PricewaterhouseCoopers. “International capital is looking at the sector and there is a real race for investments.”
“There is a huge need for social infrastructure investment and the private sector needs to be involved because the state sector is not investing nearly enough,” adds Anne Copeland, head of specialist funds, real assets equity, at Aegon Asset Management. “Appetite from investors is off the scale and early movers have really benefited.”
‘We see huge opportunities in Europe thanks to the European Green Deal. There will be a lot to do in the UK, in Germany and in the Nordics, but Spain, Portugal and Italy are going strong as well.’
Jan-Peter Mueller, Commerz Real
Experts agree that Europe offers the best opportunities when it comes to infrastructure. “There are opportunities everywhere, but in Europe we have some of the most attractive valuations in infrastructure globally,” says Alex Araujo, fund manager, global listed infrastructure, at M&G Investments. “There are some great opportunities in the listed realm, and that’s why in our global equity allocation we’re overweight in Europe.”
The framework is positive in Europe because capital investment is incentivised, especially in new build or retrofit, although there will be a lag between the stimulus available now and the wave of capital rolling in. “Most portfolios are overweight in Europe, it’s very popular,” says Richard Abadie, partner, global leader of capital projects & infrastructure group, at PwC. “In developed markets there’s an ecosystem that works very well and the amount of capital available exceeds what is needed.”
Emerging markets are a trickier proposition, related to currency risk and issues over security of legislation and regulations, he adds.
“We see huge opportunities in Europe thanks to the European Green Deal,” says Jan-Peter Mueller, executive director, head of asset structuring and infrastructure investments, at Commerz Real. “There will be a lot to do in the UK, in Germany and in the Nordics, but Spain, Portugal and Italy are going strong as well.”
“We go where regulations are welcoming, returns are good and public policy initiatives create unique chances,” adds Araujo. “In Europe it’s all built around the green recovery plan. At the micro level there are many opportunities. It takes a lot of work, but you end up with a portfolio of businesses that can do very well.”
German spending boom
In Germany new greenfield infrastructure developments will be needed on top of existing stock transformation. By 2030, 10,500 km of
new motorways and an additional 3,118 km of railways will be built, while the waterways will
be expanded by 1,155 km. PwC calculates that €300 billion will have to be invested just in physical, not digital, infrastructure in Germany.
“The numbers are huge but it won’t be a problem to finance,” says Veith. “The key challenge is capacity and capability in the public sector, so the private sector needs to be involved. Every year in Germany we see over 50 large-scale transactions, in the hundreds of millions of euros, and there is room for many more deals in future.”
In terms of where the capital is going there is increasing demand for renewable assets and social impact investing. The downside is that asset acquisition is becoming more difficult, as more players are entering the market wanting a piece of the action.
“We’ve seen change, a globally coordinated effort to restart economies, and much of that is focused on infrastructure, which is good for society,” says Araujo. “A lot of money is being thrown at efforts to rebuild, with a different focus in different regions.”
Healthcare, specifically operational businesses, technology and service delivery in the buildings, has been resilient. “Healthcare has been a very defensive play,” says Aegon’s Copeland. “Long leases guarantee long-term income streams. We’ve had 100% payment of all rents throughout the crisis and not many funds can say that.”
In the energy sector the downturn has been less significant because demand is so high. “Just think of the energy needs of data centres, of Google, Amazon and so on,” says Commerz Real’s Mueller. “What’s important is feeding that huge hunger for energy with green energy.”
‘Most portfolios are overweight in Europe, infrastructure is very popular. In developed markets there’s an ecosystem that works very well and the amount of capital available exceeds what is needed.’
Richard Abadie, PwC
“We’re in the early stages of the energy transition to hydrogen, carbon capture and storage,” adds Abadie. “If you take risks now you will get massive returns in the long term.”
Telecoms is another sector that is attracting interest. “We’ve been investing in fibre optic networks, telecom towers and data centres,” says Araujo. “They are a core part of our portfolio and they’ve done very well this past year, but the winds keep shifting.”
Investors must be nimble and flexible to grab opportunities that arise in other areas. During the pandemic in the listed realm valuations of airports were very attractive, for example, Araujo points out. “We invest for the long term but we must exploit opportunities that come up. We like transitional businesses, such as reconfiguring high voltage networks in Germany to accommodate renewables, or making low voltage networks smarter. Areas which may not be obvious to people but are very interesting.”
There is an increasing crossover between infrastructure and real estate. “The regulatory framework needs to change, as the two sectors merge more and more,” says Veith. “The good news is that it’s not difficult to combine infrastructure investment with a green agenda, without greenwashing.”
ESG now informs investment into all infra assets
The challenge for infrastructure investors will be the number of assets available to invest in. “The infrastructure market has a wide spectrum of sub-sectors so it can be difficult to define,” says Thomas Veith, partner, real estate, at PricewaterhouseCoopers. “Each sub-sector has its own characteristics and requires a unique set of skills and expertise.”
PwC has identified five segments:
• Social infrastructure, which includes hospitals, social housing and schools;
• Transport & Logistics, comprising roads, railways, ports and car parks;
• Energy, from generation, transmission and distribution to gas networks and oil pipelines;
• Renewables, which range from wind to solar to battery to waste;
• Telecoms & Digital, which includes mobile networks, fibre networks and data centres.
The ESG theme now runs across all five segments. An increasing number of infrastructure funds support the transformation agenda of public and private stakeholders.
‘The infrastructure market has a wide spectrum of sub-sectors, each has its own characteristics and requires a unique set of skills and expertise.’
Thomas Veith, PwC
“In all private markets ESG is very important,” says Veith. “It is seen as a value component that has to be factored in, not as a burden or a cost.”
ESG is a hot topic around the globe, but in Europe it has added momentum because of EU taxonomy, as regulations are kicking in. “The EU is a pioneer in pushing the green agenda forward,” says Veith. “Unfortunately now it’s losing speed because each of the 27 countries at national level has to define how the taxonomy will be integrated in local laws.”
There are positive signs for ESG outside Europe as well: US President Joe Biden has put it at the centre of plans to invest $2 trillion in infrastructure upgrades. China is leading the green bond boom and other countries, from Malaysia to Australia, are pushing hard for reform.