UK: An Asset On The Rise: Infrastructure (Part One)

Last Updated: 4 September 2019
Article by Simon Burgess

Infrastructure investing is rapidly maturing. As institutional investors seek risk adjusted returns from their physical and real assets, Head of Alternative Investments, Simon Burgess highlights how infrastructure gives access to longer term income with enhanced capital security, with similarities to that experienced in real estate investing.

Effective infrastructure is a vital foundation to economic development that supports sustainable, long-term growth. As time and technology have progressed, the umbrella of infrastructure has broadened to encompass many different combinations. From businesses and buildings, roads and rail, to water systems and data centres; infrastructure is a pillar of modern society giving those who benefit a higher quality of life.

Flagging government commitment, rising investor demand, technological innovation, greater customer expectation and an evolving regulatory landscape are all contributing to an increase in the appeal of infrastructure to private investors. Spanning the risk-return spectrum from lower risk public-private partnerships (PPP) in developed economies, up to more private equity-like (and therefore higher risk) assets in less developed countries, infrastructure investing can play a valuable role in portfolio strategies. Research conducted with 200 intermediaries by independent infrastructure and private equity investment manager, Foresight Group LLP revealed that 62 per cent of financial advisers are looking to increase their clients' allocation to infrastructure over the next three years, a dramatic increase from 32 per cent in 2018.

Infrastructure investing also shares a number of similarities with that of real estate investing, including its investment appeal. They are now becoming part of the same conversations as traditional real estate investors seek longer term returns.

A real plateau?

In the UK, with Brexit impacting the economy, the real estate investment market has been exposed to specific investment strategies targeted by non-UK investors. Immediately following the Brexit vote, there was an influx of foreign capital from Asia, the Middle East particularly, but also North America. They clearly took the opportunity to capitalise on the negative hit that Sterling took following the referendum vote.

In isolation, such currency play strategies are not necessarily a major issue, but they do open the door for the types of investment plays favoured by, say, Korean investors. While relative capital values fall (driven by weaker currency), Korean investors have capitalised on short-term currency boosts to obtain returns on their capital investments of 3% to 4%; compared with 1% to 1.5% which is commonplace in their home jurisdiction.

In conjunction with Brexit, foreign investment strategies have certainly played their part in the levels of confidence in UK real assets as a whole. A 2017 survey by the British Property Federation (BPF) and Grosvenor Britain & Ireland revealed that confidence surrounding the real estate sector's performance over the following year dropped from 88% to 40%.

For UK institutional investors, such foreign strategies have created a fully priced home market pushing yields down and values up. This has made capital deployment a tough job for UK based real asset investors. Non-UK investors have benefitted, but as the market settles into a new norm, there will be a renewed focus on stable long-term returns; an attractive aspect of infrastructure investment.

Part two of this article will continue to examine the infrastructure investing market, identifying its similarities with real estate and private equity investing and how infrastructure is also featuring within the Real Estate Investment Trusts (REITs) market.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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