One of the best reasons for investing in infrastructure is the growing interest in the asset class from institutional investors worldwide. United States, British and Asian investors are all looking to grow the amount they put into this asset class and so those who hold the asset class now should benefit from the rise in demand.
This is the logic of Chris Trevillyan, a senior consultant at Frontier Advisors, who says: “In Australia, industry superannuation funds often have more than 10 per cent of their funds invested in infrastructure. If pension funds globally decide to allocate even a small portion of their assets to the sector, the amount of new capital looking for infrastructure opportunities will significantly rise and this could see valuations materially increase in coming years.”
In the UK, the world’s third biggest pension fund market, some of the largest pension funds are banding together to form a specialist infrastructure fund manager, not dissimilar to the activities of Industry Funds Management. The Pensions Infrastructure Partnership is to begin investing $5.8 billion this year. There are four hotspots in infrastructure, according to managers and consultants.
District heating in Poland
District heating, the process of producing hot water from a power station and making it available for a large local area of homes and businesses to access, is big in former communist countries such as Russia, Romania and Poland, as well as countries with harsh winters such as Canada and Finland. It is widely seen as more energy efficient than individual heating, but it needs a great deal of investment to set up and is suited to long-term investors.
Industry Funds Management has been involved with district heating in Poland since 2006 when it went into partnership with global energy firm Dalkia. It has grown its portfolio since then, taking a 40-per-cent stake in Dalkia Polska, which has produced returns of 10 to 15 per cent so far from its holding in the district heating network in the Polish capital Warsaw.
Christian Seymour, head of infrastructure for Europe at Industry Funds Management, says the attraction is based in part on the fundamentals of Poland, which he says has all the characteristics of an undervalued investment destination. He cites good rule of law, low investment-grade status, an educated workforce that has a strong work ethic stemming from the national desire to transform itself after the deprivations suffered under Soviet communism.
The Polish investment is one of eight assets that sits within IFM’s US$6 million infrastructure portfolio.
The Philippines is one of the most overlooked of Asian investment markets, believes KGL Investment Asia, a specialist investor in ports and general infrastructure in emerging markets. As proof, it cites the improving outlook given to the country by Fitch Ratings, which on March 27 upgraded The Philippines’ long-term foreign currency issuer default rating from BB+ to BBB-. The agency notes a persistent current account surplus and a “resilient economy”, driven by strong domestic demand, which expanded 6.6 per cent in 2012 amid a weak global economic backdrop. It adds that improvements in fiscal management begun under President Gloria Macapagal-Arroyo have made general government debt dynamics more resilient to shocks.
Indeed, Mark Williams, chief executive officer of the infrastructure fund manager, says the amount of foreign direct investment going there in comparison to other Asian countries is “miniscule”.
The Philippines’ attraction for KGL is its growing trade and 7000 islands, for which the importance of ports is immense but has so far lacked the interest of many foreign investors. KGL is also focused on the former US possession, Clark Air Base, about 60 kilometres northwest of the capital Manila. With the support of the government, the base is being converted into an international airport within a special economic zone. Korean giant Samsung has already committed US$2 billion to the project.
Ports and airports
It is an attractive time in the investment cycle to invest in assets such as airports and ports that are leveraged to global GDP, believes John Julian, senior infrastructure manager at AMP Capital.
Otherwise he sees interesting opportunities in both Australia and Europe. The state governments of New South Wales and Queensland are planning to sell off transmission and distribution assets, while the federal recycling of carbon tax revenues and the restructuring of the electricity generation sector will present further chances for investment.
In Europe, he says there is strong appetite for the power distribution assets that are coming to market as a result of unbundling and deleveraging initiatives.
Infrastructure stocks in continental Europe
Frontier Advisors identifies continental European listed infrastructure stocks as one of the most undervalued areas of the market. “This is obviously a higher risk strategy, given ongoing issues with the euro,” says Trevillyan. “However, for investors willing to accept these risks, the potential for high future returns seems material as a number these stocks are currently trading at significant discounts.”